Deposit rate cut fails to translate into cheaper loans

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Economists have called on the government to put a cap on all lending rates instead of letting banks decide

The lowering of the deposit rate cap last week was expected to provide much-needed relief to struggling businesses in the form of reduced lending rates, but no such thing has happened.

Several banks did cut their lending rates after the maximum deposit rate was lowered by 1 percentage point and maximum interest rate on short-term loans to four priority sectors was cut to 12 percent on December 24.

But businesses say this has done them no good because the cheap loans are only for terms of up to a year.

Vietinbank is charging an annual interest rate of 8.95 percent on one-year loans for small and medium-sized businesses, while HDBank and OceanBank are offering annual rates of 8.6 percent and 6.8 percent respectively on three-month loans.

The Military Bank has earmarked an unspecified sum to lend to small and medium enterprises at annual rates of between 11.8 and 12.5 percent for six-month loans, saying those borrowing for three months can enjoy lower rates.

According to the State Bank of Vietnam, interest rates for short term loans ranged between 6.8 and 13 percent at the end of December, while those for longer terms remained as high as 17.5 percent.

Economists say the government should have slapped a cap on all lending rates instead of letting banks decide. Until February 2010 loan interest rates could not exceed 1.5 times the central bank's benchmark rate.

They said the current situation only benefits the banks further.

Nguyen Van Thuan, head of the finance and banking department at Ho Chi Minh City Open University, said capping deposit rates but not lending rates is unfair to both depositors and borrowers.

Thuan said the central bank might have made the latest rate cuts due to pressure from businesses and economists rather than out of its own will to save businesses.

It cut deposit rates four months ago from 11 to 9 percent.

The economist said banks have made a lot of money from loans this year, and they would continue to do well if the lending rates are cut a bit.

Figures from some major banks this year show they attracted few new borrowers, with an average credit growth of 4.85 percent, but interest from old loans still made up a large sum.

Asia Commercial Bank's interest earnings were VND5.3 trillion (US$254.5 million) in the first nine months, and Eximbank's, more than VND4 trillion even though its lending was down 15 percent.

Some experts have backed the banks, saying they cannot afford to offer cheap loans since most deposits are short-term.

Pham Xuan Hoe, deputy head of the central bank's Monetary Policy Department, said if the banks offer long-term loans, they would need extra funds to sustain liquidity.

Former central bank governor Cao Si Kiem also said most people are depositing their money at banks for one to three months and the lenders would face a liquidity crisis if they gave long-term terms.

But several banks themselves have said customers extended deposit terms before the cap came into effect to enjoy a higher interest rate.

Few people considered switching to gold, stocks or the property market.

But many people think that 8 percent is not adequate to compensate for inflation.

Some have also considered switching to the dollar to avoid the inflation, prompting economists to warn of a widening forex rate.

An economist who did not want to be named told Vietweek that the dong deposit rate is currently only 6 percent higher than the dollar deposit rate, but in reality, banks have exceeded the dollar rate cap and the gap is even less.

"That is an unsafe gap, and the pressure on [exchange rates] will rise."

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