Negotiation-based interest rates to be applied to medium and long term loans

The State Bank of Vietnam is set to launch a document allowing commercial banks to apply negotiation-based lending interest rates for medium and long term loans instead of the basic interest rate scheme.

The information was released by Nguyen Ngoc Bao, director of the Monetary Policies Department under the State Bank of Vietnam at the online dialogue with readers of Thoi bao Kinh te Vietnam held on February 23.

Currently, except consumer loans (banks give loans to fund individuals’ purchases of houses, cars and some other valuable assets), commercial banks have to provide loans at the lending interest rates no higher than the ceiling level which is equal to 150 percent of the basic interest rate announced monthly by the State Bank of Vietnam.

Currently, the ceiling lending interest rate is 12 percent per annum, since the basic interest rate is eight percent.

Bao said that under the circular, which will be launched in several days, besides loans in foreign currencies, medium and long term loans in Vietnam dong will also enjoy the negotiation-based lending interest rate scheme.

Bao declined to comment about the purpose of the State Bank of Vietnam’s decision to apply the negotiation-based interest rate scheme. Meanwhile, analysts believe that the central bank has had to make such a move to help ensure capital flow. Currently, many commercial banks refuse to provide loans to clients, because they have to mobilize capital at high costs and then provide loans at low interest rates, which does not allow them to cover expenses. Meanwhile, some banks have been trying to charge high interest rates by collecting additional fees.

The decision means that negotiation-based interest rate will be applied to medium and long term loans only, while this scheme will not be applied to short term loans.

Meanwhile, Tuoi tre newspaper, has reported that the ceiling interest rate scheme will still be applied to short term loans. However, commercial banks will be allowed to collect additional fees, which will make the actual lending interest rates of short term loans higher than nominal rates.

In early response to the information about the negotiation-based interest rate scheme, experts commented on Tuoi tre that they fear the monetary market would be distorted by the decision.

They said that once the negotiation-based scheme is applied to medium and long term loans only, lenders will dodge the laws and turn short term loans into medium and long term loans in order to apply higher interest rates.

Regarding additional fees for short term loans, experts said that the State Bank of Vietnam has not revealed if it will set up the fee or allow banks to define the fee levels themselves.

If the option one is chosen, or the State Bank fixes the additional fee instead of commercial banks, this means that the ceiling interest rate scheme will still exist. In this case, the new ceiling level will be defined by the formula: basic interest rate + 150 percent + additional fee, while the current formula is: basic interest rate + 150 percent.

VietNamNet/TBKTVN, TT

Tags: Vietnam banking, Vietnam finance news, Vietnam interest rates