Vietnam is in the group of countries that have the highest borrowing costs in the world, with interest rates of around 20 percent, a senior financial official has said.
Le Xuan Nghia, vice chairman of the National Financial Supervisory Council, said such rates are too high compared to 5 percent in China and 6-7 percent in most Southeast Asian nations.
"High interest rates translate into high production costs, making it hard for local companies to compete against regional rivals," he said.
For businesses to survive, lending rates have to be cut to 12 percent, Nghia said.
Can Van Luc, senior consultant at the state-owned Bank for Investment and Development of Vietnam, also known as BIDV, said Vietnam is an unusual case, with interest rates being kept at a high level for a long time.
He said as local companies take out loans to cover 60 to 70 percent of their capital demand, high interest rates will immediately cause production to be halted and business to be shut down.
The State Bank of Vietnam last month ordered five major banks Agribank, BIDV, MHB, Vietcombank and Vietinbank to cut costs by 5 to 10 percent so that they can bring interest rates down. Their rates for medium and loan terms loans are still hovering around 19 percent.
Do Thi Nhung, deputy director of the central bank's monetary policy department, said policy makers understand that local businesses are struggling, which in turn will cause trouble for the banking system.
Nhung confirmed the central bank's plan to cut the deposit rate ceiling by an average 1 percentage point each quarter if liquidity improves and inflation continues to slow, following a cut in March that brought the limit to 13 percent.
By the end of this year, deposit rates may be lowered to 10-11 percent, allowing banks to bring lending rates down, she said, forecasting there will be a gap of 3 or 4 percentage points between the deposit and lending rates.