Despite rhetoric and laws designed to change the way business is done in Vietnam, local banks continue to funnel cheap loans toward state-owned corporations.
Many public and private banks have gone so far as to secure central bank approval to lend state-owned groups more than 15 percent of their assets.
They are also willing to offer these companies loans at rates below the annual deposit rate of 6-7 percent.
The trend began after the Bank for Investment and Development of Vietnam (BIDV) the country’s largest privately-owned bank by assets, secured permission to lend more than 15 percent of its assets to the Ministry of Transport's 319 Corporation for work on National Highway 1A.
Then, last July, VietinBank was allowed to exceed the 15 percent limit on its loan to the Northern Power Corporation and the Power Engineering JSC--both subsidiaries of state power monopoly Electricity of Vietnam-- to build, repair and expand a number of electrical networks.
Drawing on that same privilege, in early September, VietinBank disbursed loans to 11 members of the Vietnam Coal and Mining Group (Vinacomin) in excess of the government's asset limit.
Due to its gargantuan holdings, a Vietntinbank customer would have to borrow over VND7.65 trillion ($361 million) in order not to violate the central bank asset cap.
The privatized SeaBank, whose charter capital alone is nearly VND5.5 trillion, also broke the limit to help Vietnam Airlines acquire a single Airbus aircraft.
Eximbank also went beyond the 15 percent cap to lend the national carrier money to buy two planes.
Nguyen Tien Dong, director of the credit division at the central bank, said banks have put “too much” money into state-owned corporations, often at interest rates as low as 4.5-5 percent a year.
Private firms currently seek loans for a minimum of 10-12 percent a year.
Can Van Luc, deputy general director of BIDV, said they believe they have better control over their money and take fewer risks when they lend to big state firms.
Luc apparently wasn't aware of the recent government audit of state-owned corporations that found many of their operations unsustainably dependent on cheap, borrowed cash.
The audits also revealed that their debt-to-equity ratios had passed the Finance Ministry’s safety level of 3.
The audits revealed the 319 Company maintained an average ratio of 4.66; Vincomin's ratio fluctuated between 3.18 and 9.
The Civil Construction Engineering Corporation (Cienco) No.6 -- another company that belongs to the transport ministry -- maintained an average debt-to-equity ratio of 3.27.
Finance expert Vu Dinh Anh, the deputy director of the state-backed Institute of Economics and Finance, said the banks’ preferences for state-owned borrowers don't make sense.
The government itself is pushing for restructuring of the state-owned sector, including cutting its credit supply and shifting loans to the private sector.
So he does not understand why the central bank has allowed lenders to continue to offer state-owned giants with such outsized privileges.
He said private firms, particularly small and medium-sized enterprises, are either struggling or collapsing under the weight of high interest rates.
Figures show that 18,271 business shut down during the first five months of this year and 50,263 businesses suspended their operations during the same period.