A worker polishes granite slabs in a factory in Ho Chi Minh City
The interest rate cuts have not had any effect on credit growth and, in an economy where companies depend overwhelmingly on bank loans for their operations, on economic revival.
Economists are now saying the rate reduction is not enough, and resolving bad debts and restructuring state firms are more important factors in resuscitating the economy.
In March the central bank lowered the maximum deposit rate to 7.5 percent from 8 percent, the first cut after the six last year. Following this, banks are now lending at 10-15 percent compared to 22-25 percent two years ago.
But companies do not want to borrow when demand is weak and inventories remain piled up, and credit growth in the first four months of this year was a mere 2 percent. The government is aiming for a 12 percent expansion in credit this year.
The chairman of the Vietnam Association of Small and Medium-Sized Enterprises, Cao Sy Kiem, said: "Most Vietnamese firms depend a great deal on bank loans due to their low equity.
"The low credit growth means they have not recovered [from the slump]."
An estimated 90 percent of firms depend on bank loans for running their business, he said. Many small firms depend completely on loans since they are not listed in the stock market, he said, citing the example of the seafood industry, in which 80 percent of firms borrow from banks.
However, credit growth does not depend on the interest rates now, but on resolving bad debts, he said.
"It is"¦ stifling Vietnam's economic revival since banks are reluctant to lend even if they have funds.
"The measures to deal with the issue were announced long ago but are being implemented too slowly.
"The central bank has planned for a long time to set up a company, the Vietnam Asset Management Corp (VAMC), to buy up non-performing loans (NPLs). However it has not come into operation so far."
The State Bank of Vietnam plans to urge lenders with bad-debt ratios of above 3 percent to transfer their NPLs to the VAMC, which is scheduled to be set up in the second quarter after plans to establish by March end were delayed.
At the end of March NPLs accounted for 4.51 percent of loans outstanding, the government reported to the National Assembly Monday.
Economist Can Van Luc said: "To speed up resolution of bad debts, the government should quickly set up the VAMC and a debt trading market. We need to chart a concrete monthly schedule for the work.
Hongkong and Shanghai Banking Corporation Limited (HSBC) said in a recent report: "The issue with sluggish credit growth in Vietnam is not supply but demand driven.
"To materially raise sluggish credit demand, the central bank will need to instill confidence and resolve the bad debt issue."
Kiem said the hurdle to firms' recovery is the low demand. So the government should look for ways to improve incomes and subsidize firms to help them cut prices.
The economy would have bottomed this year and rebounded in 2014 if revival measures had been implemented faster, he said, adding that since they were not, there is no basis to expect an economic revival in the next two years.
HSBC said: "The bad debts issue will not be resolved unless better regulations on insolvency are created or there is an injection of private or foreign capital.
"Given that the economy is undergoing a deleveraging process and the financial market is essentially frozen, only significant reforms can materially change the economic situation in the short term.
"The formation of the asset management company as well as concrete plans to reform the banking sector, state-owned enterprises, and public investment are necessary to cement the government's commitment to prioritize sustainable development."
Luc said Vietnam has been too slow in restructuring state-owned enterprises and public investment, which resulted in slow resolution of the bad-debts situation. The country's banks are saddled with what is widely regarded as Asia's highest ratio of bad debts, largely due to funding state-owned firms and a frozen real estate market.
Vietnam's 100 biggest SOEs took loans worth $64 billion, about half of all debts, and many strayed far beyond their core business, investing heavily in the real-estate market.
Returning the economy to a higher and sustainable growth path would require acceleration of banking and state-owned enterprise reforms, with planned structural changes "implemented decisively and additional steps considered," the IMF said in a recent statement.
HSBC said while Vietnam targets reform of the financial sector and state-owned enterprises by 2015, a concrete plan has yet to be announced.
If the government rhetoric is any indication, then the discussion would be constructive and motivated by the ambition to make Vietnam a more competitive economy, the bank said.
"The prime minister approved the 2013-2020 Economic Restructuring Plan which highlights reform goals.
"We do not expect drastic reforms to be rolled out any time soon, as the debate over SOE reform is going on.
"And the government is more likely to adopt a trial-and-error approach, implementing incremental reforms rather than sweeping changes."
Nguyen Xuan Thanh, director of the Public Policy Program at the Ho Chi Minh City-based Fulbright School, said the government should sell more of its stake in successful joint stock companies and use the money to restructure ailing SOEs.
The firms, after being restructured and becoming efficient, should also be sold, so that the restructuring of ailing SOEs could continue, he said.
"Vinamilk, Vietnam Airlines, and mobile network operators Vinaphone, MobiFone, and Viettel are among SOEs in which the government could sell equity.
"This will also create attractive investment opportunities for foreign businesses."
The economy grew by 5.03 percent last year, the slowest pace since 1999, and the International Monetary Fund last month cut this year's forecast to 5.2 percent from 5.8 percent.
The country eyes 5.5 percent growth this year.
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