No high hopes for new lending cap

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Firms struggle to get cheap loans despite central bank moves

A branch of Maritime Bank in Ho Chi Minh City. The State Bank of Vietnam imposed a 15 percent limit, or 3 percentage points above the deposit rate cap, on lending interest rates this week.

The State Bank of Vietnam has put a new cap on lending rates applicable to four backbone business categories, but many companies and experts are not sure if the move not the first effort to bring down borrowing costs will work this time.

The 15 percent limit, or 3 percentage points above the deposit rate cap, was imposed Tuesday on loans for businesses in four sectors including agriculture, exports, small and medium enterprises and the support industry.

According to the central bank, rates for these companies previously ranged up to 16.5 percent.

The cap is the latest in a series of measures taken by the government in an attempt to cut interest rates, which local businesses have been complaining about since last year. It came after the central bank cut its policy rates twice over the past two months, causing some worry among economists about the risk of rising inflation due to easing monetary policy too soon.

Last month, the central bank also ordered five major banks in the country to cut costs by 5 to 10 percent so that their loans could become cheaper.

Following these moves, some banks have announced that their interest rates are now as low as 13 percent per year.

But for local businesses, even large ones, cheap loans are not very easy to get.

Do Duy Thai, chairman of Viet Steel Co., said the company is unable to borrow at 15 percent. Most of its loans now bear rates of between 17 and 18 percent per year, he said.

The new cap on interest rates has just taken effect, so it is too soon to tell whether borrowing costs will really fall this time, he said.

Thai, also vice chairman of the Vietnam Steel Association, said it would be a positive development if lending rates can be brought down to 15 percent for all businesses. Right now only large companies are allowed to take out cheap loans while many small firms even have to borrow at more than 20 percent due to limited assets for guarantee.

Some other business executives are much less optimistic.

Nguyen Tuan Anh, general director of Ut Xi, a seafood processing company, said 15 percent is still a very high rate to bear. Borrowing at this rate, local exporters will find it hard to compete against foreign countries on the global market, he explained.

When interest rates are too high, businesses can only operate moderately because they do not have enough money to think about expansion, Anh said.

For seafood exporters, the situation is even tougher, he said, noting that the main production season will begin in July and many of them need cheap loans to buy materials right now.

Despite the mixed feelings from the business community, the stock market responded quite positively toward the new rate cap.

Analysts said the cap, together with tax cuts announced by the government last week, were the main drivers of the country's two stock exchanges early this week. Still, some fear that stocks will likely correct themselves in the short term if there is no news to lift the market's sentiment again. The benchmark VN-Index is the best performer in Asia this year after it slid 27 percent in 2011.

Cao Sy Kiem, chairman of the Vietnam Association of Small- and Medium-Sized Enterprises, said many companies are skeptical about the news of the 15 percent cap because they do not think they will benefit much from that.

The funds for cheap loans are limited and most companies are being charged more than 17 percent on their bank loans, he said.

Dau Tu, a newspaper of the Ministry of Planning and Investment, on Monday quoted bankers and economists as saying the new cap will not necessarily translate into cheaper loans unless banks are forced to cut rates. Some banks have not even seen the cap as an obligatory maximum limit.

Tran Bac Ha, chairman of the state-owned Bank for Investment and Development of Vietnam, said the central bank only requested commercial lenders to maintain a margin of 3 percentage points between lending and deposit rates.

With deposit rates capped at 12 percent, that means banks are encouraged to lend at no higher than 15 percent, he said.

"The margin is not a ceiling that banks are forced to abide by. Each bank will apply the margin their own way depending on their conditions and the demand of their shareholders in terms of profits and dividends," Ha said.

Now that his bank has already followed the central bank's request, Ha expected officials to make sure other lenders also respect the recommended margin.

An unnamed bank manager, however, told Dau Tu that the margin works exactly like a cap and that it is protested by even mid-sized banks.

Some lenders plan to stop lending if they are forced to keep interest rates under 15 percent, the manager said.

Experts said the objection means the liquidity of some banks is still weak. Several banks in fact are still offering more than 13 percent for deposits.

Meanwhile, other lenders who have surplus cash prefer lending to other banks instead of corporate clients for fear that bad debts could grow.

"The State Bank of Vietnam is likely to deliver more cuts in the coming quarters to support spending" as domestic demand may remain subdued, Bloomberg quoted Trinh D. Nguyen, a Hong Kong-based economist at HSBC Holdings Plc, as saying Tuesday.

The HSBC Vietnam Manufacturing Purchasing Managers' Index showed output declined in April for the sixth time in seven months.

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