The current high interest rates in Vietnam are a great source of profit for banks, while businesses are facing numerous hurdles.
The State Bank of Vietnam (SBV) policies on interest rates over the past 12 months have led to increased production costs. Deposit rates are limited while lending rates are self determined by commercial banks, says Vu Vinh Phu, Chair of the Vietnam Supermarket Association.
Banks enjoy advantages from current monetary policies
With a 3-4 percent ratio between borrowing and lending rates, in theory, banks can earn a profit. However, the ratio has reached 8-10 percent in recent months. As a result, banks are enjoying huge profits, but depositors and businesses are facing many disadvantages.
Phu claims that nowhere else in the world has such an interest rate policy, especially in the context of the economic downturn, rising inventories, weak purchasing power and people’s poor living conditions.
According to Phu, if the deposit rates are limited, the lending rates should be limited, too. Of course, he says, there can be incentives for some prioritised cases. Otherwise, banks can apply floating interest rates so that banking transactions can follow market fluctuations.
In addition, policies and information should be publicised, and the State should intervene in controlling the price of goods produced by businesses that are dominating the local market. The State should also take measures to prevent the possible resurgence of inflation in the near future.
The government has asked the SBV to lower interest rates and it should ask the central bank to stabilise those rates at an appropriate level. Dr Ngo Tri Long, former deputy Head of the Price and Market Research Institute, says both basic and target inflation rates should be taken into account to prevent shocks from outside. Lowering interest rates does not mean reducing requirements for loans or lowering credit quality. If the interest rates are not lowered, a cycle of bad debt may appear soon.
Dr Long affirms that the heart of the matter does not lie in reduced interest rates. It will be meaningless if the rates are lowered but businesses still find it hard to access loans. At present, many businesses are suffering from high inventories and the consumer price index (CPI) is falling.
Businesses still face difficulties
According to SBV statistics as of June 30, new outstanding credit saw a year-on-year increase of 0.76 percent. SBV Governor Nguyen Van Binh says the biggest challenge is dealing with slow economic growth, which results in financial difficulties and decreased credit growth.
Leading economist Nguyen Minh Phong says high interest rates prevent businesses from accessing loans. Banks are also hesitant to offer loans to local firms due to their rising bad debt ratio.
The annual deposit rates are currently maintained at 9 percent, but the lending rates are out of control. Some businesses say they are enjoying an annual 13-percent, while others claim they are unable to get such a rate.
At the moment, banks are dealing with bad debt-related issues so they cannot offer loans for unfeasible projects. In the immediate period, banks should be able to increase their liquidity, thanks to their increasing deposit loans.
Dr Nguyen Thi Lan from the Financial Academy said the current bad debts are causing interest rates to rise and slowing down credit growth. The SBV should complete its projects to purchase bad debts and restructure banks. This means that bad debts which cannot be withdrawn should not be bought, she adds.
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