Government bonds have seen robust sales thanks to massive buying by banks, but economists warn it is stymieing the growth of private bonds as well as firms' plans to borrow.
In the first quarter the government issued some 65.45 trillion dong (US$3.13 billion) worth bonds, almost half the full year target.
Government bonds are a good option due to the low risk involved.
Most of the buyers were banks who are flush with funds since lending remains sluggish. Outstanding loans were up only 0.03 percent this year as of late last month while deposits rose by 3.86 percent.
Thoi Bao Kinh Te Vietnam newspaper Tuesday quoted economist Vu Dinh Anh as saying banks prefer bonds since they lend little and gold and other asset classes are risky.
The bonds also offer instant liquidity.
But it does no good for the economy, Nguyen Hoang Hai, general director of the Vietnam Association of Financial Investors, pointed out.
Since the government is unintentionally proffering them a safe investment channel, banks lack the motivation to lend to companies, who have repeatedly sought lower interest rates, he said.
The central bank late last month lowered the deposit rate cap to 7.5 percent from 8 percent. The National Financial Supervisory Committee has suggested a further cut to 7 percent to bring down lending rates to around 10 percent since businesses complain they still cannot afford the rates considering the economic situation.
The government bonds also hurt the uncompetitive non-government segment, he said, since they offer attractive yields of 8.8-9.4 percent.
"Yields of bonds issued by companies must be 13-15 percent to be able to compete [with government bonds], but these rates would be too high for them."
He called for trimming the rates on government bonds so that non-government bonds can become more competitive.
This would also persuade banks to focus on lending, he pointed out.
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