Banks Are Hanging “Wooden Fish”

“My company is lucky enough to borrow money from a bank at a preferential interest rate of 15 percent per annum. But, this is not because of our feasible projects but the value is small and we have collateral for it,” said Tran Kim Phuong, Chairwoman of Winter Textile Company, Hanoi.

 

It seems that the collateral for loans is a puzzle for businesses, especially small and medium ones. Therefore, since banks announced four priority fields bearing concessional interest rate of 15 percent per annum, many are moaning about their inaccessibility to credit sources. Nguyen Viet Hung, Retail Banking Manager, PG Bank, said, most banks require security assets for loans, except for only some special cases.

 

Some banks are applying so harsh conditions that corporate borrowers complain that banks are hanging a “wooden fish” which they can only see, not eat. Maritime Bank’s borrowing conditions for four priority fields are healthiness and transparency. A company is called healthy and transparent if it does not have bad debts in the latest 12 months, has audited reports and have its internal ratings of A, AA and AAA. Given such strict criteria, Mr Tran Xuan Quang, Deputy General Director of Maritime Bank, predicted that only 8 - 10 percent of corporate customers satisfy.

 

In this regard, Dr Nguyen Dinh Cung, Vice President of the Central Institute of Economic Management (CIEM), said banks always demand as security for new loans even in the normal economic context. This condition is further tightened in the tough time. This is universal. However, collateral asset and borrowing conditions in other countries are more diversified, not only security asset.

 

Collateral is not the only blockade to bank loans. Businesses still cannot borrow although banks have excess capital. Mr Hung, Retail Banking Manager, PG Bank, said: The health of businesses is too weak to absorb the capital. In addition, banks fear that borrowers will use the loan for wrong purposes.

 

Speaking of this prudence, Dr Le Hong Nhat from Economics - Law University under the Ho Chi Minh City-based Vietnam National University, said: A large amount of bank loans was previously channelled into the real estate market. As their nonperforming loans are now very risky, they do not want to provide loans now. If they are bold enough to lend businesses, they will not be able to respond if their borrowers use the money for wrong purposes. Mr Cung, Vice President of CIEM, pointed out another reason. Possibly, banks have to raise deposits at a rate that higher than 12 percent per annum and they are not easy to lend at 15 percent.

 

But no matter what the root is, many want to know where banks will go if the status of excess capital prolongs. According to Mr Cung, if they cannot lend, they can buy government bonds. Although coupon rates are now lower deposit rates, this is a long-term investment. Banks anticipated that inflation would go down further and they will then earn a margin from bond investment.

 

Nevertheless, government bonds usually have a long maturity while excess capital is short-lived. Purchasing treasury bills issued by the State Bank of Vietnam (SBV) is a better option in the current context to avert risks. According to a report by SSI Research, the SBV issued bills worth VND101,772 billion since March 15, of which VND71,276 billion worth of bills have not reached maturity. Highest rates are only 8 percent per annum but banks have purchased all. It is wondering that how banks will handle their money when bills are mature.

 

Another good option, despite being riskier than buying bills but being safer than lending businesses, is lending on the interbank market. However, this market is also showing signs of excess money when overnight rates are just 1.7 - 2 percent per annum on May 25. Comparing with the rate of over 30 percent in November 2011, we can understand how much banks have money in excess.

 

Thus, Mr Hung of PG Bank said if banks cannot lend, they will not mobilise much. Then, both deposit and lending rates will go down.