Recently, at the prime minister’s dialogue with businesses in 2020, Dang Hong Anh, Chair of the Young Entrepreneurs Association, proposed that to reduce lending interest to support enterprises, the State Bank of Vietnam (SBV) should impose a ceiling on mobilising interest rates at five percent per year and progressive by 0.5 percent for the following year. According to Hong Anh, that would create cheap capital for commercial banks to lend businesses with low interest rates.
Before the above opinion of the Chair of the Young Business Association, there were many mixed opinions. The Nhadautu.vn Press had a direct exchange with Nguyen Tri Hieu, a financial and banking expert on this issue.
On the proposal to impose a cap on one-year deposit rates at five percent per annum and a progressive increase of 0.5 percent for the following year, Hieu believed that it was an outrageous proposal that went against market principles.
In fact, in the past, Vietnam had applied the ceiling interest rate regulation. Still, it had to cancel so that the interest rate operating under the market mechanism only applied the ceiling for six months (currently 4.75 percent per year).
Hieu once suggested that the ceiling rate of interest should be removed for six months to make this tool marketable and for the market to decide. It could be said that the above proposal was against the timeline and was unreasonable.
It was true that administrative orders could be used to impose a ceiling on deposit rates, thereby reducing lending rates. However, this would distort the market with the foreseen thing that customers might rush to withdraw money from banks and invest in other channels.
Interest rate was a stable price when supply and demand met. With the ceiling of interest rates, instead of having a supply and demand meeting, a fixed price was applied. This would cause the supply and demand to be out of order.
The reason why the business proposed the above regulations to reduce capital costs was understandable. However, it was likely that when the application would occur in the opposite reaction, significantly affecting the economy.
Hence, from then until the end of the year, would there be room for banks to reduce interest rates for business loans?
The answer from Nguyen Tri Hieu was that whether banks would further reduce interest rates depended on the supply and demand factors of the economy.
If the demand for credit were low, banks could not have much order for capital mobilisation; the interest rate might decrease. In contrast, if the demand for credit increased, businesses needed more capital, banks must raise mobilisation, the interest rate would rise again.
Significantly, the interest rate depended on the inflation factor. Inflation must be low to lower interest rates; if inflation were high at seven percent to eight percent, interest rates were unlikely to be humble enough.
Particularly this year and the present time, there were two factors affecting interest rates. Firstly, the demand for loans was very high for many businesses facing difficulties, but SBV did not want to lower lending standards, and banks could not lower lending standards. The demand for loans was high, but the number of businesses that was allowed to borrow again was smaller and lesser during the crisis. That was the credit thrust down, and interest rates maintained at low levels.
However, if the epidemic in Vietnam were well controlled, it was likely that banks would be more assertive in lending soon, so interest rates might increase. And if Vietnam could declare the end of the epidemic, and the economy would return to regular operation, the interest rate would rise further. If the epidemic worsened, banks would shrink again because of bad debt, and interest rates would fall.
That said, the supply and demand of credit were not meeting. How to solve the problem of enterprises lacking capital, banks with excess money?
According to Nguyen Tri Hieu, balancing at this point was very difficult.
Businesses were increasingly tricky, needed high capital, but banks could not lend. If banks did not help, enterprises could only look forward to the State. Hieu once proposed a source to guarantee credit for businesses from the budget.
Credit guarantee fund for small and medium enterprises currently existed, operating in localities. But these credit guarantee funds were minimal in size, leading to meager operations. Then banks themselves did not dare to lend when looking at the amount of funds allocated to these guarantee funds. Therefore, it was vital to use the budget to upgrade the operation of credit guarantee funds to help businesses overcome the extreme.
Another favourite source was shadow banking. It seemed that shadow banking was raging in localities as more and more people lost their jobs, their incomes reduced, and businesses faced the risk of dissolution and bankruptcy. This was a very worrying problem when the whole economy was in a sluggish situation, banks had money but did not dare to lend, and businesses could not do anything. This had created room for shadow banking to grow, raging everywhere.
Shadow banking companies operated in a variety of ways, both online and offline. They often took advantage of businesses that were on the verge of bankruptcy to lend continually, then appropriated assets at exorbitant interest rates and eventually bankrupt customers.
