Interest rate confusion
By Phuong Thao in HCMC
For many local businesses, cutting lending interest rates on existing loans to 15% as ordered by the State Bank of Vietnam (SBV) from July 15 is their biggest nightmare.
At a glance, this order, which was made by governor of the SBV Nguyen Van Binh at a conference held on July 7, should be good news for both lenders and borrowers, helping boost liquidity of lending capital flow at banks and to share the burden with enterprises. However, they have found that the move might fail to save businesses from their current woes promptly while bank bosses are tearing their hair out given the challenges in rate cutting.
Local media in recent days has reported extensively on the contrasting picture between entrepreneurs and banks before the new interest rate policy. They are stuck in a great confusion in which borrowers still see interest rate cut benefits out of reach while lenders, especially small ones, are hesitating to reduce rates due to the lack of guidance on how they should follow the order.
Some banks have implemented the order in different ways as the central bank’s request is more like a recommendation than a compulsory legal document. Besides, other banks have yet to let their branches cut rates as told by the central bank.
Businesses, that are anxious about the order, are surprised that the order has not yet been realized at many banks. Some have also bemoaned that banks only apply lower rates for selected customers, businesses in profitable sectors and having stable operations, while it is the ailing firms who are in desperate need of capital.
Pham Chi Cuong, chairman of Vietnam Steel Association, is quoted by Vnexpress to say that only large and prestigious enterprises in the sector are able to access interest rates under 15%, while small firms still face lending rates of 17-18% per annum given strict requirements of lenders.
Banks are waiting for a clear direction from the central bank to learn who will be subject to the rate cut, whether they are businesses or individual borrowers, and for long or short-term loans. In fact, many banks are unhappy at the rate cut order as they will face a high danger of losses after mobilizing capital at high rates previously.
In their calculation, if banks have to lower rates of all old loans, they will lose nearly VND16.5 trillion in the last six months of this year, forcing them to reduce mobilization and select firms which meet the criteria for loans to secure profits.
For Sacombank, the total value of loans with rates cut to below 15% is around VND26 trillion, meaning the bank will see revenue reducing by VND80 billion each month for the foreseeable future.
As told to Sai Gon Tiep Thi, the general director of a Hanoi-based commercial bank said that SBV’s request will put pressure on commercial banks and admits that it does not give rate cuts for all credits. As existing loans have different risks, the bank will apply the rate cut policy for only good customers with long-term relationships.
The banker also points out the disadvantages of commercial banks compared to State-owned lenders, which enjoy huge capital sources, low capital costs and support from the central bank. Whereas, commercial banks are under pressure from shareholders because of profit, managing agencies and the public as they are told to share the burden with businesses. “Reducing interest rates means a cut in profit, but we have to cut rates to keep customers,” he said.
Nguyen Thanh Toai, deputy general director of ACB, was quoted by Phap Luat as saying that it is normal to give interest rate cuts for good customers only. “The nature of interest rate is risk. If customers have asked for loans to invest in risky sectors like real estate or securities without any profit potential, banks cannot cut rates of their loans. Banks are not aid funds.”
Most banks disagree with the 15% rate for all customers, explaining that enterprises with effective projects and good credit ratings should enjoy low rates and vice versa. Besides, banks are not able to classify customers and have to cut operation costs to compensate for lower lending rates. But who will compensate them for their losses after applying high deposit rates beforehand?
Dominic Mellor, Asian Development Bank’s economist for Vietnam, in an interview with Sai Gon Tiep Thi predicts that banks will continue to be hesitant in giving loans to small and medium-sized enterprises due to huge risks. Banks with good liquidity will also be afraid of providing credit to weak banks until the uncertainties of the financial sector are lifted.
The Saigon Times Daily