Central bank targets fourteen percent annual lending rate

It’s anticipated that commercial banks will offer short term loans at a real interest rate of fourteen percent/annum after the State Bank removes its ceiling interest rate on short term dong loans, reports Tuoi Tre. That’s two percent than the current official ceiling, but three or four percent lower than what enterprises are actually being charged at present.

The target lending rate was discussed on April 2, at a meeting convened by the State Bank of Vietnam (SBV) with commercial banks in Hanoi and HCM City, and is widely seen as a step by the central bank to force the interest rate down to a level that enterprises will consider to be reasonable.

The path to lower interest rates

According to Dr, Tran Hoang Ngan, a member of the National Advisory Council on Monetary Policy, the first thing that needs to be done is to free up idle capital by allowing banks to earn a higher return on short term loans.

In principal, the State Bank will allow banks to charge a market-determined rate for short term loans just as it has on medium and long term loans. However, it is understood that the state-owned commercial banks, which have a big market share, will all offer to lend at fourteen percent per annum. Doubtless some commercial banks will still demand 17-18 percent or higher, but qualified borrowers will ignore them and only contact the banks that are willing to lend at fourteen percent.

The intended loan interest rate of fourteen percent per annum is two percent more than the current ceiling interest rate, but lower by three or four percent than what borrowers are actually paying for short term dong loans at present. That’s because banks have tacked on various ‘lending fees,’ raising the real cost of borrowing money to seventeen percent or more.

Ngan predicts that by the end of the year, the deposit interest rate will be eight to ten percent per annum, while the lending interest rate will be 12 percent or lower.

Ngan adds that, together with cutting the lending interest rates, banks will gradually reduce what they’ll pay for dong deposits to the twelve percent per annum level. Right now, banks are forbidden to advertise a rate of more than 10.5 percent/annum for short term deposits; in practice they offer incentives to depositers that raise their actual cost of capital. To encourage banks to cut deposit interest rates, SBV will increase the money supply through open market operation (OMO).

Transparency will help ease interest rates

The General Director of Vietcombank, Nguyen Phuoc Thanh, observes that when the central bank removes the ceiling interest rate scheme, commercial banks will not have to ‘bend the rules’ in order to earn a market rate on their loans. He stressed that the greater transparency will help ease interest rates.

Nguyen Xuan Canh, Director of the HCM City Branch of Agribank, said that no reason to worry that the interest rates will go up when the ceiling rate is removed.

If banks set overly high interest rates, he added, they will not be able to find borrowers. In this case, they will have to cut lending interest rates and deposit interest rates as well.

Dr. Nguyen Duc Thanh, an economist from the Hanoi National University, said that enterprises are refusing to borrow at current interest rates. Therefore, commercial banks will not dare to raise interest rates further, or businesses will turn their back on banks. In fact, some commercial banks are already offering to lend to preferred borrowers at 13-14 percent per annum.

What businessmen are saying:

The current lending 15-17 percent interest rate is too high for manufacturers. Therefore, many export companies are borrowing dollars instead of the dong. However, I’m afraid that this will make the dollarisation of the national economy will become more serious. I think that businesses can’t operate profitably if they must pay more than ten or eleven percent per annum. — Nguyen Duc Thanh, Director of Tan An Farm Produce Export Company

A loan interest rate of ten percent would be high enough. Currently we only borrow capital when we cannot obtain it any other way. — Nguyen Huynh Thy Khoa, Director of Long Vu Computer Company

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Tags: Vietnam Central Bank, Vietnam finance, Vietnam finance news, Vietnam lending rates