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Almost no way to stop foreign currency lending

Tuesday,  Dec 5,2017,23:35 (GMT+7)
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Almost no way to stop foreign currency lending

U.S. dollar bills are seen on a cash counter at a local bank. The State Bank of Vietnam has found it tough to stop foreign currency lending - PHOTO: UYEN VIEN

HCMC – The fact that interest rates for Vietnam dong loans are far higher than those for U.S. dollar loans is one of the key reasons for the State Bank of Vietnam’s (SBV) failure to stop foreign currency lending as planned, Nguoi Lao Dong quoted analysts as saying.

According to a draft circular that revises Circular 24/2015 on foreign currency lending, the SBV, the nation’s central bank, plans to allow for short-term lending in U.S. dollar until the end of next year. However, at the time of disbursement, borrowers are required to sell U.S. dollars to lenders to get Vietnam dong to buy goods.

Dr. Nguyen Van Thuan at the University of Finance and Marketing was quoted by Nguoi Lao Dong as saying that it is necessary to extend dollar lending to help exporters cut costs, enhance competitiveness on global markets and contribute to economic growth.

The interest rates for three- to six-month dollar loans currently range from 3% to 3.5% per year, way below 6%-7% for Vietnam dong loans with the same tenors.

The low rates are the reason for strong dollar borrowings by enterprises. January-October saw a rise of 11.5% in foreign currency credit, whereas the increase in the same period last year was a slight 4.4%, according to a report by the National Financial Supervisory Commission.

Data of the General Statistics Office shows that the nation’s exports in January-October totaled US$173.7 billion and its imports reached US$172.5 billion, resulting in a trade deficit of US$1.2 billion.

If enterprises having export revenues fail to access foreign currency loans, they would have to borrow in Vietnam dong with interest rates two times higher than those for foreign currency loans. This would push up production costs and hit exports.

In the past, the SBV stopped banks from lending foreign currency but then allowed them to resume it given high rates on Vietnam dong loans. 

The central bank in March 2016 announced to suspend foreign currency lending to shift to a regular foreign currency trading regime. At that time, interest rates for U.S. dollar loans rose in line with the rate hike by the U.S. Federal Reserve, and rates for Vietnam dong were expected to go down, thus encouraging enterprises to borrow in the local currency instead.

However, as the SBV ruled short-term capital used to make medium and long-term loans must be cut from 60% to 40% of total raised capital in 2018. This prompted banks to step up capital mobilization, making it impossible to bring down Vietnam dong interest rates and suspend foreign currency lending.

Foreign currency lending was thus extended in June 2016, and maintained until the end of last year, then this year-end to facilitate export.

According to a banker, demands and supplies of U.S. dollars in Vietnam are unpredictable.

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