Banks cut rates to ease money shortage

Vietnam’s banks cut borrowing costs to customers after the central bank increased compensation on reserves holdings in a bid to encourage lending.

Lending rates for Vietnamese dong dropped about 1% from a month ago and are now about 1.5% lower than the 21% maximum rate banks are permitted to charge borrowers, according to a statement by the State Bank of Vietnam Thursday, which cited a September 30 central bank report.

The state bank increased the interest rate on reserves that banks are required to set aside to 5% from 3.6% from October 1. It has also decided to allow credit organizations to use compulsory bills to secure loans from this month, which will help increase their liquidity.

Vietnam has raised interest rates three times this year to slow the fastest inflation in 16 years. The central bank is under pressure from companies to lower borrowing costs, with banks allowed to charge as much as 21%.

Cao Sy Kiem, president of the Vietnam Association for Small and Medium-Sized Enterprises and a former central bank governor, said about 20% of the nation’s smaller companies had gone bankrupt this year due to a capital shortage, Thoi Bao Kinh Te Viet Nam reported on September 15.

Le Dac Son, general director of the Hanoi-based Viet Nam Commercial Bank for Private Enterprises, known as VP Bank, told Thanh Nien last week that lending rates were too high for businesses. Recent central bank decisions gave commercial banks the chance to lower their lending rates and thus share the difficulties experienced by businesses, he said.

The common lending rate of state-owned banks is now 19.5%, and 20% for private commercial banks, according to the central bank statement.

Companies trading or producing fuel, cement, steel, pharmaceutical products, fertilizers and rice are borrowing money at an interest rate of between 18.5 and 19.2%, the statement said. These products are considered essential for the economy.

Interest rates will be lowered slightly before the end of the year as inflation slows, the statement said, citing an unidentified bank official.

“In order to ensure enterprises can obtain banks loans to maintain their business and make profits, lending rates should be lowered to 18% by the end of this year,” Son said, noting the development of business was important to economic growth.

Eximbank, or the Vietnam Export Import Bank, recently announced that starting this month it would lower lending interest rates for small and medium-sized enterprises to 17.5%, which is currently the lowest rate offered by a joint stock bank in the country.

Nguyen Duc Vinh, general director of Techcombank, said as banks cut their lending rates, the risks of lending would increase, especially when many enterprises would have difficulties in doing business toward year end.

Banks should also be more cautious when assessing loan applications from businesses because Vietnamese exports would be hurt by the economic slowdown in the US, Vinh said.

Banks are also starting to lower deposit interest rates, said Vinh, who also said he didn’t expect many banks to expand their lending activities.

Over the last few days, several banks have reduced deposit interest rates, with some even making adjustments to their rates two or three times.

Many banks said despite lower interest rates, deposit inflows were stable.

But an expert from Vietcombank, who did not wish to be named, said the situation may change in the next days, with joint stock banks having lower deposit rates and thus facing competition from state-owned banks. (TN, Bloomberg)