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Wednesday, October 5, 2022

Potential concerns over interest rate support

By Thuy Le

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The policy is expected to aid the recovery of the business community and the economy as a whole, but are there any downsides?

A preferential interest rate of 2%, with support worth up to VND40 trillion, is a significant part of the Government’s draft decree, which has recently been made available for comment. This decree is aimed at providing interest rate support sourced from the State budget for loans previously given to enterprises, cooperatives and business households nationwide.

Who is entitled to the support?

In just the first two months of this year, 32,700 enterprises temporarily suspended their business, a surge of 51.3% over the same period last year, while 8,900 others stopped operating and followed procedures for dissolution, up 6.3%, according to the General Statistics Office. Compared to the 55,000 businesses that temporarily suspended operations during the whole of 2021, the figure in the first two months of 2022 was high, even though the economy has now accepted living with the pandemic so that production and business activities can be restored.

This suggests the business community is still mired in troubles, with quite a few enterprises left with no choice but to pull out of the market now that they are completely exhausted. In such a context, financial support policies become more urgent than ever, as they are seen as a necessary dose to speed up growth again. For this reason, the draft decree on interest rate support has recently been brought up for discussion, a month and a half after the National Assembly gave its nod to economic recovery support packages, and is now grabbing attention.

To be specific, the beneficiaries of such interest rate support are (i) borrowers from the nine industry groups suffering heavy losses in the past two years due to the pandemic (aviation, transportation and warehousing; tourism; accommodation and food services; education and training; agriculture, forestry and fishery; manufacturing and processing; software publishing; computer programming and related operations; information services), and (ii) those who take out loans to build houses for blue-collar workers to buy, rent or hire-purchase, develop low-cost housing projects, or renovate old apartment buildings on the list published by the Ministry of Construction.

It should be noted, however, that not all borrowers in the above groups can access this interest rate support package. According to the principle of interest rate support, the policy is only applicable to those who are able to repay their debts, recover and use the loans with the preferential interest rate for the right purposes, and are responsible for joining hands with banks to provide interest rate support.

Thus, enterprises that are “clinically dead” or judged by banks as no longer able to come around will find it hard to access this program. This is inevitable, as the source of finance for support must achieve the highest efficiency and be recoverable, so it is only available to those who have survived the past two years and are able to surmount the challenges to emerge. That said, the fact that banks’ assessments are required sparks concerns that it may fuel corrupt practices.

In addition, loans under this interest rate support program are those arranged in the dong, paid out between January 11, 2022, and December 31, 2023. The loan term with interest rate support is calculated from the date of disbursement according to the agreement between the bank and the customer, but no later than December 31, 2023. Loans whose principal/interest is overdue or whose repayment term is rescheduled will not get any interest rate support for such extended periods.

The preferential interest rate in this program is 2% per annum, based on the loan balance and the actual loan term with interest rate support. However, banks will stop providing interest rate support for loans taken out after December 31, 2023, or when the State Bank of Vietnam and the Ministry of Finance announce that the total value of interest rate support has reached a maximum of VND40 trillion, whichever comes first.

Stable interest rates are what matters

The preferential interest rate in this program is only half of that offered by the program implemented in 2009 (4%). Still, the lending rate after several adjustments in the past two years, is now significantly lower than it was 13 years ago. Therefore, even though the level of support is just 2%, lending rates have been much more tolerable for the corporate sector.

The problem is, with the regulation that the support only lasts until the end of 2023 or when the amount of VND40 trillion has been reached, there will probably be a chance of banks hastening loan disbursements to aid their customers as soon as possible, and consider this as a tool to compete for credit and entice customers. As a result, this shall exert greater pressure on the liquidity of the system, which has been grappling with hardships since the beginning of this year.

In case deposits in banks, which are still facing intense competition from other investment channels such as securities, real estate or even the gold market recently, failed to keep up with credit growth from the beginning of this year, the pressure to put up interest rates would be unavoidable. Earlier, this January witnessed a sudden increase in credit, up 2.74% against the end of 2021 and 16.32% over the same period in 2021, whereas the growth in January 2021 was only 0.53% compared to late 2020.

Moreover, inflation is becoming more unpredictable now that the prices of oil, food, foodstuffs, and minerals are shooting up due to the escalating war in Ukraine. In such a context, if deposit rates further go up in the near future, they will prompt lending rates at banks to follow suit, impairing the efficiency of the 2% interest rate support.

Therefore, together with an interest rate support policy, it is more important to keep interest rates stable for both the input and output of banks.

The concern about interest rates rising again is not unfounded, considering how inflation is accelerating everywhere, the liquidity of the banking system is no longer ample, as many banks have adjusted up their deposit rates since the fourth quarter of last year and central banks around the globe are adopting a tightening monetary policy, etc.

In the past, once the program with the 4% interest rate support was carried out, not only did it help considerably push up the prices of such assets as securities throughout 2009, but the economy thereafter also saw interest rates rising as the liquidity of the banking system was unstable. The climax of such a situation came in 2011, forcing the operator to impose a ceiling interest rate of 14% per year for deposits in the dong, or up to 17-18% under informal agreements, leading to consequences.

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