Credit quality more important than growth: economists

By Ngan Anh, Thanh Nien News (The story can be found in the April 11 issue of our print edition, Vietweek)

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Bank tellers count money for a customer at a bank branch in Hanoi

The government has ordered the central bank to cut interest rates to increase sluggish credit rates and reduce business closures, but economists say the country should not seek to increase credit growth at any cost since credit quality is more inportant than just numbers.

At a Cabinet meeting last month, Prime Minister Nguyen Tan Dung instructed the central bank to extend loan terms and cut rates, saying that while most new loans enjoy interest rates of around 10 percent or less, old ones are still charged 15-19 percent.

“It is still very difficult for businesses to get bank loans. I suggest the governor should look into it since the business community is waiting,” he said.

However, according to a former governor of the central bank, Cao Sy Kiem, interest rates are not the main reason for the current stagnant credit; but “the health of firms.”

“Amid weak domestic demand, enterprises dare not borrow to expand business and production. Interest rates have recently decreased. Many banks have launched preferential loans, but failed to attract more customers,” he said.

As of March 31 credit growth for the year was a mere 0.01 percent, according to the central bank. Many banks now face pressure to improve credit flows. They have been emulating each other to lure customers and they are assigning their employees the task of seeking customers to borrowing their capital.

The central bank last month cut the refinancing rate to 6.5 percent from 7 percent and lowered the VND deposit cap to 6 percent from 7 percent. HSBC said in a recent report: “This signals the central bank's intention to spur credit growth, we do not think it will substantially alter credit conditions.”

“Interest rates are not the issue, as rates are already accommodative and there is excess VND funding. The elephant in the room is Vietnam's bad debts, which remains largely unaddressed. With inflation rising in the coming months, we do not expect further cuts,” it said.

“Due to the economic slowdown, most firms have kept production and business at a moderate pace. There are not many enterprises doing good business. When the firms have the demand to borrow capital, they will be invited to do so by tens of banks,” an official from a bank in Hanoi said.

Van Duc Muoi, general director of food producer Vissan, said many banks have frequently solicited his firm to borrow capital with preferential interest rates. “There are banks offering us loans with interest rates of only 6 percent each year. Not all firms could be offered the rate, which is even lower than long-term deposit rates.”

Some banks now offer interest rates of 6.5-6.8 percent for 7-11 month deposits, and 5.7-6 percent for 1-6 month terms.

A representative of local bank Eximbank said his bank, since early this year, has offered lending rates of some 6 percent each year to increase credit flows, but few enterprises have the demand to borrowing capital. Some of the enterprises have not met his bank’s requirements to access loans.

Kiem said banks, despite lowering interest rates, find it hard to lure customers, as they still have lending requirements tight for most enterprises due to concerns about the risk of bad debts.

The central bank has recently said some firms, including infrastructure construction

ones, could not access loans due to their weak financial capacity, failure to demonstrate their projects’ feasibility and effectiveness, massive bad debts, and shortages of assets to mortgage at banks.

“Loosening requirements to borrowers to help firms easier access loans will cause credit risks, increase bad debts that will affect banking system security,” said the central bank.

Companies’ dreams of loosened credit requirements will not be met, said Kiem.

Finding it hard to increase loans to enterprises, many banks have sought ways to lure more individual customers to meet their credit growth targets.

Bank staff frequently come to visit, or call potential customers to promote their banks’ loans. Individual customers could receive gifts and preferential interest rates when borrowing at many banks.

General director of Oriental Bank Nguyen Dinh Tung said credit flows are unlikely to sharply increase in the short coming time. “Capital demand can increase only when production and consumption are spurred.”

What’s in a number?

Nguyen Duc Thanh, head of the Vietnam Center for Economic and Policy Research, said: “Credit growth does not depend on the banking’s system’s efforts only.  Credit flows could be improved when we have a better business environment, facilitating firms’ development, and bad debts are solved.”

Economist Vu Dinh Anh said what’s most important is not credit growth, but credit quality. “We must not let new bad debts occur. If banks lower lending requirements, bad debts may increase in the next 3-6 months. ”

Economist Vo Tri Thanh said credit growth depends on bad debt reduction, banking system reform and financial policy. Vietnam targets credit growth of 12-14 percent this year.

However, bad debts now still stand high, hindering banks’ credit growth, said economist Nguyen Tri Hieu.

The World Bank has recently said credit activity in Vietnam remains subdued because banks, with balance sheets saddled by high levels of nonperforming loans, are increasingly risk averse and looking to deleverage.

“Credit demand also remains weak, reflecting low business confidence in the private sector. Important financial sector vulnerabilities remain, creating a drag on overall economic performance. Nonperforming loans in the banking sector continue to be a major concern, although poor quality data and limited disclosure requirements preclude accurate estimations of their magnitude,” it said.

In an effort to deal with nonperforming loans in the banking sector, the government has established the Vietnam Asset Management Company (VAMC), which is responsible for the purchase, recovery, and restructuring of banks’ bad debt. However, there are concerns over the operational capacity of the VAMC, the lack of resources to meet banking sector capitalization needs, and the pace of implementation, among other issues.

The issues of bankruptcy, insolvency, and creditor rights will also need to be addressed to facilitate corporate debt restructuring, according to the World Bank.

Bad debt in Vietnam is expected to account for about 9 percent of total loans, after careful calculations, below the 15 percent ratio estimated by Moody's Investors Service, the central bank said in a recent statement.

Banks in Vietnam managed to cut bad debt to 3.63 percent of loans at the end of 2013, from 4.73 percent last October, said the central bank after a Moody's report on February 18.

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