Lending interest rates up, banks and businesses feeling down

10:29' 25/07/2007 (GMT+7)

VietNamNet Bridge – Enterprises are now weeping because they have to pay more on their bank loans, while banks also feel unhappy because they have to raise the interest rates while they do not want to. As the central bank has required a higher ratio of compulsory reserve for both VND and US$ deposits (10%), commercial banks have to raise the lending interest rates to have more usable capital. Except for the Industrial and Commercial Bank (Incombank) system, which retains the interest rates it has been applying since the end of last year, other banks all have raised their lending rates. In Hanoi, the average lending interest rate is 14.4% per annum (+ 2.04% per annum) for short-term loans, while the rates are 14.4% per annum (+ 1.35% per annum) for medium-term loans, and 15% (+ 0.6% per annum) for long-term loans. Where to get money to pay interest on bank loans? Deputy Director General of a Dong Nai-based state owned corporation said that with such high interest rates banks could only loan to big corporations which could budget for paying debts from different sources, while small projects and businesses dared not borrow money from banks. In fact, with the interest rate of 12% per annum and higher for medium- and long-term loans, many enterprises venture to borrow money while they still do not know where to get money to pay interest on the bank loans. “The enterprises that operate under the market mechanism, joint stock and private companies cannot bear such high interest rates. If enterprises borrow money for 9-10 years, the interest they have to pay will be equivalent to the original loans,” chief accountant of an enterprise said. She added: “I heard that a bank lends at 16.2% per annum. I think you can pay the interest only if you trade forbidden goods.” When hearing that banks planned to raise the interest rates, enterprises said they would not accept the new interest rates, saying that they had drawn up business plans based on the previously applied interest rates, and that any interest rate adjustment would make them lose money. Higher interest rates: enterprises dead, banks deceased An expert related that the director of a transaction centre of a state owned bank decided to raise the lending interest rate right after the central bank announced the new required compulsory ratio. The director feared that the transaction centre would not fulfill the targeted profit plan if the margin between the input and output interest rates was too low. However, two months after applying the new interest rates, his staffs asked him to lower the interest rates, saying that clients had left for other joint stock banks offering ‘softer’ interest rates. The expert said that several big branches of Vietcombank had asked headquarters not to raise the interest rates in order to create favourable conditions for clients to maintain production and business. Which solution? The solution that commercial banks thought of when the central bank set a higher requirement on compulsory reserve ratio was to raise the lending interest rates. However, the move proved to be not the optimal solution. Higher interest rates have made businesses and households delay their projects and spending plans. As a result, banks cannot expand their markets, while enterprises are becoming less competitive. What banks can do now is to seek profit from other activities rather than relying on credit, including investment and non-credit services, while trying to seek cheap-capital sources. This will help ensure the stable income of banks and there will be no need to put a heavy burden on enterprises. Nguyen Dong Tien, Deputy Governor of the State Bank of Vietnam, said that the central bank would not adjust the recapitalisation, discount interest rates and the basic interest rate in the immediate time, in order to help commercial banks draw up suitable policies beneficial to both banks and the national economy. The lending interest rates offered by commercial banks in mid July 2007: Short-term VND loans: 9.84-13.8% per annum Medium- and long-term VND loans: 11.4-16.2% per annum Short-term $ loans: 5.7-6.7% per annum Medium- and long-term $ loans: 6-7.8% per annum Though members of the Vietnam Banking Association agreed on April 2007 to lower the VND deposit interest rates, the actual rates offered by banks are higher than the agreed levels, 0.03-0.04%/month higher for state-owned banks, and 0.02-0.12%/month higher for joint stock banks (Source: Lao dong, Viet Nam Net)