Bringing Banks and Businesses Closer

To support businesses to access capital and seize businesses opportunities in time, the Vietnam Business Forum Newspaper collaborated with the Orient Commercial Joint Stock Bank (OCB) to organise the “Connecting banks - businesses: Year’s end capital opportunities in 2012” Forum in Hanoi.

 

Dr Vu Tien Loc, President of the Vietnam Chamber of Commerce and Industry (VCCI), said: One of the best ways to resolve capital source matters is to connect banks with businesses. The Government has implemented a lot of measures to eradicate difficulties for enterprises and curb inflation. However, enterprises’ accessibility to capital sources remains very narrow and difficult. In fact, banks’ capital supply remains relatively abundant. Many quote attractively low interest rates but not all businesses can access. Businesses need to prove good enough to use capital effectively. This forum is a good opportunity to banks and businesses to discuss, solve problems, and connect with each other.

 

Dr Nguyen Dai Lai, a banking and financial expert, said: Capital absorption capacity of enterprises is in the alarming state. Much of credit injected into the system over the past eight months is mainly used to repay old loans and/or swap old debts; thus, total outstanding loans are staying around the old level which is described to be relatively high, about 125 per cent of GDP. Economic inertia is clearly portrayed by the very weak absorption capacity of enterprises. This proves that, on the commodity and service market, supply is greater than demand, or purchasing power is very frail. Capital markets also show signs of congestion because lenders cannot find qualified customers. As a result, the economy is now in the state of “excess capital, excess goods and insufficient money.” Businesses are full of hardships and banks are not in good state.

 

He said that banks are now actively looking for customers and lowering interest rates to pump capital to rescue businesses and self-rescue. Interest rates get lower because of easing inflation and economic slowdown. Lending rates are staying at 10.5 - 11.5 percent per annum, lower than deposit rates plus reasonable expenses for credit operations.

 

The Ministry of Planning and Investment reported that inventory index of manufacturing and processing industries decreased from 34.9 per cent as of March 1, 2012 to 29.4 per cent as of May 1 and to 21 per cent as of July 1. Although this index was on the fall but it was well above the rate of 19.3 per cent in late 2011. This demonstrated the slump in aggregate demand of the economy. Hence, although banks have recently launched a series of credit programmes with lowered interest rates, they cannot increase lending to expected level.

 

Dr Lai said businesses should join forces together to form reasonable distribution channels from producers to consumers in all provinces and cities and in foreign countries.

 

Besides, the Government should have demand stimulus policies and considered them urgent measures to be implemented. Stimulus essentially touches the buying side rather than the manufacturing side where inventories are growing up, particularly real estate stocks. Stimulus measures must reach right addresses.

 

He proposed that the State Bank of Vietnam (SBV) should purchase excess capital of commercial banks at an interest rate equal to its refinancing rates minus 1 per cent and sold it to commercial banks falling short of capital at an interest rate equal or nearly equal refinancing rates in the period, which should not higher than those on the primary market while the banking association should be added new functions: Cross-debt trading. Accordingly, the association may establish a debt trading company or a debt trading brokerage company to act as an operator of undue receivables and payables among banks to generate immediate capital just before maturity and reduce pressures on interbank credit market.

 

He added that the central bank should soon remove all the regulations on ceiling interest rates on the primary market. In case administrative measures need to be use, they should be short-lived and applied to the lending side. Lending rates should not exceed 125 per cent and/or 130 per cent of coupon rates of government bonds in the latest issues in the corresponding periods.

 

Dr Lai noted that demand stimulus, reorganisation of domestic and foreign distribution channels, and designing of financial market management in general and credit market management in particular in the principle of respecting market laws, removing all administrative and monopolistic barriers are the keys to unlock the capacity of capital absorption of businesses.

 

Rate cut in Vietnam is necessary in the coming time. The country also needs to see immense changes in business conducts (project establishment, risk management, corporate governance, etc), reforms of the banking system, and restructuring of State-owned economic groups. In addition, corporate capital solutions should not be made in an easy manner in the future. Principles and practices prove that excessive easiness with financial resources like lowering interest rates too quickly, lowering credit conditions too much or spreading the money (a policy in the US called helicopter drop of money) seemed to save businesses in the short term but they left mounting problems like inflationary pressures and macroeconomic instability risk in the medium term. Obviously, rate-cut and cash-pump solutions must look at macro and micro balances.

 

In the medium term, the Government, the State Bank and entrepreneurs among others should change behaviours with capital cautiously to reach sustainable growth in the years to come even though we may need a support. If we do not change our behaviours to resources in general (including capital), our economy may slide again into the old status - or low-income poor economy (low-income trap).

 

Most outstanding loans at the association’s member banks declined in early months of the year. However, from May 2012, credit growth started to increase slightly. Credit structures at most member banks improved, with a rise in credits for prioritised fields and a drop in loans for discouraged fields.

 

However, banks are now inclined to rate risks and term risks because depositors withdraw immaturely, bank credits also performs the functions of capital markets, borrowers cannot repay debts due to unfavourable business performances.

 

To promote credit market in the last months, commercial banks need to continue implementing business support programmes by deploying favourable lending and customer policies and as well as forecast customer credit demand.

 

Enterprises should actively restructure their operations to best match their resources and capabilities, understand the roles of credit leverages to define the limits of bank loans.

 

Authorities support businesses, particularly small and medium-sized enterprises (SMEs) to borrow money by guaranteeing their loans to banks and granting interest rate subsidies for enterprises.

 

For the time being, banks report excess capital for lending while production companies cannot have access to such capital source. Their pledges to support businesses have not reached because both sides have not come to a common voice. Banks necessarily lend existing companies. For instance, the livestock husbandry will not develop if banks do not provide loans. Then, the country will fall short of meat at the end of the year. After that, meat prices will soar and imported meat without unclear origins will penetrate into our country. Therefore, I suggest that banks and the State should not let that scenario happen.