Higher Interest Payment Concerns Businesses

After the Lunar New Year, the interest rate is continuously rising due to the banks' raising capital to deal with Circular 36 amendment, with regulations to reduce the rate of capital used for short medium and long term loans from 60 per cent to 40 per cent. In the long term, the race is also very fierce and 13-month interest rates have risen above 8 per cent a year.

 

According to analysts, there is a preparation for macroeconomic factors such as the expected inflation this year of 3 per cent- 4 per cent, while the inflation in 2015 was 0.6 per cent so the inflation rate is expected to be higher than last year. Besides, the expected growth of the economy will be 6.7 per cent, higher than the actual growth rate of 6.68 in 2015.

 

Talking to the press about the interest rate trend, Director General Bui Quoc Dung of the Monetary Policy Department (SBV) affirmed that the lending interest rates remained stable and have not pressured lenders as the banks are pushing up funding costs. Mr Bui Quoc Dung assessed that some banks' increased VND deposit rates are temporary factors to estimate the capital lending for business production after the first months of the year. Basically, this is not the general trend of the market.

 

In fact, the interest rates are pushed up over 8 per cent in the long term with specific conditions. One reason banks are racing for long-term interest rates is to take advantage of the amendment of Circular 36 on the significantly reduced rate of short-term loans and long-term loans.

 

The SBV's statistics show that the proportion of medium and long term loans from 2005 to 2009 was 40 per cent, then falling to 30 per cent in the period from 2009 to 2014. The size of medium and long term credit, including the credit for real estate sector, have grown rapidly.

 

According to the market operators, the amendment of Circular 36 has drawn much positive feedback from domestic and foreign experts because the new rules will encourage banks to strengthen their control of liquidity and risks of loans, which helps avoid the fast growth leading speculative bubbles. This signal is emitted in time to help the enterprises early avoid a repeat of the difficulties of the property market bubble in 2009.

 

Mr Vu Viet Ngoan, Chairman of the National Financial Supervisory Commission, in the Financial Markets Overview in 2015 by the Financial Supervisory Commission, held on March 14, noted that the term structure of the banking system exposes potential risks. According to Mr Vu Viet Ngoan, the banking system has exposed hidden liquidity risk. The main reason is that the medium and long-term credits account for 55 per cent, while the medium and long term deposits account for only 10 per cent. The growth rate of medium and long term credits amounted to 31.8 per cent in 2015, while it was up to only 20.2 per cent in 2014. If the operators do not come up with timely solutions, the banks will fall into liquidity problems, the market continues to be "fragile" and could not be regarded as a sustainable platform for the economy.

 

After several years of modest credit growth rate, the rate in 2015 has grown unexpectedly at 19 per cent, as calculated by the National Finance Supervision Committee. Also, new NPLs have risen about VND45 trillion. Whereas, the previous bad loans are still being"hanged" without specific solutions. In particular, the bad debt is concentrated in some weak banks. The bad debts of the three banks, including Vietnam Construction Bank, Ocean Bank and Global Petroleum Bank, accounted for 30.8 per cent in 2015 of the total bad debts of the banking system.

 

The rapid long-term credit growth comes not only from real estate. The long and medium term credit growth are due to the structuring of the policy on liabilities of the SBV in accordance with Decision 780 that allows the change of the current debt liabilities in to the long-term ones. The real estate credit has risen too fast to 29 per cent, which needs an adjustment. This is the cause of the launching of Circular 36.

 

The trend to increase the interest rates comes from Circular 36 and the implementation of VND30 trillion credit package to support low-income home buyers after 36 months.

 

"The pressure of liquidity has increased. The interest rates are continuing to rise and according to our calculations, it will increase by 1-2 per cent compared with 2015. So it is not simply said that the businesses could expand production in a normal way as last year," said Mr Le Duc Thuy, former Governor of the SBV.

 

Businesses are those who have first concerns on the warming interest rates. The goal to reduce the interest rates to support the production and business of the government becomes difficult. "The rising mobilising rates have led to the average lending rate in long term rising to 11 per cent per year. The average rate is still high so the interest rates for other loans might be much higher," said Le Duc Thuy.