Interest Rate Cut: Widening Credit Sources to Rescue Enterprises

At the cabinet meeting, Minister and Chairman of the Government Office Vu Duc Dam said Prime Minister Nguyen Tan Dung requested the State Bank of Vietnam to lower interest rates after the meeting was over.

 

Governor Nguyen Van Binh said that the banking system slightly reduced interest rates in the fourth quarter of 2011, bringing lending rates for manufacturing companies to 17 - 19 percent, which was 1-2 percent lower than previously. However, some banks had to borrow refinancing loans to ensure liquidity. The situation got better in early 2012, with interest rates falling sharply to 7 - 14 percent per annum.

 

Positive signals plus desired outcomes of implementing the Government’s Resolution 11 have laid the groundwork for lowering interest rates. Governor Binh said after making specific reports and assessments on operations of the entire banking system, the central bank is confident to lower interest rates by 100 percentage points right now.

 

Accordingly, all SBV’s regulatory rates like open market rates, refinancing rates, overnight rates, etc will be reduced by 1 percent. This degree of reduction is also subjected to credit institutions.

 

He analysed that all monetary policies are attached to the ultimate objective of controlling inflation. “If all factors are favourable and inflation is brought down to a single-digit rate, interest rates will be likely reduced to 10 percent at the end of the year, or a reduction of 100 percentage points each quarter,” he added.

 

Remarking on bank liquidity, Governor Binh said the Government successfully issued a huge volume of bonds at a coupon rate of 11.27 percent per annum. This bid attracted a lot of credit institutions. The volume of government bonds held by Vietnamese credit institution rose by 10.5 percent, a record growth. This is a good sign that bank liquidity is gradually improving. The maturity term will be increased in the next round of refinancing programme.

 

In response to the press to rumours on mergers and acquisitions (M&A) of banks and financial weakness of some commercial banks, Governor Binh said nine credit institutions now have poor financial health but they are being put under the strict control of the State Bank. They are burdened with overdue loans on the interbank market and are subjected to penalised interest rates for late payment. For that reason, they have to pay higher than the upper limit of 14 percent, popularly hovering at 18 percent - 20 percent per annum. These nine institutions account for less than 10 percent of operating banks and 6 percent of market share. Thus, the restructuring of these units will not leave much impact on the system. But, restructuring plans have not made specific.

 

Unlike in 2011, exchange rate was very stable in early 2012. The State Bank is buying a huge amount of foreign currencies to balance the market and increase foreign exchange reserves. Foreign exchange reserves rose some 50 percent in 2011 over 2010 and the value rose 20 percent more in the first two months of 2012, said Mr Binh. “The SBV will issue treasury bills with a maturity term of one, three and six months and 364 days at a reasonable interest rate to maintain the stability of interest rates on the market and withdraw temporary excess capital at credit institutions,” he noted.

 

Though liquidity is guaranteed and credit growth is ensured, excess cash flows in the economy are well-controlled in order to prevent pressures on inflation and foreign exchange markets.

 

Speaking about the stock market, Governor Binh is optimistic about a new wave of investment flows into this market when the interest rates are lowered. The SBV is also pondering to create a solid foundation to sustain the stock market development.