Commercial banks are rushing to "convert" short-term loans into middle and long term loans to take advantage of the central bank's recent decision to allow interest rates for the latter.
Adding just one day to a short-term loan (up to 365 days) could fetch them interest rates of up to 18 percent, much higher than the rate cap of 12 percent on short-term loans.
Even before the State Bank of Vietnam's decision on negotiable interest rates made in late February, lending rates were in fact 15-16 percent per annum as commercial banks added around 4 percent onto the 12 percent cap in the form of extra fees for consulting, paperwork and assessment.
The central bank last month allowed lenders to negotiate with clients the interest rates for medium to long term loans in specific areas including production, services and investment for development. Earlier banks could decide on rates outside the lending rate cap of 150 percent of the key rate only on consumer loans.
A representative of a Hanoi-based commercial bank, who did not wish to be named, said, "The fact that we switch short-term loans into mid and long-term loans has two benefits.
"First, we don't break the central bank rules. Before we were always afraid of being inspected. Second, we can negotiate rates with customers."
He also said that even though the loans were mid- and long-term ones, customers repaid the amount ahead of the loan period.
Earlier this month, the central bank ordered branches nationwide to inspect lending and deposit activities at commercial banks to make sure they abide by interest rate regulations.
According to the central bank, some lenders were offering bonus interest rates for deposits and charging extra fees on loans. Violations were to be reported to the State Bank by March 9.
The general director of a commercial bank, who also wanted to remain unnamed, said, "Now lenders can negotiate rates on short-term loans, but not officially. This will badly affect the banking system's transparency."
Ly Xuan Hai, general director of Asia Commercial Bank, told Saigon Tiep thi newspaper businesses can afford the rates of 17-18 percent being negotiated now, but they will not able to withstand higher rates.
Le Duc Thuy, Chairman of the National Financial Supervision Committee, suggested that the rate caps on short-term loans be removed as well.
The rate cap for short-term loans should be removed following the removal of caps on mid- and long-term loans, in order to benefit borrowers and create healthier competition among banks, the Vietnam News Agency quoted him as saying.
"Keeping a cap on short-term but not on mid- and long-term loans would be an obstacle to monetary policy management and distort the market," said Thuy.
Meanwhile, Prime Minister Nguyen Tan Dung has approved the National Financial Supervisory Committee's proposal to remove the deposit interest cap, Thuy said, adding the Governor of the State Bank, Nguyen Van Giau, was working on this issue.
As lending rates increase, bankers say many clients are insisting on receiving higher interest rates on their deposits, instead of the current maximum of 10.5 percent.
In order to attract enough funds, commercial banks are having to offer various perks to depositors, which can sometimes rise to as much as 30 percent of the total deposit rate. The perks include gifts, gold, cash or bonus rates.