Cutting interest rates for capital restructuring Bad debts hamper bank restructuring
However, big lending rate cuts are unlikely due to the bank’s high borrowing costs from old deposits and bad debt risks.
The central bank on June 11 reduced the ceiling deposit rate for one-12-month terms from 11 to 9 percent, the refinancing rate from 12 to 11 percent, the interbank electronic payment overnight rate from 13 to 12 percent and the discount rate from 10 to 9 percent.
The magnitude of policy rate cuts, to trigger credit expansion in negative territory throughout the first five months of 2012, was higher than what many economists had expected. However, bankers said quickly bringing down lending rates, as domestic enterprises desired, was difficult.
Pham Thien Long, deputy director of HDBank, said with the 9 percent interest rate, banks could lend out at 11 – 12 percent for profits.
However, it would take banks up to three months to cut the lending rate.
“Moreover, banks that have liquidity difficulties last year had to borrow on the interbank market at 20 – 25 percent, and they still have to suffer from such high capital costs until now. That is a barrier for banks to reduce the lending rate”, he noted.
Agribank chairman Nguyen Ngoc Bao said deposits came with high mobilization costs. At Agribank, the capital mobilized at 14 percent for more than one year accounted only 15 percent of the bank’s total deposits, causing banks to balance between deposits and lending.
Le Quang Trung, deputy general director of VIB, said 90 percent of banks’ deposits were less than three months and together with other costs such as operation costs and required reserves, banks could reduce lending rates to 12 – 13.5 percent while still making profits.
“However, banks’ credit growth remains modest due to their ineffective operations and bad debts of many enterprises which make banks not dare to lend out. The lending rate reflects the rate of return from a loan. If a loan is risky, the interest rate for it must be higher”, said Trung.
SBV Governor Nguyen Van Binh two weeks ago announced that the banking system’s non-performing loans had surged to 10 percent of outstanding loans.
Trinh Nguyen, an analyst from HSBC, said that after the SBV's move to reduce deposit cap by 2 percent, lending rates remained high at around 15 – 17 percent, making it difficult for firms to access loans.
“The lending interest rates are still so high as they reflect the risks that banks have to take to extend loans to corporations now. Firms with higher risks incur higher borrowing costs”, Trinh told VIR.
Long of HDBank said banks could not enhance lending because many enterprises had ineffective business results, lacked collaterals and had too high inventory levels. “Banks can accept inventories are collaterals but it is very difficult for us to evaluate them and we do not know when we can sell such inventories”, said Long.
A survey by the Vietnam Chamber of Commerce and Industry (VCCI) shows that until the end of April, in most enterprises still suffered lending costs at 18 percent.