Oxygen-starved firms can breathe easier with low-cost capital on the way.
On April 11, the State Bank lowered key interest rates by 1 per cent, with the refinancing rate and mobilisation cap falling to 13 per cent and the discount and basic rates down to 11 and 9 per cent, respectively.
In addition, the State Bank last week issued Document No 2056/NHNN-CSTT which largely expands credit access for the real estate sector and private consumption. Earlier, the State Bank asked credit institutions and foreign bank branches to keep the maximum lending for “discouraged fields” including real estate, securities investment and private consumption against the total outstanding loans at 16 per cent for 2012.
The move translates to loans now being on offer for building, repairing and purchasing a house for leasing or selling and for developing housing projects in urban areas. Loans are also offered to employees of state-owned enterprises to buy shares in their companies’ initial public offerings.
Also, consumer loans no longer belong to the group of “discouraged fields”.
State Bank Governor Nguyen Van Binh said the above changes meant 50 per cent of all potential borrowers off the black list. Although stock market investments remain to be in the group of “discouraged fields”, Saigon-Hanoi Securities Company analyst Doan Anh Nguyet said removing real estate projects from the black list would lead to more credit for the stock market.
State Bank figures show that loans to the real estate sector currently account for about 10 per cent of the banking system’s total outstanding loans. Binh said after the cuts in key interest rates, the lending rate would drop to 13- 16 per cent. The current average rate is 17-19 per cent. The governor claimed banks had sufficient capital to reduce interest rates and the banking system’s total reserves had amounted to VND60 trillion ($2.88 billion), more than the obligatory reserve of VND15-20 trillion ($720 million).
In response to the State Bank’s new moves, many commercial banks last week reduced lending rates by 1-2 per cent, including the rates for real estate and securities investments. Techcombank made about $192 million available at 15 per cent for agricultural, export and essential consumer goods manufacturing businesses. Eximbank offered 16.5 per cent for small businesses and home purchase loans, while HSBC reduced long-term home purchase loans from 18 per cent to 17 per cent.
Meanwhile, BIDV stated the bank would offer consumer loans and loans for stock market investments at 16.5 and 17 per cent, respectively. “The rate for our real estate loans will be 16 per cent. We will also try to give more support to real estate purchasers,” said Pham Quang Tung, BIDV deputy director.
Le Quang Trung, deputy director of private bank VIB, said 70 per cent of Vietnamese banks’ profit came from interest income and lowering the lending rates would bring capital demand closer to supply. “Companies that previously borrowed at 18-19 per cent can now take out a loan at 16-17 per cent. Businesses that have a good financial standing can get a much lower rate,” he said.
On April 11, the State Bank also required credit institutions to extend payment periods for firms struggling to repay loans.
While the increased credit could help ease the government’s worries about the stagnancy of domestic production, foreign financial institutions offered words of caution. Dominic Mellor, ADB Vietnam economist, said inflation in 2013 might average 11.5 per cent on expectations of higher global food prices and hikes in domestic electricity and fuel costs.
“Lowering interest rates at this time to 11-12 per cent will put the dong under renewed pressure. While foreign reserves have been rebuilt, they are still low, making the economy vulnerable to external shocks,” he said.
According to ADB, Vietnam’s forex reserves by the end of 2012′s first quarter reached $17 billion, equal to about two months of imports, far below the safe level of 2.5 months of import as defined by the World Bank.
In a report entitled ‘State Bank cuts rates again by 100bps-too fast?’ issued last week, ANZ economists warned that aggressive monetary easing risks were fuelling inflation expectations and would make controlling inflation more difficult. ANZ also claims that while the recent decline in inflation came about because food prices declined, the danger of future inflation lurks because non-food/fuel prices continue to be unsteady.