The State Bank of Vietnam (SBV) was seeking comments on amending and supplementing some articles of Circular 22/2019 effective from January 1, 2020, offering two options on the roadmap to lower the short-term capital ratio for medium and long term loans at banks. The two options that had been proposed included continuing to hold the maximum ratio of short-term capital for medium and long-term loans at 40 percent by March 31, 2021, then gradually decreasing at the old rate in subsequent years; or maintaining the rate of 40 percent until the end of September 30, 2021, and gradually lower after that.
Previously, the SBV’s Circular No. 22/2019 stipulated that from June 30, the maximum ratio of short-term capital for medium and long-term loans was 40 percent and gradually decreased to 30 percent after 1/7/2022. According to the statistics of SBV until March 31, the ratio of the whole system was 25.52%, of which the state-owned commercial banks were 29%, joint-stock commercial banks were 28.7%.
The difficulty of the bank
SBV issued Circular 01/2020 guiding credit institutions to restructure debt, reduce interest rates, etc. for customers affected by the Covid-19 epidemic. The SBV Governor Le Minh Hung mentioned that the loan balance affected by the disease was about 2 quadrillion dong, accounting for 23 percent of the whole system, posing potential risks to banking activities. Circular 01 allowed credit institutions to restructure their debts, extend the repayment period for businesses, in order to keep the debts from being grouped. However, this also partly caused the outstanding debt to shift from short-term to medium-term, long-term, affecting the capital structure, lending of credit institutions.
In order to reduce the ratio of short-term capital to medium and long-term loans, in addition to reducing medium and long-term loans, banks could increase mobilised capital. Not to mention, attracting capital in the context of low savings interest rates these days was not simple.
Since the beginning of the year, deposit rates had decreased by 70 basis points to 90 basis points for terms of less than 12 months and decreased by 100 basis points for terms over one year compared to 2019. Meanwhile, some other channels, such as gold, stocks, bonds, had become attractive yields for investors. According to SSI Securities Corporation Research centre (SSI Research), corporate bonds were absorbing a significant amount of money from other investment channels, of which the most direct was deposits, due to the same nature of investment with fixed returns.
The lowering of savings interest rates was the foundation for banks to extend the cap to lower lending rates and support businesses. If interest rates were raised, credit institutions would incur larger capital costs and narrow profit margins. This would create additional burdens for the bank, in the context of reduced income, and banks must prepare for the arising of bad debts in the future.
Consider support
According to SBV, in order to reduce capital costs and deploy preferential interest rates for customers, banks would need to maintain the proportion of short-term capital in the capital mobilisation structure. Therefore, reducing the maximum rate of short-term capital for medium and long-term loans according to the roadmap in Circular 22/2019 might lead to difficulties in capital restructuring plans of banks.
With the pressure of the epidemic on production and business activities, the amount of customer deposit at banks was expected to decrease. Therefore, in order to ensure the implementation of preferential interest rate policies, maintain stable medium and long-term loans to customers, SBV considered reversing the roadmap to apply the maximum short-term capital source. The loan could be used for medium and long-term loans under two options, which were an additional six months or one year.
Sharing the same view, an expert, Can Van Luc, said that the roadmap to apply the ceiling rate based on the proposal of credit institutions had been delayed. Currently, the demand for medium and long-term borrowing was more to take advantage of relatively attractive interest rate incentives. Credit in the first six months showed that the growth of medium and long term loans was higher than the short term.
Besides, according to Luc, the abundant liquidity of the system proved that the current ratio of short-term capital for medium and long-term loans was not a problem. However, delays in the route would remove a part of difficulties for credit institutions if they had to support businesses more.
KB Vietnam Security Company had mentioned that deposit rates might increase in the second half of 2020 when the schedule of tightening the ratio of short mobilisation for medium and long-term loans took effect, boosting the competitiveness of deposits and reversing. Deposit interest rate trend was decreasing.
However, some argued that it was not necessary to delay the application of regulations on reducing the ratio of short-term capital to medium and long-term loans. Even if the Covid-19 epidemic continued to impact the economy, the need to continue was to control and limit short-term capital flows for medium and long-term loans to ensure healthy operations of the credit and long-term benefits. Not to mention, medium and long-term capital was mainly in the field of real estate, if extending the short-term capital schedule for medium and long-term loans, it could make the market develop in a direction that was difficult to control.
