Circular amended, banks may ease interest rates

VietNamNet Bridge – It is expected that, starting mid-October, commercial banks will resume the process of easing dong interest rates, which they intended to do three months ago.

Tuoi tre newspaper has quoted sources from the Vietnam Banking Association (VNBA) as saying that, at last week’s meeting, banks agreed on easing deposit interest rates. Circular 13 on capital adequacy ratio, considered as a barrier to lowering interest rates, has been amended.

Now banks are going to cut the highest deposit interest rate from 11.2 percent per annum to 11 percent per annum. The plan is expected to be implemented from October 15, giving time for VNBA members to adapt to the new regulations.

On July 5, 2010, commercial banks unanimously eased deposit and lending interest rates. With the VNBA agreement, deposit interest rates of over 15 percent were lowered to 11.2 percent at highest. The banks also committed to lower lending interest rates to 12.5-15 percent per annum.

Still, these interest rates are still far below target levels. The Government wants to see deposit interest rates lowered to 10 percent, and lending interest rates to 12 percent. The process of gradually lowering interest rates had been interrupted, even though economists continuously called on banks to slash them.

Cao Sy Kiem, former Governor of the State Bank of Vietnam (SBV) and now Chair of the Vietnam Small and Medium Enterprises’ Association, cited high interest rates as one of the biggest difficulties for enterprises in 2010.

In 2009, companies had more favourable conditions, thanks to Government support.  The sudden rise in interest rates in 2010, together with dong depreciation and higher material prices, have presented big challenges for businesses.

Kiem stressed that current lending interest rates are overly high for businesses. They must borrow capital at interest rates of 14-15 percent per annum on average. If they can get profits of 20 percent, they have to use the funds to pay many other expenses, rather than loan interest.

“Businesses are still relying by 80-90 percent on bank loans. Only a small part of businesses can arrange capital themselves by issuing corporate bonds or shares. Meanwhile, banks still keep their principles and high lending interest rates. That explains why the borrower and lenders still cannot meet each other,” Kiem explained.

Dr. Pham The Anh from Thang Long Securities Company has warned that if lending interest rates cannot be lowered, it will hamper economic growth..

Anh remarked that one of the measures to ease interest rates is to restrict Government bond issues on the primary market. The issued bond volume reached 10 trillion dong in mid-2010, but dropped in the last two months to 900 billion dong.

According to Anh, the monetary policy needs to follow the principle of balancing the exchange and interest rates, or the capital flow will run from one market to another, causing uncertainties.

Anh cited dong and dollar interest rates earlier this year as an example. The dollar interest rate was 7-8 percent per annum, while the dong interest rate once reached 15 percent. The big gap prompted businesses to borrow in dollars.

Commenting on commitments by banks to slash deposit interest rate to 1 percent, financial experts say this is a “modest” decrease, with which the lending interest rate will not likely decrease immediately. However, this is good news for businesses that believe they can see the “light at the end of the tunnel.”