VietNamNet Bridge – The State Bank of Vietnam plans to slash interest rates further, but the interest rate reduction process will be carried out in a gentle way.

The interest rate reduction process will be carried out in a gentle way

Businesses are now waiting for the interest rates to further decrease to borrow money. It is deserving of attention. The State Bank of Vietnam has drawn up plans to obtain suitable interest rates.

“Suitable interest rates’ does not mean that the deposit interest rate must be higher than the inflation rate. The interest rates, or the cost of capital, will depend on supply and demand. Bank interest rates must be lower than the average profit of the national economy.

Previously, the bank interest rate scheme was designed in such a way that served the purpose of curbing inflation. However, nowadays, as the pressure on high pressure has been eased, it is necessary to define reasonable interest rates based on supply and demand. The interest rates must be acceptable for borrowers who can make profits with the interest rates.

Most recently, the State Bank of Vietnam asked the Vietnam Banking Association to discuss reasonable interest rates that can meet the above requirements. The central bank plans to create a ‘soft landing’ for interest rates in order to avoid a shock to the national economy. Therefore, borrowers should not wait and only borrow money when they can see the ‘bottom line’ of the interest rate performance.

Many experts said that other countries have lowered the basic interest rate to nearly zero percent, while Vietnam still insists on having a high interest rate (the current basic interest rate is 8.5% per annum). Will it happen that the lending interest rate will decrease to below 5%, as expected by many people?

In 2008, the outstanding loans in HCM City grew by 20.6% over 2007, while the mobilized capital increased by 15% over the end of the previous year, including an increase of 33% in the deposits from the public.

Though experiencing a difficult year in 2008, most joint-stock banks in HCM City were profitable. Regarding dividends, some banks had very high dividends, while other banks paid 12%.

Businesses expect the basic interest rates to be slashed to only 3-4%. However, in fact, the current banking technology in Vietnam is not perfect enough to obtain a low capital mobilization cost, which allows lending at low interest rates. If the basic interest rate is lowered to 4%, and the ceiling lending interest rate is 6%, the gap of 2% would be not high enough to cover all bank expenses. Several years ago, the gap had to be 4.32% to ensure the operation for banks. In current circumstances, the lending interest rate cannot be cut rapidly and sharply, while it needs much more time to go down in a step-by-step manner.

How high should interest rates be? This requires thorough consideration. The Government’s Resolution NO 30 also mentioned the interest rate liberalization, under which interest rates will be defined based on the market supply and demand. However, the ‘state’s hand’ remains necessary in defining interest rates. Previously, the basic interest rate slashing was an intervention by the state that aimed to help settle difficulties of businesses. If interest rates had not been slashed, businesses would have faced more difficulties. However, we also have to respect the rules of the market.

As far as I know, the central bank has suggested that banks adjust the interest rates of the credit contracts signed before at high interest rates, which aims to help businesses escape from difficulties. However, very few banks have done this, why?

Some commercial banks have announced that they will lower the lending interest rates for some credit contracts that were signed previously with higher rates. This is a kind of civil negotiation between lender and borrower. There have been arguments between borrowers and banks. However, the central bank thinks that it would be better to let borrowers and banks negotiate themselves to reach agreements.

The market situation will also lead to adjustments. Banks now have capital in excess, and if they insist on high interest rates, clients will pay debts to the banks to borrow from other banks with lower interest rates. As such, banks and clients have to discuss and decide on the most reasonable solutions.

What worries businesses most is the changeable policies that make them unable to arrange business plans. They wonder if the problems of 2008 will be repeated in 2009?

We should have a look over what happened in 2008. The signal of tightening the monetary policies was sent right at the beginning of the year, but banks could only adapt to this in May 2008. Businesses proved to be even slower than banks. A lot of businesses complained that banks did not lend money to help them stock up merchandise.

However, it was later clear that the stocking up created consequences to many businesses as the commodity prices dropped sharply after that.

We also should not be too rigid with the forecasts and set plans, but we need to become flexible. The things that happened in 2008 showed that all predictions can be upset. The exchange rate policy should also be regulated in a flexible way.

(Source: Tuoi tre)