Banks prefer providing long-term loans to short-term

After the State Bank of Vietnam (SBV) decided to allow commercial banks to apply negotiation-based interest rates for medium and long-term loans, most banks have stopped providing short-term loans.

Commercial banks told reporters that they have to “dodge the laws.” Previously, they liked providing short-term loans at the interest rate of 12 percent per annum. They could then charge additional fees on other services that clients use. Nowadays, they will only provide medium and long-term loans, even when there is demand for short-term loans.

A director of a joint-stock bank in Hanoi revealed that while credit contracts state that these are medium and long-term loans, the banks can disburse the money within several months, and borrowers can also repay debts within several months. He calls this “killing two birds with one stone.” By signing long-term loan contracts, banks do not violate current regulations on the ceiling interest rate. Banks can then lend money at interest rates agreed upon by both sides.

A general director of a state-owned bank also admitted that they must follow the regulations of the central bank more strictly. “However, we still have to manage somehow, because if we strictly obey the regulation of lending money at 12 percent per annum, we will surely incur losses,” he admitted.

Currently, commercial banks must mobilize capital at 10.5 percent per annum. If counting on the compulsory reserve, reserve for liquidity, management fee and provisioning, the price of banks’ capital would all be higher than 12 percent per annum. Therefore, it is impossible to lend money at that rate.

Under current regulations, the loans with the length of 365 days are considered as ‘short-term’ loans, while 366 day loans are referred to as ‘medium-term loans.’ This means that loans of 366 days or more allow banks to negotiate interest rates. Meanwhile, with loans of 365 days or less, banks can lend at interest rates of no more than 12 percent.

A general director of a joint stock bank called the 366^th day, or the 24 hours of the 366^th day as the ‘fatal day’. He said that though the central bank has helped banks by allowing to some negotiated interest rates, policy problems still exist.

A SBV monetary expert admitted that the current ceiling deposit interest rate is putting small depositors at a disadvantage because they can enjoy interest rates of 10.5 percent at maximum. Meanwhile, bigger depositors can negotiate with banks and set claims on higher interest rates.

In fact, experts say, the central bank and the “top” level understand the difficulties of banks, depositors and businesses very well. Still, altering the laws must cannot be done overnight.

VietNamNet/DTCK

Tags: banks in vietnam, Vietnam banking, Vietnam banks, Vietnam finance news, Vietnam financial, Vietnam long term loans

Posted by VBN on Mar 9 2010. Filed under Banking-Finance. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry