Local banks unable to tap foreign sector market

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Dollar notes are counted on a teller's desk at a bank in Ho Chi Minh City

Local banks have failed to use foreign invested firms to improve their credit growth figures, and experts say they are hampered by less competitive interest rates and limited range of services.

Hoang Van Thanh, chief accountant with Japanese-owned copper rod producer CFT, said his firm could borrow up to US$40 million from a Japanese bank at just one percent a year.

"Thus, there is no reason for us to borrow capital from Vietnamese lenders with much higher lending rates."

The lowest rate local banks offer on dollar loans is 3-3.5 percent, a representative of beverage firm Dona Newtower, a Vietnam-Hong Kong joint venture, said.

"Local banks cannot compete with their foreign rivals in terms of interest rates. Also, foreign lenders do not ask customers to pay fees for repaying loans before they are due."

Economist Bui Kien Thanh said foreign banks do not use much of deposits they mobilize from Vietnam at high interest rates to lend to their customers. They use funds mobilized in their home countries at much lower rates. 

For example, the interest rate for a six-month deposit in the United States is just 0.30 percent. The central reserve can also recapitalize the banking system at annual rates of 0.5-1 percent per annum. Thus, US commercial banks can offer firms loans for just 3-4 percent.

Echoing Thanh, another economist who did not want to be named said deposits with high interest rates in Vietnam did not significantly raise costs for foreign banks due to the balancing power of lower interest rates abroad, where the banks borrow far more than they do here.

"With lower input costs, they (foreign banks) can obviously offer lower interest rate loans in Vietnam."

Parent companies of foreign-invested firms in Vietnam would typically have used services of a particular bank or banks for many years. The banks will know well the financial situation of the firms, and this helps the former reduce their lending risks. The reduced risk is another reason that foreign banks can offer firms loans at lower rates than local lenders.

Foreign banks can also offer lower rates as foreign invested firms use many of their services, including borrowing capital, opening letters of credit, and making money transfers, he added.

Furthermore, foreign banks make it easier than local banks for customers to take loans. Their main criteria is the feasibility of a firm's business plan, while the local banks focus on collateral.

Another advantage that firms enjoy with foreign banks is that the latter are more reliable and strict in keeping their commitments to customers, as also more professional in the way they do business. So it is not surprising that foreign firms prefer to work with foreign lenders.

"It will take a long time for local banks to compete well with foreign ones in attracting customers," the economist said.

Thanh also noted that Vietnamese banks earn their profit mainly from lending more than 80 percent, according to some accounts, and have not yet begun tapping hundreds of other services that foreign banks offer.

In fact, foreign banks in Vietnam do not offer big loans because their registered capital is low, Thanh said.

ANZ is the foreign bank with the highest registered capital in the country at $3 billion, while Japanese invested banks only have several hundred million dollars each, Thanh said.


An industry insider said all local banks are keen to lend to foreign companies, particularly given the slow credit growth, weak domestic demand, and the high bad debt levels.

Credit growth as of August was 5.4 percent, less than half the full year's target.

However, they have failed to lure foreign customers. Le Hoang Son, director of state-owned lender VietinBank's branch in Dong Nai Province, said his bank cannot offer low enough interest rates to attract foreign borrowers due to profit concerns. The State Bank of Vietnam caps interest rates on dollar deposits at 0.25 percent and 1.25 percent for institutions and individuals respectively.

The head of a joint stock commercial bank in Hanoi said only a few foreign invested firms borrow capital from his bank. "It is too difficult to expand credit to the foreign sector. Most foreign firms use our card services, or the service to pay salaries."

At the end of last year 33 of 39 local banks operational then that had published their results reported that foreign-invested firms accounted for a mere two percent of their total lending, according to global consultant KPMG.


Vietnam's policy to tighten lending in foreign currencies is working.

Commercial banks saw credit growth of 6 percent in the first 10 months of this year. Dong loans rose 11.5 percent, but dollar loans were down 13.6 percent, according to the State Bank of Vietnam.

Nguyen Dinh Tung, director of Orient Commercial Bank, attributed the reduction mainly to the regulation, which took effect early January, allowing dollar credit access only to those firms that could earn enough foreign currency from their exports to make loan repayments.

In addition, many firms are more cautious about borrowing in foreign currency because they are worried about dong devaluation. The central bank has targeted to keep the dong devaluation at 2-3 percent this year. At commercial banks, the exchange rate stood at VND21,070-21,080 per dollar on Tuesday.

One economist said that firms finding it hard to get dollar loans from local banks can borrow from lenders abroad.

"It could cause risks to the economy if the funds are not strictly managed. The firms' demand for dollars to repay loans may increase when they mature, creating pressure on the exchange rates."

Relevant agencies should monitor lending in foreign currencies carefully to prevent pressures in the local financial market, he said.

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