Although the real lending interest rate in Vietnam is not too high, it is still a concern for many businesses.
The real lending rate is the nominal lending rate excluding the inflation. According to the World Bank (WB) data for the period 2014-2018, when comparing Vietnam to some regional countries (China, Indonesia, India, Korea, Myanmar, Malaysia, Philippines, Singapore and Thailand) and those who have same income level, we can see that Vietnam’s real lending interest rate (in local currency) is at a high average (4.96 percent per annum compared to the average of 10 countries of 4.39%) but much lower than the group of countries with the same income level (7.35 percent per year).
Before the question “What causes the real lending interest rate in Vietnam to be still high?”, the in-depth research report by Can Van Luc and the author of Training and Research Institute of Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) has pointed out four main reasons. Firstly, Vietnam’s inflation is still quite high. In fact, inflation is one of the factors that have a major impact on deposit rates in Vietnam, when the correlation between deposit rates and inflation is positive and at a high level of 0.3, much more than Thailand (-0.34), Singapore (-0.03), Malaysia (-0.93), South Korea (-0.76) and China (-0.34).
Secondly, the real mobilising interest rate in Vietnam is at a high level. Statistics show that in the period of 20142018, Vietnam’s real mobilising interest rates were always positive, partly due to the management mindset as well as the sentiment of the depositors. The average real deposit rate of Vietnam in the research period was 2.58 percent per year, only lower than Indonesia (3.26%), Myanmar (2.61%), but much higher than Thailand, Singapore and Philippines who even have negative real deposit rates.
The control inflation of Vietnam during the year was determined at three to four percent along with the depreciation of dong expected at two to three percent, making the nominal deposit interest rates required by depositors equal or higher than five percent.
Given Vietnam’s real lending rates and real deposits, many people question the profitability of the banking system, especially the net interest margin (NIM) of Vietnam. WB statistics show that NIM of Vietnamese banks is relatively low compared to other regions and countries with similar income level.
Another cause is shown to be the high risk. Regarding economic risks, according to the credit rating results for the Vietnamese economy of three international credit rating organisations (Moody’s, Fitch and S&P), Vietnam is still at “below the investment” level in the last ranking reviews.
The last reason is the high transaction costs of the economy. In fact, businesses will bear two main types of transaction costs. The first is official expenses (costs to ensure compliance with laws, fees and charges payable); The second is informal costs (business voluntary or forced to pay agencies and individuals involved in the transaction process).
In recent years, with the policy of administrative procedure reform, the compliance costs of Vietnamese businesses have decreased significantly, but in some activities, the cost of compliance is still relatively large.
As for informal costs, VCCI’s 2018 PCI Report shows that unofficial costs have decreased but still remain high (54.8 percent of enterprises pay informal costs, 58.2 percent of enterprises indicate that harassment exists.).
Reduce lending rates to support businesses?
From the above analysis, Can Van Luc and the author of the BIDV Training and Research Institute believe that, in order to reduce lending rates radically, Vietnam needs to do well the following three points:
The first is to strengthen the control of inflation at a low level and the macroeconomic stability. One of the key solutions to this is to soon change the way inflation targets are set. With the current way of identifying hard targets, it is easy to give false signals to the economy when understanding that inflation targeting at four percent.
Instead, regulators should announce target inflation and controlled inflation. The market and the people will then receive more accurate signals.
At the same time, policy coordination (especially between monetary, fiscal and price policy) continues to promote and do better, especially in the issue of government bonds, neutralisation stage of the amount from equitisation, divestment and adjustment of state-managed public service prices.
Next is to reduce the level of risk of the economy, organisations and businesses. From the recommendations of international rating organisations and the current business situation, Can Van Luc and his colleagues said that Vietnam should focus on: promoting the improvement of the business environment, enhancing national competitiveness capacity in a substantive and durable manner; accelerating the restructure of the economy, ensuring more efficient allocation of resources, healthier organisations and markets; increasing the cushioning and the ability to cope with external shocks, in which it is necessary to focus on accelerating the handling of bad debts and restructuring the state budget;
Increasing financial capacity, managing risks of enterprises; enhancing the transparency of information of the economy and businesses, which helps rating organisations and investors have a better and more accurate basis for risk assessment.
Finally, there is much work to be done to reduce the transaction costs of the economy, but recent studies show that “transparency of information, promotion of cashless payments and changes in the wage regime of public officials and employees are three strong measures to help combat corruption and informal costs.”
