Reducing Interest Rates to Ease Business Difficulties

The State Bank of Vietnam (SBV) has made four policy rate cuts of 0.3-2% in total this year, with the latest reduction on June 19, 2023. Following this move, commercial banks also revised down their interest rates accordingly. Their deposit interest rates are currently about 5.8% per annum, down 0.7% from the end of 2022. The rate cuts by the SBV are aimed at supporting people and businesses to expand their access to finance to revive their business activities.

Agribank has the lowest interest rate in the market, at 3.4% per annum (1-2 months), 4.1% (3-5 months) and 6.3% (12 months)

Sharp decline in many deposit terms

Many commercial lenders have drastically slashed their deposit rates, with the lowest being 3.4% per annum. State-owned commercial banks including Agribank, BIDV, Vietcombank and Vietinbank reduced interest rates the most on deposits of less than six months for individual customers. Specifically, BIDV cut its rates by 0.4% for deposits of fewer than six months to 4.1% per annum (1-2 months) and to 4.6% (3-5 months) while keeping the 12-month deposit rate at 6.8%. Vietcombank also made the same reduction as BIDV to 4.1% per annum (1-2 months) and 4.6% (3 months), while its 12-month deposit rates are kept unchanged at 6.8%. Similarly, Vietinbank lowered its deposit rates to 4.1% per annum (1-2 months), 4.6% (3-5 months), and 6.8% (12 months).

Among the Big 4 banks, Agribank has the lowest interest rate in the market, at 3.4% per annum (1-2 months), 4.1% (3-5 months) and 6.3% (12 months). Private commercial banks revised their deposit rates to 4.75% per annum (on terms of less than 6 months). Moreover, they also reduced interest rates on deposits of longer maturity terms. The 12-month term interest rate was applied at 7.5-7.8% by ABBank, BacABank, VietBank, OceanBank, Nam A Bank, BVBank, SHB, VietABank, NCB, OCB and Eximbank.

According to the State Bank of Vietnam (SBV), the continued reduction of regulatory interest rates confirms and establishes a rate-cut trend in the market in the coming time. This will make credit institutions bolder and more drastic in lowering their lending rates, which in turn help companies to slash their input costs, especially cash-short companies and play a greater role in economic growth and recovery.

Dr. Can Van Luc, Chief Economist at BIDV and Member of the National Monetary and Financial Policy Advisory Council, said that this policy move marks a step in changing monetary policy from caution to adaptation and partial easing. Anticipating lower interest rates, businesses and people will be more determined to invest and consume more thus helping economic recovery and development.

Businesses still expect more appropriate interest rates

According to experts, central bank rate cuts are necessary when companies face difficulties and challenges, especially capital shortages. Data from the Business Registration Department under the Ministry of Planning and Investment shows that the registered capital of new corporate entries continued to decrease in the first six months of 2023. The total registered capital of newly established enterprises was only VND707,457 billion in the period, equal to 75-80% in the same period in COVID-19-affected years. Moreover, the average registered capital per enterprise was only VND9.3 billion in the first six months of 2023, which is the lowest in the first six-month registrations since 2017. At the same time, supplemented capital of existing companies shrank by 48.1% year on year.

Despite rate reductions, credit growth remained low according to the department. It rose only 3.36% year on year in the year to June 15, equal to less than a quarter of the full-year target growth (14-15%). The Business Registration Department attributed slow credit growth to difficult business conditions, high inventories and even staff redundancies. High prices of imported raw materials led to an increase in commodity prices while the purchasing power of both domestic and world economies declined, causing consumer contraction. This resulted in shrinking demand for new loans for businesses.

In addition, some companies failed to meet borrowing conditions imposed by banks such as weak financial health or no viable business plans. On the other hand, market capital sources such as bonds, securities and real estate market slowly recovered.

Meanwhile, banks have abundant financial resources. Private joint stock banks reached just about 50% of their given credit room while state-owned commercial lenders reached only 35% of their assigned room limit.

Many lenders have expressed their desire to find good borrowers. However, many companies have resolutely paid back loans to banks to reduce costs due to slow sales. Meanwhile, banks have not dared to lend to weak companies because they are afraid of bad debts.

According to analysts, it will take 2-3 months to lower lending interest rates because the current cost of banks’ input capital (deposit rates) remains high due to immature deposits. According to SBV Deputy Governor Dao Minh Tu, the SBV also wants to boost credit but increasing credit is not by lowering credit standards but keeping credit quality and effect for the economy.

“Policy always has a certain lag. But given today’s difficult conditions, how to make that delay shorter is the desire of the Government, the banking industry and businesses,” he said.

The State Bank will continue to work with commercial banks to jointly find solutions to reduce costs and lower lending interest rates more quickly as directed by the Government.

For businesses, the current interest rate, despite being slashed, is still too high to make a profit because the input fell by 1.5-2% but borrowers managed to reduce the cost by about 0.5%. Mr. Nguyen Xuan Thong, Deputy General Secretary of the Hanoi Association of Small and Medium Enterprises, believes that interest rates between 7.5-8% are reasonable.

Source: Vietnam Business Forum