Despite demands, bank lending rates unlikely to fall

By Ngan Anh, Thanh Nien News

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An undated photo of stacks of money arranged inside a bank in Hanoi. Photo: Ngoc Thang An undated photo of stacks of money arranged inside a bank in Hanoi. Photo: Ngoc Thang


Though inflation remains low, banks have not further cut loan interest rates, worrying local enterprises, which are set for fierce competition as Vietnam accedes to several free trade agreements.
Nguyen Huu Vinh, director of a woodwork company in Hanoi, said the rates, despite being cut sharply from a peak of 18-23 percent a few year ago, remains high at 7-11 percent, hitting the profitability of many companies.
“High interest rates translate into high costs, making it hard for local companies to compete with regional rivals, especially in the context that the country has more deeply integrated into the international economy.”
Vietnam recently signed the Trans-Pacific Partnership Agreement (TPP) besides bilateral free trade agreements with the EU and South Korea.
Vinh said his company plans to expand production this year, but is worried about the interest rates.
“Interest rates should be cut to 6-7 percent.”
The Vietnam Chamber of Commerce and Industry said at a recent meeting that 60 percent of local companies are not making profits and "a slight cut" in interest rates is necessary.
Foreign firms borrow from foreign banks at lower rates -- 3 percent in Thailand and 4 percent in China, for instance – making them very competitive, economist Le Dang Doanh pointed out.
For some other companies, the situation is even tougher, as they continue to pay the old, very high rates on loans taken a few years ago.
Insiders said high interest rates have been a nightmare for businesses.
“It is not easy to make profits of 10 percent; meanwhile, we are having to pay rates of 10.5 percent on our loans,” the director of a Hanoi garment company said.
Cao Sy Kiem, chairman of the Vietnam Association of Small and Medium-Sized Enterprises (SMEs), said SMEs make up 90 percent of the country’s businesses and lack funding.
“They are small, and so will borrow just a little. But having to pay high interest rates makes it very difficult for them.”
But despite the high interest rates, businesses find it hard to get loans since banks are only willing to lend against assets, and SMEs typically do not have much to offer in terms of collateral, he said.
A full 30 percent of SMEs in Vietnam are unable to get loans, according to a recent report by the Vietnam Chamber of Commerce and Industry.
Interest rate hikes
Amid low inflation, enterprises hope for rate cuts and better access to loans so that they can survive. Last year Vietnam saw the lowest inflation rate since 2006 of 0.63 percent due to falling oil prices, according to the General Statistics Office (GSO).
However, the State Bank of Vietnam has said it will not lower interest rates any time soon.
Its deputy governor, Nguyen Thi Hong, said low inflation is only one of many factors to be considered for monetary policy.
Oil prices could rebound at any time since they are unpredictable, and borrowing demand has been increasing, meaning the central bank cannot afford to be complacent, she said.
It would continue to "observe the situation," was all she would say.
According to the GSO, the inflation rate could rise to 5 percent next year on the back of expected rises in electricity, education and healthcare costs.
Banks reported that demand for credit has increased in recent months as enterprises expand production and distribution ahead of Tet, the Lunar New Year, in early February. But deposit growth has not kept pace, putting paid to the possibility of lending rate cuts.
Expansion in money supply as of December 21 was much lower than its target of 16-18 percent for last year, according to the central bank.
With pressure on liquidity, banks recently resorted to hiking deposit interest rates to attract more money to meet the rising demand for loans.
BIDV increased the rate on six-month deposits from 5.3 percent to 5.5 percent last week; MaritimeBank increased its rates by 0.1-0.4 percentage points. Several other banks have also made similar moves.
Despite the high lending rates, credit has grown rapidly and so banks have no reason to cut rates, an economist pointed out.
Another reason for banks not to cut interest rates in the coming months is that they have invested large amounts in government bonds, causing pressure on their liquidity.
Banks prefer bonds since they offer instant liquidity, economist Nguyen Tri Hieu explained.
Banks now hold 85-95 percent of all government bonds, higher than the 80 percent in late 2014. Most of bonds have a long tenor, while most deposits are short-term. Thus, deposit rates face increasing pressure, Youth newspaper quoted another central bank deputy governor, Nguyen Phuoc Thanh, as saying.
The government, in the second half of last year, sold bonds worth of VND130 trillion ($5.9 billion) with an average yield of 6.35 percent 0.9 percentage points higher than during early last year.
The central bank said it would target annual credit growth of 18 percent in 2016, though this could be raised to as much as 20 percent.
Assessing the target, HSBC said in a recent report, “Even if credit growth is managed at the lower end of the target and core inflation stays contained, we think it would be prudent to commence gradual tightening in the second half of the year to mitigate the risk of another overheating of the economy.”
In the past a tilt toward an overly pro-growth policy has resulted in credit booms and overheating, which ultimately led to currency instability and required sharp policy tightening to reverse.
“Given that we are less than half way through financial sector reforms and bank balance sheets remain fragile, we would be worried if credit growth begins to consistently top 20 percent,” the report said.

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