From 31st March, credit institutions will stop lending short-term loans in foreign currencies to pay for imports in order to produce goods and services for domestic demand. Continuing to tighten foreign currency lending, in order to shift lending and depositing in foreign currencies to buying and selling foreign currencies in line with the policy of the State Bank of Vietnam (SBV), on 30th September 2019, lending medium and long term loans in foreign currencies for importing will also be stopped.
The above regulation is implemented in accordance with Circular No. 42/2018 of SBV on foreign currency lending. Specifically, credit institutions (CIs) can provide short-term foreign currency loans to make overseas payments to import goods and services in order to carry out production and business plans to meet domestic demand when the borrower has enough foreign currency revenue to repay the loan until the end of 231st March 2019.
If medium and long-term loans are provided, it will be carried out until 30th September 2019. SBV also abolished the timeframe limit for short-term loans to meet domestic capital needs to carry out export goods production and trading plans when borrowers have enough foreign currency sourced from their revenue sources to repay the loan.
However, when loans are disbursed by credit institutions and foreign bank branches, borrowers must sell such foreign currency loans to the credit institutions, in the form of spot exchange transactions, except for the cases where payment currency is regulated as a foreign currency by law.
With the tightening of foreign currency lending, businesses that import for domestic demand will have to borrow in dong with higher capital costs compared to US dollars loans of about 3-4 percent p.a., in the context that exchange rate is expected to fluctuate around 2-3 percent in 2019, not to mention if the US-China trade war continues to escalate, the Chinese yuan is stronger, and the pressure to increase the exchange rate of US dollar/dong is very big.
Therefore, the leaders of the banking sector of HSBC said that when they have to switch to dong loans with higher capital costs, for businesses with foreign currency revenues, they can sell foreign currencies to get dong to help reduce borrowing costs.
Thus, the actual cost increase will be very small for this group of businesses. For businesses having no foreign currency revenue, with the fact that dong often depreciates 1-2 percent annually, the cost of dong loans does not increase much compared to US dollar loans. In general, the cost of borrowing in dong of businesses will increase compared to US dollar loans, but not too much.
Regarding the question of whether tightening foreign currency loans will reduce the ability to access loans of entity customers who have demand for foreign currency or not, the leaders of banks say that they are not constrained. The reason is that when businesses need to pay in foreign currency, they can borrow dong and then buy foreign currency for payment. Banks can advise financial solutions to help businesses carry out this in a cost-effective manner.
According to Dr Le Dang Doanh, former director of the Central Institute for Economic Management, tightening foreign currency lending, reducing with a roadmap to terminate lending in foreign currencies is necessary to combat “dollarisation”. All countries in the world strictly control the use of foreign currency in their own country.
In Vietnam, the stable US dollar/dong exchange rate in recent years has facilitated business activities of enterprises, especially exporters. Besides, lending interest rate in US dollar is much lower than dong lending interest rate, and this interest rate difference makes the demand for US dollar loans of businesses soar to reduce interest expenses. This has impacted to Vietnam’s foreign exchange reserves, so it is unreasonable to satisfy all demands.
Faced with concerns that stopping foreign currency lending will increase interest rates for dong loans, according to a leader of a commercial bank in HCM City, the liquidity of dong may be affected as banks have to arrange enough local currency funds for lending. In particular, commercial banks without abundant capital sources may face difficulties to meet the demand for loans.
“The gradual shift from lending and borrowing foreign currency to trading foreign currency, in the short term, competition on lending rates and mobilisation of capital in dong may be more stressful leading to the lower profit margin of commercial banks. However, in the long term, the market will balance itself,” he said.
Meanwhile, an industry expert said that concerns about the above regulation may push up the dong interest rates. He analysed, if businesses borrow foreign currency to import, what they need is foreign currency, not dong, so if they cannot borrow in foreign currency, businesses must buy foreign currency.
The purchase of foreign currency to meet the demand for payment of legitimate import orders will certainly be fully met by banks, so importing companies will not be negatively affected by the prohibition of foreign currency lending by SBV. When importing companies borrow dong to buy foreign currency, they must pay dong to banks and the banks return to the businesses the amount of foreign currency corresponding to the amount of money they has paid for.
Therefore, the amount of dong that businesses withdraw when borrowing from banks will be nearly equal to the amount that are remitted to banks in exchange for foreign currency, so the supplydemand for dong remains unchanged and does not make the dong lending interest rate increase as many people fear for.
