Banks reduce foreign currency loan

25-Sep-2020 Intellasia | Thoi bao Ngan hang | 6:02 AM Print This Post

On September 22, the State Bank of Vietnam (SBV) held a press conference to announce the results of banking operations in the first months of 2020, in which special attention should be paid to credit institutions that strictly control foreign currency lending activities.

In fact, foreign currency credit tends to decrease quite quickly. This is partly because Circular 42/2018/TT-NHNN has cut many foreign currency borrowers. Accordingly, from April 1, 2019, credit institutions are no longer allowed to provide reciprocal foreign currency loans to pay abroad for the import of goods and services in order to carry out their production and business plan for goods to serve domestic demand, even when borrowers have enough foreign currency from production and business revenues to repay loans. Then, from October 1, 2019, mid-term and long-term lending activities to pay abroad for imported goods and services will also be terminated.

Currently, only exporting enterprises with foreign currency income will be able to borrow short-term foreign currency loans from banks to pay for the import of goods and services in order to carry out their export goods production and trading plan. As for the domestic capital needs in order to carry out the production and trading plan for export goods, enterprises are also allowed to borrow in foreign currency, but the borrower must sell the loaned foreign currency to the credit institution. This means that businesses borrow foreign currencies in the form of swap, disburse in VND to take advantage of lower interest expenses.

With this form, businesses often borrow foreign currency and exchange for money to pay the orders to farmers to collect raw materials for shrimp, fish, coffee, pepper, cashew… processing exports. After completing an export delivery contract, the enterprise must resell the foreign currency amount from the export money to the bank that issued the foreign currency credit. Export enterprises that borrow foreign currency swap mainly short-term loans for three months or six months currently have interest rates ranging from 2.7 percent 4 percent per year, so it is more beneficial than short-term loans in VND with interest rate five percent per year.

However, in the context of the disruption of import and export activities due to the Covid-19 translation, the demand for foreign currency loans of enterprises is not great, even though the exchange rate has been maintained quite stable since the beginning of the year. Foreign currency lending minimises risks for businesses. According to the data of the SBV HCM City Branch, as of the end of August 2020, foreign currency loans outstanding of credit institutions in the province decreased by 0.52 percent compared to the end of 2019. In terms of absolute value of outstanding loans for foreign currency loans reached about 165 trillion dong (converted), accounting for about 6.96 percent of the total loan balance in the whole area, much lower than the proportion of 7.78 percent in the first eight months of 2019, accounting for 7.78%.

Foreign currency credit decreased further pressure on exchange rate. In particular, according to the current mechanism, only enterprises with renewable foreign currency can borrow foreign currency, so foreign currency credit does not put pressure on the foreign currency market when it comes to repayment period. Another factor is that the people have turned their backs on gold, making the exchange rate no longer fluctuating when the price of gold rises sharply as before.

In addition, the USD deposit interest rate is still maintained at zero percent, much lower than the VND savings interest rate, making holding USD no longer bring many benefits, especially when the exchange rate in months the beginning of the year is quite stable. That is the reason that some gold shop owners in HCM City reflect, during the Covid-19 epidemic earlier this year, due to the social distancing, many people brought hoarding dollars to sell for VND to spend and deposit VND to the bank to get savings interest.

Economist Huynh Buu Son said that the SBV’s policy of zero percent USD deposit interest rate is reasonable, because if the banking system mobilises 500 million USD, it will have to prepare 500 million USD to pay back to foreign currency depositors when maturity comes. Son said that, in the long run, the regulator needs to remove the policy of mobilising and lending foreign currencies to switch to trading relations to minimise the dollarisation in the economy.

 


Category: Finance, Vietnam

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