Rate Ceiling Removal Still A Real Stumbling Block

09-May-2012 Intellasia | Saigon Times | 7:01 AM Print This Post

The interest rate cap remains, probably until the end of the second quarter this year. This controversial policy tool has once again captured attention because, despite ample liquidity in the banking sector and falling interest rates in the bond, treasury bill and interbank markets, enterprises’ access to capital is still limited.

In February 2012, support for the removal of the interest rate cap started to soar. However, an official deemed this move impractical back then, contending that, given inadequate data about the performance of every bank in Vietnam, such a change would cause turbulent capital flows and push up interest rates. Since the State Bank of Vietnam (SBV) is likely to rescue every credit institution, the absence of an interest rate cap will cause money to flow into banks that offer high returns on deposits.

Consequently, some have urged SBV to keep the public informed of banks that fare badly according to prevailing standards. The central bank has given the suggestion much thought, but is still reluctant to announce the list of incompetent banks. Public opinion can only guess what these banks are, taking into account credit growth figures.

Such speculation certainly fails to address the fundamental issue of how the central bank can effectively remove, if ever, the interest rate ceiling. Admittedly, feeble banks may be willing to offer incredibly high returns on deposits as a way of enhancing liquidity. However, should struggling banks really shoulder the entire blame? SBV itself says that these banks account for only 10 percent of the market and can be judiciously handled with such instruments as refinancing and restructuring packages, so that the ailings will not spread to other credit institutions.

SBV has yet to announce the list of underperforming banks because it fears bank runs. Such vigilance is probably warranted, but can be problematic. Banks with woeful performance can still survive given sufficient backing from SBV. In fact, the central bank’s reluctance has led many to wonder whether the share of ailing banks is really 10 percent. Could it be that even banks that have posted better liquidity are still haunted by severe internal flaws? Are banks that have undergone mergers and acquisitions capable of tackling bad debt now? Has there been a unified balance sheet for banks? Just how far the first stage of restructuring has been a success remains unclear.

Interest group problem

Big banks continue to benefit the most from the interest rate cap. When interest rates are similar, branded banks inevitably lure more deposits. Besides, these banks also enjoy SBV’s refinancing loans, which can be disbursed in sectors receiving preferential treatment – agriculture, export and so on. The VND30 trillion worth of capital for refinancing loans recently unveiled by SBV is probably meant to help not only poor performers but also their prestigious counterparts.

By right, as deposits rise and refinancing loans from SBV are available, big banks should swiftly slash lending interest rates to attain a first-quarter credit expansion rate of 3-4 percent year-on-year to foster economic growth. This is far from the case as star performers clocked up negative credit growth in the first three months, dragging the figure for the whole sector to minus 1.96 percent (the first negative value recorded over the past 10 years). Capital access remains woeful, and yet big banks have focused on protecting themselves through investment in the bond, treasury bill and interbank markets. Lending interest rates, meanwhile, are still sky-high.

These credit institutions often gripe about the lack of thriving enterprises into which capital should be channeled. However, in view of escalating inventories and capital costs, how many thriving enterprises can there be? Last year witnessed staggering profit growth of G-12 despite bleak economic prospects. Has anyone worked out the returns reaped by this group in the first quarter of 2012, when gross domestic product growth hit a five-year low of 4 percent? The figure is likely to be at least 10 percent, which is extremely enviable.

The disparity between group interests and the economy’s prospects must be addressed, starting from the interest rate cap. This instrument has outlived its usefulness. Stimulating purchasing power is vital if the government wants to cut inventories and prop up production. Instead of boosting money supply, which will stoke inflation, the authorities should make it easier for enterprises to lower prices. Banks blessed with ample liquidity can contribute by reducing interest rates. Of course, doing so means banks will harvest less profit, which is hardly an enticing prospect for credit institutions.


Category: Finance

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