Following the hikes in dong and foreign currency deposit interest rates at many domestic commercial banks recently, lending rates in turn are also significantly rising.
Dong lending interest rates of the Bank for Agriculture and Rural Development (Agribank) which account for 35% of market share of banks nationwide, are ranking top among lending rates of state run banks. The medium and long-term lending rate is up to 1.2%-1.25% a month and the short-term lending rate 1.05%-1.15% per month. The aforementioned lending rates are even higher than those at urban commercial joint stock banks, nearly equal to lending rates at rural commercial joint stock banks and people’s credit funds. Presently, lending rates at Vietcombank for other commercial banks climbed up to 0.65-0.68% but only for short-term borrowings as Vietcombank now almost does not spare and funds to lend to other banks. In fact, some of Agribank’s branches are short of capital and have declined to lend to what are considered financially feasible projects.
Even Vietcombank, which has a stable interest rate level and the lowest lending rate among commercial banks, has recently also significantly hiked lending interest rates because deposit interest rates have increased sector wide and Vietcombank has reportedly admitted to difficulties in raising sufficient deposits. The highest lending rate of Vietcombank is now up to 11.52% per year or 0.96% per month, up by 0.6% compared to the previous rate. The lowest lending rate is for short-term loans that are mortgaged by savings books issued by Vietcombank and fixed at only 0.77% a month as previously while the current rate is 0.83% a month or 9.96% a year. The average lending rate is now fluctuating from 9.72% per year to 11.52% per year. Such lending rates are equal to some other state owned banks and nearly reach those of urban commercial joint stock banks. Therefore, it is said urban commercial joint stock banks are planning to soon again raise lending rates by another 0.05% to 0.06% a month before the end of April.
Additionally, the interest rate level hike can be clearly seen on the Treasury bill auction market, the OMO and other interest rates of the central bank. In T-bill sessions in January, the bid winning coupon was 5.90% a year but by early April the rate increased to 6.05% a year and hit 6.2% by April 11.
But it should be pointed out that increases in rates is a normal event according to international rules. As deposit interest rates are hiked it only follows that lending rates will also rise. Foreign currency rates in Vietnam closely follow the international monetary market. Since the US Federal Reserve from June 2004 raised its key rate seven times from 1.0% a year to 2.75% a year, thus domestic US dollar rates had to follow suit. Increase in interest rate of the State Bank of Vietnam is also attributed to the public psychological worry of inflationary pressure.
Businesses say they now prefer to borrow in US dollars giving the reason the real dollar lending rate is lower than the dong rate. Unavoidably, this will push the economy into dollarisation.
Regarding economic growth, raising interest rates is a concern because bank credits are the mainstay of capital supply channel for state initiated projects, businesses and farmer households, even foreign investment projects and joint venture projects in Vietnam. Due to interest rate hikes, a tighter lid on credit capital, the plan on raising 11.5 trillion dong from government bonds, education bonds this year may not turn out as anticipated. Furthermore, the increase in the cost of borrowing combined with ever higher costs for petroleum products, steel, and chemicals will the performance of industry thus pulling down the economic growth rate. Given the high CPI which year-on-year had climbed to 9.7% in January, and in regard to the macro-economy, it is imperative for the central bank to take into account all aspects related to finance, prices, and investment to harmonise the targets as growth, reduced inflation, job creation and a lessoning of the dollarisation of the economy. This is a difficult task for a transitional economy such as Vietnam’s.