Credit crunch puts firms in life and death situation

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Nguyen Tri Kien needed VND6 billion to keep his company, Minh Tien, a leading bag manufacturer, afloat.

When he approached his local bank, and found that annual interest rates had hit 25 percent, he gave up on his plans to seek a loan.

"Only companies that see a 30 percent profit margin can afford such high interest rates," Kien said, adding that such margins are no longer possible given the recent dip in sales.

Many businesses, from garment to plastic producers, said high borrowing costs have made it really difficult to refrain from cutting back on production.

Nguyen Thi My Linh, director of a garment firm in Ho Chi Minh City, said bank loans are now officially out of her reach. "There's no way we can repay them," she said.

Linh added that the biggest concern for many businesses now is whether or not they can survive the rest of the year.

Lending rates for the manufacturing sector soared as high as 20 percent, according to a report published last week by the State Bank of Vietnam. On Monday, Tuoi Tre newspaper reported that some small banks had hiked interest rates on dong loans to up to 28 percent.

According to the central bank, Vietnam's money supply rose 1 percent in the first four months of this year, a paltry jump considering the bank set a 15 percent growth target for 2011.

Meanwhile, credit grew by 5 percent in the same period a figure the monetary authority had hoped to keep below 20 percent for this year.

Some small banks said their loans had expanded by that margin, already, which means they will have to recoup their debts before offering any further loans. Other lenders said that, even if they had room for credit growth, they'd still need to control lending to ensure liquidity.

The State Bank of Vietnam has intensified its efforts to control inflation, which hit a 28-month high in April.

In late April, following consecutive increases in policy rates, the central bank said it would stop tightening its monetary policies in the next three to six months.

However, in its latest move, the central bank increased the reverse repurchase rate by 1 percentage point to 15 percent on May 17, the second hike in two weeks. The rate, which is used to charge commercial banks in daily open-market operations, has risen 8 percentage points since November last year.

Economist Pham Chi Lan said it's necessary to tighten control over credit expansion but the policy should be applied only to state-owned enterprises. These businesses take out huge loans despite the fact that their economic efficiency remains questionable, she said.

Capital resources in the country have their limits and smaller companies desperately need access to loans to keep their business running and provide jobs to workers, Lan said.

"Nobody wants to see the economy decline and companies shut down," she said.

Hoang Cong Gia Khanh, a professor at the University of Economics and Law, said that, if prolonged, the tightened monetary policy will push many small businesses to bankruptcy.

Khanh said high inflation in Vietnam was a result of macroeconomic instability and thus cannot be tackled by monetary policy alone. Instead, the government should focus on restructuring the economy by, first and foremost, slashing public investment.

Local companies are paying for the weaknesses of the economy, economist Tran Ngoc Tho told Thanh Nien.

"The government needs to let enterprises know about what's going to happen next and whether the prospects are bright," Tho said. "Because right now, there is nothing businesses can do apart from trying to live from day to day."

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