Difficulty in Borrowing Capital

Not only Vietnamese businesses need capital to meet their transactional obligations in the Tet period, but banks also yearn for increasing capital to achieve profit targets, but the credit growth is still way below expectations.

 

Demand for capital towards the end of this year is expected by banks to be weak, although this used to be a hectic period in the previous years when businesses actively borrowed capital. Two main causes of this issue are the hesitancy of businesses to borrow more capital and of banks to distribute their capital.

 

Banks assert that demand for capital of businesses remains stagnant even during the Tet holiday period. Regarding businesses, however, the capital issue has always been a hard nut to crack, and their thirst for capital is displayed more clearly towards the most hectic period of business activities. The director of a consumer product company shared that although his company still has a credit relationship with banks, borrowing capital is still not easy at the moment. Although the interest rate does decrease, accounting for the 4-5 percent “bank fee”, the real interest rate can go up to 18-20 percent annually. While the market demand is low and revenue continues to nosedive, businesses are hesitant to increase their output for the Tet holiday.

 

Since early September, in order to boost credit demand, both big and small commercial banks have offered favourable credit packages for businesses. For example, from Nov 5, Military Bank (MB) initiated a VND2 trillion package with an annual interest rate from 11.8 to 12.5 percent per year with a maximum borrowing period of six months. Nevertheless, it is hard to access these credit packages due to more stringent credit requirements.

 

Eximbank is among those which have many favourable credit packages. Besides the VND5 trillion package with 13 percent annual interest, effective from June to mid-October 2012, the bank set aside a VND4.5 trillion loan package with 10 percent annual interest rate (for VND) and 5.5-6 percent annual interest rate (for $US). The packages are only applicable to A-tiered customers with no bad debt, and are more favourable towards export businesses. Businesses who need capital to increase their output towards the year end still have a difficult time accessing the cheap capital.

 

Another big-time bank claimed to distribute VND2 trillion with a 12 percent annual interest rate for businesses which are building low-income housing. However, regarding the loan prerequisites, the commercial loans are still much better. This is because the prerequisite that the bank set forth is even more stringent than for commercial loans: Businesses need to shell out 40 percent in reciprocal capital and 20 percent in other mortgaged assets on top of the mortgaged assets from the borrowed capital. Commercial loans, though having a slightly higher interest rate, only require 30 percent in reciprocal capital to be able to use mortgaged assets from the borrowed capital.

 

Because of the stringent requirements of obtaining a favourable loan package, an executive at Eximbank admitted that the two favourable credit packages totalling VND9.5 trillion have not seen much distribution.

 

Since the economy still encounters strong headwind, people reduce their spending level, businesses downsize and restructure their operations, and everyone is not really optimistic towards the year-end. During the third quarter, Vietcombank Securities (VCBS) believes that capital demand for the last few months of the year will remain relatively stagnant, despite the period being the most active in previous years.

The credit growth in the nine-month period of many big banks is not encouraging, with Vietcombank’s 8.6 percent, MB’s 10.7 percent, STB 8.3 percent, Vietinbank’s 2.63 percent, and Eximbank’s 1-2 percent, while Techcombank and ACB have negative growth rate of -3.35 percent and 0.01 percent respectively.

 

The statistics above show an overall low credit growth rate, although many banks have sought permission to increase their credit growth. At the beginning of the year, the credit growth set forth by the Government is 15-17 percent. However, towards the middle of the year, because of the low outstanding credit growth rate, the target was revised downwards to 8-9 percent. The true number, however, will be much lower at a 5 percent rate until the year-end, according to a report by VCBS.

 

Nevertheless, the State Bank of Vietnam’s (SBV) Governor Nguyen Van Binh presented a more optimistic outlook. Replying to inquiries from Parliamentary Representatives regarding the hard-to-achieve credit growth target, the Governor asserted that the credit growth rate could reach 10 percent if accounting for the issuance of Government bonds. “It is not necessary to base the growth rate only on capital lent to businesses. This year we have successfully issued a huge chunk of Government bonds. The banking system alone purchased VND183,000 billion of Government bonds. Therefore, if businesses account for 5 percent, and the Government bonds account for another 5 percent, the credit growth rate will be 10 percent”.

 

Therefore, the money does not only flow directly into businesses, but also is channelled to Government bonds. This is a new trend compared to the previous years. During these periods, when banks focused on lending to businesses in order for the latter to prepare for the Tet holiday, banks will cut Government bonds purchase to ensure proper liquidity. This year, when Government bonds are more favoured, banks have excess capital, which is hard to lend out to businesses. This trend is expected to continue till the year-end.

 

According to the Governor, in 2011, the credit growth was 14 percent, due not to the issuance of Government bonds, but the money lent to businesses.

 

With the expectation that the credit growth will remain stagnant, banks’ profit is not expected to see an improvement during the fourth quarter. VCBS forecast, “The fourth quarter profit will not see an improvement compared to the third quarter, and the 2013 statistics will not be any brighter if bad debts and weak banks are not properly handled.”