No respite yet from central bank's rate cuts

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Borrowing costs will continue to remain high for businesses, experts predict

A local commercial bank's employee counts money next to piles of notes in Hanoi

Vietnam has lowered policy rates and the dong deposit interest rate cap, paving the way for reductions in lending rates to support its slowing economy, but businesses are unlikely to reap significant benefits any time soon, experts say.

They say that the latest deposit interest rate cut will not lead to lending rate cuts that can prompt businesses to invest further in production and expansion.

From last Tuesday, March 6, the maximum deposit interest rate banks are allowed to offer customers is 13 percent a year for terms of one month and above, down 1 percentage point from the previous rate, State Bank of Vietnam Governor Nguyen Van Binh announced Monday.

The dong deposit rate cap may be removed in one or two quarters, he said.

The central bank also reduced the repurchase rate to 13 percent from 14 percent, and lowered the refinancing rate for the first time since 2009 to 14 percent from 15 percent. Slowing inflation may allow the central bank to cut policy rates by 1 percentage point each quarter, Binh said.

The discount rate has been slashed by one percentage point to 12 percent.

"Inflation has continuously declined since late August. The liquidity (of the banking system) has remarkably improved, so we are able to reduce the interest rates," Binh said.

In previous years, the banking system's liquidity was weak, as up to 80 percent of lenders' deposits were short-term ones, while 40 percent of their loans were medium and long term, he said.

Vietnam's inflation eased for a sixth straight month in February to 16.44 percent compared with 17.27 percent in January.

The central bank has forecast that inflation may slow to below 10 percent by the end of the year, and the economy may expand 5.5 percent this year, compared to 5.9 percent in 2011.

Former central bank governor Cao Sy Kiem said, "The reduction has been done at the right time. Together with closely monitoring credit growth via the application of different credit limits on different banks, and restricting loans to non-production areas, the interest rate reduction is a reasonable measure to curb inflation," he said.

However, the rate cut could increase the pressure for dong devaluation after a long period of stabilization, he cautioned.

The lower interest rate could make the dong less attractive for people and they might choose to convert their deposits to dollars or gold, raising the pressure on the exchange rate, Kiem said.

He also said the reduction of only one percentage point in the dong deposit ceiling to 13 percent is not big enough to be of real help to firms.

"With this deposit rate, banks will offer annual lending rates of 18-19 percent, which are still too high for companies to develop production and business," he said.

Firms can survive and develop their business only when lending rates are below 15 percent, Kiem said.

But Binh said that after the central bank's latest rate cuts, lending interest rates would be between 14.5-16.5 percent.

More time

Do Minh Toan, vice general director of commercial bank ACB, said banks need more time because they had mobilized capital from customers at high rates earlier.

Before the central bank's move, his bank had already lowered lending rates to 18-18.5 percent, so it will not consider further cuts for at least the next two weeks, he said.

Trinh Van Tuan, general director of OCB, said his bank offers lending interest rates of some 20 percent, and may consider a rate reduction in the next two or three weeks.

"With the maximum deposit rate of 13 percent, lending rates may stand at around 17 percent," he said.

Many domestic firms have complained that dong lending rates charged by banks are still as high as 18-20 percent, hurting their business performance and profits.

Dao Duy Kha, vice general director of the Vietnam Plastic Corporation, said some member firms have been able to borrow loans from Vietcombank, Vietnam's fourth largest lender, for about 16 percent per year.

However, others are having to pay interest rates of up to 20 percent when taking out loans from some small banks, he said.

Priority for small companies

Experts have said that a lower credit growth target planned for this year will relieve pressure on banks to attract funds, helping them cut their deposit rates.

The State Bank of Vietnam has set credit growth targets for individual banks in Vietnam this year within a range of between zero and 17 percent, after loans rose nearly 11 percent last year from 2010.

Many banks said they will prioritize lending to small and medium-sized enterprises (SMEs), and those involved in agriculture and export.

With an allocated credit growth of 17 percent, VIB is expected to offer loans of VND5 trillion (US$238.1 million) to SMEs. The bank's anticipated total outstanding loans for 2012 is some VND60 trillion, said its general director Duong Thi Mai Hoa.

Le Cong, general director of Military Bank, said his bank expects to offer credit of VND4 trillion to exporters, and some VND1 trillion to SMEs operating in the agriculture sector.

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