Vietnam banks cut interest rates, carefully

By Anh Vu, Thanh Nien News

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A Sacombank teller in Hanoi. Photo: Ngoc Thang A Sacombank teller in Hanoi. Photo: Ngoc Thang

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Major banks say they've agreed to take a hit by cutting interest rates for struggling businesses, but economists say there's a lot more they can do.
After the central bank lowered the deposit and interest rates late last month, many commercial banks followed suit by cutting interest rates on middle and long-term loans.
At the end of last month, Pham Quang Dung, general director of Vietcombank, said his institution had cut annual interest rates to seven points on short-term loans in five prioritized sectors – agriculture and rural development, exports, supporting industries, small and medium-sized businesses, and high-tech businesses.
Since then, middle and long-term loans have been capped at 10 percent a year, down from 10.3.
“Vietcombank's rates are rather low. Preferential loans carry interest rates of just 6.5 percent a year,” Dung said.
He acknowledged, however, that the bank will have to offer some expensive loans to offset the cheap ones.
“The rate reduction must be gradual. Low rates will be offered to strong businesses. It would be very dangerous for us to offer cheap loans to risky businesses.”
Vietinbank also cut middle and long-term loan rates in priority sectors to 10 percent a year on October 29.
Nguyen Van Thang, board chairman of Vietinbank, said rate cuts will do the business community a lot of good and win banks more customers.
By adopting lower rates, the bank has, in essence, agreed to a roughly VND100 billion (US$4.7 million) cut in profits by the end of the year.
Nguyen Duc Huong, vice chairman of LienVietPostBank, said they have cut rates in the prioritized areas and will consider doing so in other areas as well.
Huong said rate cuts largely affect their income.
“But if banks want to eat later, they have to starve themselves a bit now,” he said.
“Banks have to share in businesses’ difficulties, help them move forward so banks themselves have someone to lend to and survive.”
The Finance Ministry said more than 70,000 businesses dissolved, went bankrupt or ceased operating during the first nine months of the year.
Only around 53,000 new businesses opened during that period, down 8.7 percent from the same period last year.
Room for more rate cuts
Economists say the gap between deposit and lending rates remains too large.
Dr Tran Du Lich, deputy head of the Ho Chi Minh City delegation at the legislature, said deposit rates are three to four percentage points lower than interest rates.
He said interest rates on middle and long-term loans have not dropped in time with deposit rates.
For that reason, many businesses have been reluctant to borrow for long-term business plans, such as investing in new equipment, he said.
He suggested that banks make bolder rate cuts on middle and long-term loans for a wider range of businesses.
Cao Si Kiem, the former central bank governor, said previous rate cuts prevented business shutdowns and suspensions.
“Banks should cut middle and long term loan rates further,” he said. 
But Huong from LienVietPost said the gap is actually just above two percentage points as banks only lend 80-85 percent of their deposits.
“We need to be very frugal in order not to suffer losses,” he said.
He says he began seeing signs of a mass withdrawal when deposit rates fell to 5-7.1 percent a year.
“The stock market meanwhile is attracting them, so people have withdrawn money to buy stocks," he noted. "The property market is also warming up.”

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