Businesses prefer borrowing in foreign currency

The dong lending interest rate has become so high that many businesses have decided to borrow loans in foreign currencies despite fears about dollar price fluctuations.

According to Ly Xuan Hai, General Director of Asia Commercial Bank (ACB), banks have begun raising the dollar deposit interest rate to lure more capital in foreign currencies. Concurrently, they aim to encourage people to borrow in dollars to enjoy lower interest rates (dollar loans now have interest rates just equal to ½ of 1/3 of dong loans).

Hai notes that demand for foreign currency loans has increased a little, because many businesses cannot afford the overly high interest rates of dong loans.

Currently, dollar loans have average interest rates of 5.5-7 percent per annum. Some banks promote dollar loans by offering very low rates of between 3.5 and 4.5 percent.

As for dong loans, businesses must pay the actual interest rates of 15-18 percent per annum, though the ceiling interest rate for short-term loans, under State Bank of Vietnam (SBV) regulations, is only 12 percent.

Nguyen Quoc Sy, Deputy General Director of Mien Tay Bank, also confirms that many of his clients have shifted to borrowing in foreign currencies thanks to the attractive interest rates.

Sy also added that those businesses are mostly export companies that have earnings in foreign currencies and do not fear risks associated with the dong/dollar exchange rate.

According to Sy, importers think twice before borrowing in foreign currencies, because no one can predict dollar price increases. Besides, companies cannot be sure that they will be able to purchase dollars to pay bank debts when they mature.

According to the SBV HCM City Branch, by the end of February 2010, capital mobilized by local banks decreased by 0.45 percent in comparison with the beginning of the year. Businesses have used up their capital for production and business instead of depositing at banks.

Capital mobilized in dong decreased by 1.3 percent, while capital in foreign currencies increased by 1.77 percent. Outstanding loans in dong during the first two months of 2010 decreased by 0.35 percent, while loans in foreign currencies increased by 2.48 percent.

Explaining this, Nguyen Hoang Minh, Deputy Director of the SBV HCM City Branch remarked that the lower interest rates of foreign currency loans is the biggest factor in persuading businesses to borrow in foreign currencies. Additionally, the expansion of subjects eligible for foreign currency loans has also led to increases in the foreign currency loans.

In related news, commercial banks have raised the quoted dollar price they purchase from businesses and the public. The move by commercial banks has immediately led to a sharp rise of the dollar price on the free market.

The official interbank exchange rate announced by SBV for March 8, 2010 stayed the same at 18,544 dong per dollar.  The banking system, in contrast, has raised the purchase price by 20 dong per dollar. Vietcombank, for example, quotes prices at 19,070-19,100 dong per dollar, while it was 19,050-19,100 dong per dollar late last week.

On the black market, the dollar was 19,390-19420 dong per dollar, an increase of 20 dong over late last week.

VietNamNet, TBKTSG

Tags: Vietnam finance news, Vietnam foreign currency, Vietnam foreign currency market