The State Bank of Vietnam (SBV) has issued a series of decisions to lower regulating rates, short-term deposit rates, priority sector lending rates, and compulsory reserve interest rates of banks at SBV… How will these decisions affect borrowers?
Curb interest rate race
Immediately after SBV announced to reduce the ceiling deposit rate for short-term deposits (less than six months) and the lending interest rates for some priority areas, an additional 0.5 percent per year from November 19. Many banks have slightly lowered lending rates for priority sectors, and some have lowered interest rates for small and medium-sized businesses.
At the same time, many banks also offer preferential credit packages for priority customers of banks.
Most recently, SBV continued to issue a series of decisions on deposits of credit institutions at SBV. In which, it is worth noting that the interest rate regulation for compulsory deposits in dong will be reduced to 0.8 percent per year after 14 years of applying the interest rate of 1.2 percent per year since 2005.
According to experts, the decision to reduce interest rates of SBV at this time is necessary. “The main objective of SBV when issuing these decisions is to reduce the rate levels for both mobilisation and lending in line with the general direction of the government as well as the operating direction of SBV in the context of well controlled inflation”, Can Van Luc, financial and banking expert said.
In the same opinion, financial expert, Nguyen Tri Hieu said that the interest rate level in Vietnam was still quite high, the reduction of interest rates would help businesses access cheaper capital, boost production and business. In particular, the fact that banks reduce interest rates at the end of the year is reasonable, because this is the time when businesses are in great need of working capital for production. However, in reality, the reduction of interest rates is quite limited, especially the rates for loans of priority areas that are assessed as not going to affect much and needs policy lag to measure the impact on production and business activities of enterprises. However, these moves are expected to curb the race of interest rates of banks, bringing the rates back to a stable level.
As observed by some experts, although the interest rate reduction decisions of SBV have been issued urgently. In reality, there have not been many impacts on a large scale. Can Van Luc assessed that SBV’s decisions tended to loosen monetary policy, but the impact was not too large. For example, the reduction of deposit rates was only applied to the short terms of less than six months, so the impact was very limited. Meanwhile, the decline in lending rates was mainly applied in priority areas, so the impact on banks’ business results was not much.
In contrast, along with measures to reduce capital costs for banks and lower interest rates for businesses, SBV has tended to tighten risky loans such as real estate credit. Accordingly, from January 1, 2020 to September 30, 2020, the maximum ratio of short-term funds used for medium and long-term loans is 40%; from October 2022 reduced to 30%. Especially, in addition to reducing the ratio of short-term capital for medium and long-term loans, SBV also increased the risk factor from 150 percent to 200 percent for real estate businesses.
Survey of reporters showed that many customers said that accessing loans to buy houses had become more difficult. Dinh Phuong Anh, a borrower who bought a house at an intermediate project in Hanoi with the price of nearly four trillion dong, said that when referring to banks, many credit officers said that with large loans, banks would apply tighter regulations. For example, previously, the bank was able to lend up to 70 percent of the value of the apartment, but currently only supported up to 50%, the loan period was reduced compared to before. The interest rate on home loans was about 12 percent per year and would be adjusted periodically based on the mobilising interest rates.
Especially for investors, access to bank capital is much more difficult. The reason, if the regulations increase the risk factor for a loan to 200%, means that the bank must increase the equity capital for a real estate loan to double. At that time, the bank will be forced to restrict real estate lending, and must raise interest rates. Increased interest rates, meaning that the cost of capital increases and this cost will be accounted into housing prices, thereby, consumers will be the last to suffer.
Currently, in order to support the production and business activities of small and medium-sized businesses, the banking system has many policies for this customer and has been effectively promoted so far. Banks have also realised the potential of this customer segment and taken a more open approach. Many banks even have their own lending rate policy for small and medium enterprises, usually 1-1.5 percent lower than other industries.
According to SBV statistics, the credit balance for small and medium-sized enterprises reached more than 1.475 trillion dong, an increase of 12.9 percent compared to the end of 2018 (an increase of 12.34 percent in the same period in 2018), with 196,689 customers with outstanding loans. Credit outstanding for small and medium-sized enterprises increased higher than the general credit growth rate of the economy (up 9.4 percent compared to the end of 2018) and higher than the same period in 2018.
According to Nguyen Quoc Hungdirector of Credit Department (SBV), under the condition that small and medium-sized enterprises are less able to mobilise capital through the stock market while the support capital sources come from the State budget and international support capital are limited. Bank credit capital is still the main funding channel for production and business activities.
However, in reality, the access to credit capital of small and medium enterprises is still facing many difficulties. The reason is that they often do not accumulate many assets, do not have collateral. The system of accounting, finance and information transparency are not up to the standards. Therefore, if there is no long-term relationship with the banks, accessing capital is still extremely difficult.
At a recent Supporting Industry Forum 2019, many businesses also expressed difficulties due to lack of capital, having to borrow banks with high interest rates, making the cost of products uncompetitive. Meanwhile, the representative of SBV said that the capital mobilised from the people should ensure the capital safety. Therefore, although the banking system is always ready to finance capital for small and medium-sized enterprises, there must be certain conditions and enterprises must comply with the regulations. Another difficult point for credit activities for the economy is that some banks are currently having difficulty expanding credit due to capital adequacy ratios.
SBV deputy Governor Nguyen Thi Hong said that, according to SBV, joint stock commercial banks with more than 50 percent state capital such as Vietnam Bank for Agriculture and Rural Development (Agribank) and Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) have capital adequacy ratios close to the threshold prescribed in Circular 41/2016/ TT-NHNN regulating capital adequacy ratio. Without raising capital, these commercial banks will have to restrict or stop credit extension. These are banks have a large market share of loans to the economy, so it greatly affects the demand for investment capital in socio-economic development.
