Soaring rates keep Vietnam companies short on cash

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Interest rates have pushed loans out of reach for local businesses and experts warn economic growth will suffer if the situation does not change.

Interest rates on medium and long terms loans now range from 15 percent to 17 percent a year, the State Bank of Vietnam said in its weekly review published Monday.

But at some small lenders interest rates on dong-denominated loans have risen to as high as 20 percent, the central bank said.

Although lenders are not allowed to set their rates higher than 12 percent on short term loans, many companies said they had been asked to pay up to 18 percent including various unofficial extra fees.

Some lenders avoid breaking the regulation by converting short term loans into medium and long term ones so that they no longer have to abide by the central bank's lending rate cap.

In late February this year, the central bank allowed banks to offer more loans at negotiable interest rates. Previously, rates on all loans except for consumer loans were capped at 1.5 times the central bank's benchmark base rate.

Unaffordable rates

Following the deregulation, many businesses have struggled with rising borrowing costs.

Hoang Minh, director of Hanoi-based Duc Minh Real Estate Service, said his company need to borrow VND12 billion for a new project from a bank and he had no choice but to accept a high 21 percent rate.

Lenders said they can't lower the rates as they also have to pay more than the current deposit rate cap of 10.5 percent to attract enough funds.

A commercial bank deputy director, who wished to be unnamed, said all banks announced similar deposit rates of no more than 10.499 percent, but in fact many of them had to offer bonus rates or else their clients would choose other banks.

Local lenders have recently asked the central bank to eliminate the cap deposit rates. The central bank, however, is not willing to take such a move, fearing that it could trigger a race among commercial banks.

Economist Tran Du Lich, a member of the National Financial and Monetary Policy Advisory Council, said lending rates of up to 20 percent a year are too high.

"There are certain business deals that can bring companies huge profits. But it's not common. Most companies with normal operations can never afford such high rates."

With dong loans becoming more expensive, local businesses are switching to dollar loans to benefit from stable interest rates, Lao Dong newspaper reported Wednesday.

As the dong/dollar exchange rate is expected to remain stable for a long time, dollar loans will be the better option to corporate clients, the newspaper said.

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