Vietnam central bank says no plan to cap lending rates

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Vietnam's central bank does not have any plan to cap lending rates as it is not a feasible move, Governor Nguyen Van Giau told the press on Thursday.

"There have been suggestions but there are no policies yet," Giau said, responding to speculation that the monetary authority was considering a cap of 19 percent on lending rates.

"Some believe that a rate cap could prevent banks from hiking their interest rates, but the reality is different. A rate cap would work only if there were a surplus in credit supply, but now the supply is short," he said.

A rate cap would distort credit activities, Giau said. "Banks would appear to offer loans at 18 percent but they actually get 3 or 4 percent extra under the table. This can lead to bribery in exchange for easy loan eligibility requirements, hurting the whole banking system."

The State Bank of Vietnam in March recognized a rate cap of 14 percent on dong deposits that had been established earlier by the country's bank association. Market deposit rates, however, have exceeded that limit, with some banks even offering 19 percent.

Lending rates, meanwhile, have reached as high as 28 percent, making things very difficult for many businesses. There has been talk that the central bank may lift the deposit cap and start imposing a lending rate cap of 18-19 percent.

In an interview with Thanh Nien last week, economist Tran Hoang Ngan said the central bank should not do so because banks would just find a way to break the rule again. Instead, he suggested that the government take things slow and try to help small banks improve their liquidity.

The State Bank of Vietnam is trying to keep credit growth at below 20 percent this year in an attempt to control inflation, which stood at nearly 20 percent this month.

Giau told Thursday's press briefing that the central bank aimed to keep credit for the non-production sector at 16 percent this year.

"Total credit in the economy is now 1.2 times its gross domestic product, and almost no other country has such a high level. We need to bring it down," the central bank governor said.

During tough times, local businesses need to try to cut operational costs and ease their dependence on bank loans, Giau said. "The goal of the government is to rein in inflation, so when interest rates are high, businesses may have to accept lower profits."

As of May 23, dong deposits fell by 2.75 percent compared with the end of 2010, he said. Corporate deposits in particular fell by VND156.7 trillion (US$7.63 billion), but individual clients put VND107.3 trillion ($5.22 billion) more into banks during the period.

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