According to experts, under the influence of the Covid-19 epidemic, following the direction of the prime minister, the banking industry soon started supporting businesses and households that were negatively affected by the Covid-19 epidemic, typically, the Circular 01 on March 13, 2020, and the Directive 02 on March 31, 2020. Credit institutions (CIs) had also been actively implementing debt restructuring, rescheduling, postponement, reduction of interest and fees, keeping debt groups in order to continue lending to customers affected by the Covid-19 epidemic.
Besides implementing Circular 01, commercial banks also performed a series of credit packages of about 285 trillion dong (then rising to about 300 trillion dong), with the preferential interest rates lower than ordinary interest rates by 0,5 percent to 2.5 percent per year, including rural agriculture, small and medium-sized enterprises, lending to sectors affected by the disease.
Credit packages supporting up to nearly 300 trillion dong of banks were being highly appreciated for the necessity for the business community and the economy. However, according to banks, recently, business and individual files were rushing to commercial banks to postpone, extend debts, reduce interest rates. Commercial banks also needed time to verify documents, ensure support to the right subjects, and ensure capital safety and avoid policy profiteering.
Should refinancing tools be used?
Recently, management agencies had proposed to use refinancing tools with appropriate discount rates for commercial banks. Thanks to that, management agencies could directly instruct commercial banks to reduce lending rates for industrial enterprises (the interest reduction was equal to 30 percent of the current interest rate for a period of 12 months to 24 months).
According to the State Bank Law, refinancing was a form of credit provision by the State Bank of Vietnam (SBV) to provide short-term capital and means of payment to credit institutions. SBV shall stipulate and carry out the refinancing of credit institutions in the following forms: Lending secured by the pledge of valuable papers; Discounting valuable papers; Other types of refinancing.
Along with monetary policy implementation tools, the refinancing tool had been used effectively by SBV to ensure the goal of supporting economic growth, controlling inflation, and stabilising the macroeconomy.
The above proposal, in Can Van Luc’s opinion, was only partially right but not enough and could not solve with the current difficulties of the business.
Can Van Luc analysed, according to the provisions of the State Bank Law, its Decrees and Circulars (most recently, Circular 24/2019 of SBV, effective on January 18, 2020), the main purpose of re-lending funding from SBV was (i) liquidity support for credit institutions, and (ii) funding support for industries and sectors encouraged by the government and SBV, with a maximum term of 12 months, the current interest rate was five percent per year (declined from six percent per year from March 16, 2020). Instruction 02 dated 31/3/2020 of SBV also mentioned the form of refinancing loans to credit institutions to carry out programmes under the direction of the prime minister. That was, SBV might provide refinancing loans to provide partial support to credit institutions in giving new loans to support businesses affected by Covid-19.
However, in the current context, the proposal of refinancing to lower interest rates was not enough and could not completely solve the problem. Luc acknowledged that this refinancing would not be much and was very limited to support credit institutions to reduce interest rates. Because, according to the regulation, SBV only refinanced up to 60 percent of the credit balance to be refinanced, how would the remaining 40 percent be handled? Moreover, if the refinancing rate were cut down to a very low level to support the interest rate for commercial banks, the main nature was using the budget to offset interest rates like in 2009, it would be very complicated to carry out when capital flowed into risky areas, causing long-term consequences.
Besides, Can Van Luc said that interest rates were not the credit bottlenecks at present, because of lending interest rates currently at low levels, declined by one percent to 2.5 percent per year compared to normal interest rates. Credit institutions had launched many credit packages for businesses and individuals. Still, the ability to absorb capital of the economy was very weak (by the end of Q1/2020, the new credit increased by 1.3 percent compared to the increase of 3.2 percent along with 2019 period).
In the same opinion, Le Xuan Nghia said that, during this period, due to the severe impact of the disease, production and business activities were almost stagnated (on the supply side), even if there were production, products could not be consumed (demand side) when the food and travel services were in a state of maximum reduction. Hence, the problem was not to reduce the new lending interest rates for businesses to invest in production and business. Moreover, controlling inflation and long-term macroeconomic stability were priority tasks.
Business support policies were very active
According to Can Van Luc, the greatest difficulty of the enterprise then was cash flow, liquidity, rather than borrowing money to invest in a new one (because the output was seriously affected). As a result, the government allowed the debt rescheduling, reduction of interest on old debt, keeping the debt group to get new loans, delaying taxes and land rent, lending zero percent of interest to pay salaries. In the near future, the reduction of corporate income tax (for small and medium-sized enterprises from 20 percent to 15 percent to 17%) might be very correct and successful.
That point should be concentrated on, according to Can Van Luc. Also, if the interest rate were too low (very preferential), sometimes businesses could re-borrow to reverse debt by all means without a feasible investment and business plan. This would be long-term risks, Can Van Luc stressed.
Meanwhile, Le Xuan Nghia also noted, recently, SBV had reduced a series of operating interest rates, along with using professional operations in the open market, increasing deposit interest rates in required reserve by dong in SBV from 0.8 percent per year to one percent per year. Thereby, SBV had indirectly created conditions for commercial banks to reduce interest rates and support businesses. If refinancing were applied, consideration should be given to specific requirements. For instance, when the translation was over, it was necessary to quickly restore supply and demand to support growth. However, the use of refinancing tools required caution, like spreading a handful of paddy rice to the flock of chickens, in which there would be weak, unabsorbed chickens, in turn, the work would be ineffective. Nghia emphasized, when using this tool, the operator would have to consider how to ensure inflation control, macroeconomic stability in the medium and long term.
In essence, the 285 trillion dong credit package (then 300 trillion dong) was not the amount of money that the State Budget spent to support the economy, but the capital of commercial banks and people and businesses’ deposits which banks were paying interest on.
This credit programme was registered by commercial banks with SBV in the spirit of sharing difficulties with people and businesses, without the support of the State Budget. All customers affected by the disease, wishing to borrow capital for production and marketing. Effective business plans would be considered by the credit institutions following the provisions of law and internal policies of credit institutions.
The lending mechanism and process of this credit package was the same as a conventional commercial loan, the responsibility of borrowing and paying was purely between banks and borrowers, the procedures would be faster, more flexible, more effective, providing more preferential interest rates depending on each project, borrowers.
According to SBV’s report, until then, credit institutions had provided new loans to 354,286 customers, of which Vietnam Bank of Social Policies (VBSP) had 275,000 customers, loan sales reached 165.208 trillion dong of which VBSP was 12 trillion dong.
