A government decision to allow negotiations on more types of loans will create healthy competition among banks and thus benefit businesses, said an official from the national financial advisory body.

"We even advise the government to extend the permission to short term loans to benefit more farmers and exporters," Le Duc Thuy, Chairman of the National Financial Supervisory Committee, was quoted by local news website VnExpress as saying.

The State Bank of Vietnam in late February allowed lenders to negotiate with clients on interest rates for medium to long term loans in specific areas including production, business, service and investment for development. Previously banks could decide rates outside the lending rate cap only on consumer loans.

It's reasonable that businesses worry about being "oppressed" by lenders after such a move, Thuy said.

"The question is: were they oppressed when lending rates were not negotiable? I say they were, even more."

"Interest rates are based on the market," Thuy said. "The government can regulate and keep the balance on the market in check, but it can't fix interest rates."

With lending rates surging, local lenders are facing difficulties raising funds as depositors now demand higher rates than the current deposit rate cap of 10.5 percent a year, he said.

"Prime Minister Nguyen Tan Dung has agreed with our proposal that the deposit rate cap should be eliminated too. He has asked the central bank governor to consider the proposal," said Thuy.