Little joy ahead

Bank interest rates won’t fall any time soon as many commercial banks seek to address mobilisation issues.

At what point bank lending rates in Vietnam will fall is still one of life’s unanswered questions. But many say it will certainly be later rather than sooner, as commercial banks find themselves in a tight spot with inflation as it is. A number of enterprises, consequently, hesitate to borrow from banks and attempt to look elsewhere. This is the nature of Vietnam’s banking sector these days.

The outlook for inflation will determine the course of interest rates, as the State Bank of Vietnam (SBV) seeks to meet an inflation target of 17 per cent this year. Despite showing signs of being in retreat over recent months and with the government urging banks to reduce deposit rates, things remain difficult for both banks and enterprises.

According to Ms Duong Thu Huong, Secretary General of the Vietnam Banking Association (VNBA), the association has held discussions with members and reached an agreement to maintain deposit rates at around 11 per cent per annum, with a range of 0.2 per cent. “Once the deposit rate goes down, commercial banks will have the conditions necessary to reduce their lending rates and improve the gap between input and output rates.” She also believes that it is not the time to fix deposit rates at 10 per cent, as the government has requested. “At the moment, forcing commercial banks to reduce deposit rates to 10 per cent is impossible,” she believes.

Thirst for capital

“Money isn’t going to banks”, is the opinion of Mr Le Xuan Nghia, Deputy President of the National Financial Supervisory Commission, when asked why bank deposit rates remain high. “When deposits from enterprises fall, the SBV should pump capital into commercial banks to ensure that growth in total payment instruments is in accord with GDP growth,” he said. “But the SBV didn’t pump in enough, so it appears that commercial banks are thirsty for capital. This is why they have had to raise their deposit rates.”

Despite increasing deposit rates to fairly high levels, banks still complain about difficulties in capital mobilisation. One banker in Hanoi said that his bank’s highest deposit rate stands at 18 per cent, but the capital mobilised is still modest. “Mobilisation of Vietnam dong (VND) cannot rise despite the fact that the bank introduces a number of promotional programmes, while foreign exchange mobilisation only slightly increased,” he said.

Banking analysts, meanwhile, believe that existing interest rates reflect the capital capacity of commercial banks. Ms Nguyen Thi Mui, Director of the VietinBank Human Resource Development and Training School, said that banks can now see the issue from enterprises’ perspective but they must also consider their own safety in the context of the economy struggling with inflation. “If banks have enough capital they would not break the ceiling rate and increase the lending rate, as they are doing right now,” she said.

Looking at the market, most commercial banks have set their VND deposit rate at 14 per cent or a touch less for the last several months. Banks also fear that cutting deposit rates could result in a mass decline in VND mobilisation. Bankers tend to watch each other before cutting rates, out of fear of losing customers. “The difference in interest rates between banks could push people to withdraw money from low-interest bank accounts and put it into banks offering higher rates,” said Mr Pham Duy Hung, CEO of Viet A Bank.

While struggling with VND mobilisation, commercial banks, even the large ones, admit to finding most of their capital from the interbank lending market. Vietcombank, for example, claims that most of its deposits are raised from the interbank lending market, as the local banking behemoth finds it hard to attract deposits from the public given the SBV’s rate cap on VND and USD deposits.

This comes as something of a surprise, as Vietcombank is often seen as a major supporter that provides liquidity for other smaller banks in the interbank lending market. Mr Nguyen Hoa Binh, Vietcombank’s CEO, told local media last month that it strictly followed the SBV’s requirements to cap deposit rates at 14 per cent per annum for VND and 2 per cent per annum for USD, causing deposits in both to decline.

Under pressure

The general director of a company specialising in exporting fine art products told VET last month that it is not a good time for enterprises to seek bank loans. “It is tough to pay interest to banks but it is even tougher to secure a loan,” he said. “Most banks have still adopted a high lending rate.”

Export companies were one of the major beneficiaries of the lending schemes of banks before inflation forced the latter to adopt more conservative credit policies. When asked whether he sought black credit or not, the director admitted to having done so. “No one likes to do it but it was the only way for me to keep my company afloat until the situation improves,” he said. “I had to borrow money from non-bank sources. The interest rate was exorbitant, at more than 9 per cent per month.”

A recent report, published by the Vietnam Chamber of Commerce and Industry (VCCI), revealed that only one-third of small- and medium-sized enterprises (SMEs) can access bank loans. The report came as banks insist they are still keen to lend to businesses in the production sector while cutting lending to the non-production sector.

According to Mr Vu Tien Loc, Chairman of VCCI, small businesses, who are struggling with the impacts of inflation, regard banks as their main channel for financing operations. Data shows that 74.47 per cent of questioned enterprises sought money from banks. Besides the high lending rate, Mr Loc also warned that bank procedures remain a burden for SMEs.

During this difficult period, local pessimists fear that if businesses cannot obtain credit then their production and revenue will fall and unemployment may rise. Foreign enterprises, who are stronger financially, would then acquire small local enterprises and gradually take over the domestic market.

According to analysts, the government should not rely solely on commercial banks to give support to the economic branches it wishes to encourage to develop, such as production and exports, as the banking sector also has its limitations.

Mr Le Tham Duong, Head of the Ho Chi Minh City Banking University’s Business Administration Faculty, in predicting that bank interest rates would not fall below 18 per cent per annum until the end of the year or even early next year, believes that small businesses need to identify other solutions. “Under the existing circumstances, SMEs should help themselves first by improving their management capacity and cutting production costs, as it will take time for interest rates to come down,” he said.

Source vneconomy

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial, Vietnam interest rates