Interest rate cut cuts no ice with struggling firms

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Interest rates are expected to fall in Vietnam soon, with some officials suggesting lending rates as low as 9 percent

Vietnam is on course to cut interest rates and although experts and business executives say such a move is overdue, they also say it will be of scant help in boosting sales and clearing inventories.

Vu Duc Dam, chief of the government office, said at a press briefing last week that the country aims to bring down inflation and that it will cut interest rates accordingly.

Interest rates ranged up to 17.5 percent at the end of November, according to the State Bank of Vietnam, and officials are considering whether to reintroduce a lending rate cap. Until February 2010, commercial banks could not charge interest rates higher than 1.5 times the central bank's benchmark rate.

Pham Viet Muon, deputy chief of the government office, said at a recent meeting with businesses in Hanoi that with inflation slowing in recent months, deposit rates can be reduced to 7.5-8 percent to allow banks to lend at around 10 percent.

Phan Van Chinh, deputy head of the Import and Export Department at the Ministry of Industry and Trade, suggested a reduction in lending rate to 9 percent a year.

He said that foreign-invested businesses have contributed more than domestic firms to the country's export revenues this year.

"Foreign firms have the advantage of borrowing from foreign banks with annual rates of just 3 to 4 percent, so they are very competitive," a Vietnam News Agency report cited Chinh as saying Monday.

The National Financial Supervisory Commission said in its November report on the economy that it sees several positive conditions for cutting lending rates.

Inflation has been contained at lower than 8 percent, and it's unlikely that people would withdraw their deposits as other investment options such as stock or real estate markets are not very attractive, it said.

Stable forex rates have also stopped people from hoarding dollars for profit, the report said.

The commission said local businesses have suffered high lending rates of more than 15 percent for more than 30 months now.

Former central bank governor Cao Sy Kiem told Vietweek, "It is right to reduce the lending rate given that the deposit rate cap is only 9 percent a year and inflation has eased."

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He said high lending rates have become "unacceptable" because they have caused difficulties for businesses for too long.

But a lending rate cut does not sound like a savior to many experts and businesspeople.

Economist Le Tham Duong, head of the business administration department at the Ho Chi Minh City Banking University, said a lending rate cap by itself will not help struggling businesses if that is what the government wants.

He said banks will push all the rates to as close to the cap as possible and will tend to choose big and prestigious businesses to lend to.

Small- and medium-sized enterprises will find it even harder to access bank loans, Duong warned.

"Money will not flow into places that need it urgently," he said, adding the situation will force small businesses to make "informal payments" to banks in order to get loans.

Duong also pointed out that no authorized agency has done a careful analysis of how lending rates would affect credit growth.

Recent figures from the central bank show that loans have grown at a much lower pace than expected despite the lending rate being reduced, from up to 25 percent late last year.

Credit growth was reported at 4.15 percent at the end of November.

On the other hand, bankruptcy numbers have surged, with nearly 6,000 closures and temporary shutdowns between October 20 and November 20, up 6.6 percent over the previous month, official data showed.

"The matter now is not quite about reducing lending rates, but about finding customers for products and services," Duong said.

Luu Ngoc Khoa, director of a garment producing and trading company in Ho Chi Minh City, agreed that the solution lies on the consumer's side.

He said what his company and many others need at present is to clear stockpiles and increase sales, so the government needs to stimulate consumption.

His company is paying 16 percent interest on its loans right now and some reduction in that will not make much of a difference if sales remain weak.

"Companies will not paying much attention even if the banks bring money to their doors at 8 or 9 percent rates.

"But if their products or services can sell well, they may be willing to borrow at rates of 15 or even 17 percent," Khoa said.

"The important thing is to make people have money to buy."

News website VnExpress on Wednesday also cited several bankers as saying that they are ready to cut lending rates but they doubt the move would mean anything as businesses would still hesitate to pour more money into their struggling operations.

They said businesses now need to have existing inventories cleared rather than funds for expansion.

Nguyen Dai Lai, a banking expert, said businesses needed the lending rate reduction a long time ago.

"Now they would not know what to do with the money.

"The issue is to help them sell their stockpiles so they can continue production," Lai said.

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