Vietnam cuts reserve levels to lift agriculture loans

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Vietnam's central bank on Friday cut the compulsory reserves level for banks with large agriculture lending to one-fifth the regular rate from February through July.

The reserve requirement adjustment was likely aimed at curbing soaring food inflation and, while unlikely to have a major impact on the economy overall, could help raise living standards in rural areas.

"By allowing more credit to circulate in this sector, Vietnam probably hopes to bolster the sector's output both for domestic and export purposes," said Trinh Nguyen, an economist at HSBC in Hong Kong.

"Increased production, which could come from having more access to credit, could ease some of the price pressures... As most of Vietnamese labor force is still in the agriculture sector, a boost to this sector would have a large impact on the welfare of Vietnamese people."

The favorable reserve requirement rates have been given to Agribank, Lien Viet Post Bank, Mekong Housing Bank, Me Kong Development Bank, the State Bank of Vietnam said in a statement.

Central bank governor Nguyen Van Binh has said agriculture lending should be the banking system's top priority this year. Over-lending in recent years to sectors such as real estate and stocks has stoked inflation and caused bad debt levels to rise.

Vietnam is the world's leading exporter of robusta coffee and the second largest rice exporter, after Thailand. Between 70 and 80 percent of the Vietnamese population of about 87 million live in rural areas.

Binh has stipulated that state-run Agribank, the country's biggest bank by assets, extend 75-80 percent of its total lending to agriculture while other lenders should devote at least 20 percent of their credit to the sector.

Lenders who devote 40-70 percent of their loans to agriculture in the latest fiscal year will be eligible for a reduction in their reserves requirement, the central bank statement said.

The current reserve requirements that apply for the banks getting their levels reduced until July was not clear. The central bank has been requiring reserves levels of up to 3 percent for dong deposits and up to 8 percent for foreign exchange deposits, depending on the terms.

The central bank has targeted total credit growth this year at between 15 and 17 percent, compared with an expansion of 10.9 percent in 2011.

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