Struggling firms not good for banks

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Commercial banks posted impressive earnings in the first half of this year, though the economy and businesses are in dire straits.

VietinBank, the nation's largest partly-private lender by assets, has posted first half pre-tax profits of VND3.62 trillion (US$176 million), or 71 percent of the annual target. Vietcombank, the second largest partly-private lender, has reported first half gross profits of more than VND3 trillion, up 8.2 percent from a year ago.

However, businesses have to run well and earn healthy profits for banks to have a sustainable, long-term future, economist Le Dang Doanh pointed out in a talk with Thanh Nien Weekly.

Thanh Nien Weekly: Commercial banks have earned dozens of millions of dollars in first half profits. Is this a paradox given the state of the economy?

Le Dang Doanh: Banks' profits come from various sources, not only from lending - foreign currency trade, for instance. However they will not do well in the long run if firms don't operate effectively and earn profits. Many companies have been unable to continue running their business in these times. According to the Vietnam Association of Small and Medium-Sized Enterprises, 20 percent of firms have gone bankrupt, and 60 percent have had to scale back operations and cut employees.

In this situation, banks can earn big profits in one year, maybe, but it cannot continue in this vein in the coming years. If commercial banks are earning big profits, while firms suffer because of high interest rates, the banks' development is unstable.

According to some commercial banks, up to 80 percent of their profit comes from lending activities. Did the banking sector overcharge customers even amidst the market's decreasing purchasing power sparked by high inflation? 

Deposit interest rates are high, but banks have still charged too much from their customers.  For example, they offered interest rates on dong deposits of 18-19 percent, while asking for 26-27 percent on dong loans. The State Bank of Vietnam and the Vietnam Banks Association should discuss ways to deal with the issue.

In other countries, banks also earn big profits because they have millions of customers. The margins are not high, but profits are. However, regulations of fees and other things are stricter than ours.

There are some who feel banks in Vietnam are able to make huge profits because they seem to hold a monopoly on raising and providing capital for firms, as other channels such as investment funds and financial leasing are not really effective. Can you comment?

Yes. The stock market no longer plays its role in mobilizing medium-term capital. And other channels are apparently not operating as well, so banks do have a central position in mobilizing and providing funds.

Some small commercial banks have competed in mobilizing capital by raising deposit interest rates to very high levels as well. How should we manage the issue?

I don't think that the liquidity situation at banks is good. Many small banks are actually facing difficulties in mobilizing capital. Now, their dollar loans have increased much faster than that of dong loans.

But to reduce the burden of high interest rates for firms, the government should regulate transaction fees that banks can charge their customers, and not let banks arbitrarily set them as is happening now. We should not have ceiling interest rates, because banks could still break them. The state should ask commercial banks to increase their compulsory reserves, as this can be monitored quite well.

Most commercial banks have broken the central bank's dong deposit interest rate cap of 14 percent, but nobody fines them. The State Bank of Vietnam should turn to other tools that it can use effectively, and seek ways to reduce interest rates, which now stand too high.

What is the risk that high interest rates would bring to the economy?

According to figures reported by the Vietnam Association of Small and Medium-Sized Enterprises, the outlook is very gloomy for business and production. Inflation may continue to rise and economic growth slows down. It means we may see both inflation and recession.


Economist Bui Kien Thanh says banks are businesses, so they can earn big profits when they do good business. In the current context, high interest rates are not the banks' fault.

But at the current lending rates of over 20 percent, enterprises will not be able to function properly. The central bank should therefore offer commercial banks loans at interest rates of 2-3 percent, so that they can lend to firms at interest rates of just 7-8 percent. The high interest rates at present will make production costs rise, contributing to rising inflation and hold back economic growth.

The State Bank of Vietnam should take measures to guarantee that commercial banks operate in a more orderly fashion and take fewer risks. The higher the interest rates that commercial banks offer are, the bigger the default risks they face. In addition to interest rates, other fees are also charged, which impose a bigger burden on firms and hurt the economy.

Small banks have increased their deposit interest rates to lure customers, and large banks have followed suit to keep their customers. Thus, interest rates increase but total deposits in the banking system do not, so it is necessary to take more measures to control the issue.

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