Interest Rate and Credit Growth

 

The Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) started the wave by lowering interest rates on one-month dong deposits 6 percent per annum, two-month deposits to 6.5 percent, and three-month deposits to 6.8 percent. Soon after that, Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) also brought down its dong deposit rates. In early May, other banks also slashed their deposit rates. BIDV cut the interest rate on one-month dong deposits to 6 percent per annum. Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) trimmed deposit rates with terms from one to 12 months at 7 percent per annum at most. The biggest shock came from the Vietnam Bank for Agriculture and Rural Development (Agribank) when the biggest lender in Vietnam by assets reduced the one-month deposit rate to 5 percent per annum, the lowest on the market. It also set 7 percent rates on two-month deposits, 7.5 percent to three, six and nine-month deposits and 9 percent to 12, 18 and 24-month deposits.

 

Deposit rate cut has become a wave when big lenders simultaneously brought down rates to lower than average rates to 5 - 6 percent per annum for short-time deposits. Reduced deposit rates are expected to result in lower lending rates, thus helping enterprises to access more comfortable loans for their business plans. Therefore, after cutting deposit rates, many big banks introduced credit packages with more attract rates. Vietinbank announced to lend VND80 trillion bearing annual interest rate of 7 percent at least. BIDV cut another 1 percent for loans given to prioritised borrowers and 0.5 percent - 1 percent for ordinary loans.

 

However, the rate-cut trend is very highly likely because mobilised capital at banks is increasingly sharply while lending is going quite slow. The credit growth was merely 1.4 percent in the first four months of 2013 while mobilised capital increased 5.34 percent. Given reception balloons faster than lending, banks pour their money into government bonds. Therefore, they are forced to lower deposit interest rates in order to bring down lending rates more to boost borrowing.

 

Although the reduction of deposit interest rates is the foundation for lowering lending rates to spur the economy, the rapid rate reduction in the past time only has positive impacts on the lacklustre stock market. The business circle is now more cautious with the rate cut information transmitted because the actual lending rate is still too high for them and borrowing conditions are very harsh.

 

Businesses are still weakly reacting to the rate cut information because the cut in lending rates is inappropriate because they are currently pegged at very high rates, except for concessional loans which are hard to reach by enterprises. According to Dr Cao Sy Kiem, member of the National Monetary Policy Advisory Council, said banks should have cut lending rates by 1 - 2 percent given the fast reduction in deposit rates in the past time as the gap between deposit rates and lending rates remains 4 - 5 percent. If the difference is reduced to 3 - 3.5 percent, it is certain that there is still room for lending rate cut.

 

Another reason for banks to hesitate to reduce lending rates is they still rely heavily on the lifesaver of government bonds. While the economy is severely undercapitalised and the enterprises’ access to capital sources is getting increasingly narrow, banks are pouring their money into government bonds with relatively attractive coupon rates. In the first three months of 2013, on the primary market, the State Treasury of Vietnam successfully raised VND13,460 billion from government bonds and VND7,290 billion from Treasury bills, an 11-fold increase over the same period of 2012. The Hanoi Stock Exchange (HNX) - the main organiser of bond auctions - announced that bond proceeds grossed VND62,852 billion, also representing a 11-times rise over the same period of 2012. As it is just simply using mobilised capital to buy bonds to earn a profit, banks have no need to lower lending rates to promote credit.

 

Worrisomely, the credit growth was very low in the context of weakening economy. With a modest credit growth of 1.4 percent in the first four months, capital flows are seriously congested.

 

At the workshop titled "Bank credit for economic growth - Problems in the first quarter of 2013 and some policy recommendations" organised by the Monetary Policy Department under the State Bank of Vietnam (SBV) and the Institute of Banking Science Studies which aimed to seek solutions to boost credit, interest rates seemed not to be the key factors. Mr Nguyen Duc Trung, Deputy Director of the Institute of Banking Science Studies, said the first drag on credit growth is the aggregate demand of the economy is still low. Inflation climbed 2.39 percent in the first quarter of 2013 and 6.91 percent from a year ago, the lowest in four years. These figures reflected weakening aggregate demand and purchasing power. Like a vicious circle, when aggregate demand is low, production shrinks, unemployment rises, spending is tightened, market confidence declines and inventories pile up. Inventories were reported to rise 21.5 percent as of January 1, 2013 from a year earlier.

 

For the time being, production shrinkage leads enterprises into difficulty, with many having already gone bankrupt or moribund; it does not come as a surprise when banks do not want to boost lending, especially when they are being caught in bad debt traps. Some banks reported negative credit growth.

 

Now, all hopes are being placed on policies. But, policies are issued quite late and supports fall short of expectations. The Government advocates delaying tax payments in 2012, not reducing or exempting for enterprises. According to a survey into enterprises membered with the Ho Chi Minh City Business Association, performed in the first months of 2013, 84 percent of enterprises are plagued by high costs, fees and taxes and 76 percent blamed difficulties on excessively high borrowing costs. Many companies reported to borrow with annual interest of 19 - 21 percent.