Rural towns were never attractive clients in the eyes of commercial banks before. However, everything has changed.

For a long time, the Bank for Agriculture and Rural Development, Agribank, has served as the main capital channel for the rural areas. Commercial banks were not interested in bringing capital to the areas because of high risks, high management fees and the fact that they would be loaning mostly small amounts of money. Only Agribank, which is a state owned bank, has to undertake the task of funneling capital to agriculture and rural areas. The loans given by the bank to fund the development of these areas account for 70 percent of its total outstanding loans.

However, banks are increasingly looking to the countryside after the government issued Decree No 41 on providing credit to develop agriculture and rural development in April 2010.

Demand still very big

According to the State Bank of Vietnam, in 2010, Vietinbank, one of the biggest state owned banks in Vietnam, loaned VND35 trillion to agricultural and rural areas. “The fact that Vietinbank has joined the market of lending to agriculture and rural areas has created new competition, which has forced Agribank to reconsider the way it provides loans to rural areas,” commented Governor of the State Bank of Vietnam Nguyen Van Giau.

In early 2011, the Bank for Investment and Development of Vietnam BIDV, put agriculture and rural areas into a list of areas the bank will prioritize in providing capital to in 2011, together with the production and export sectors and supporting industries and small and medium enterprises.

Small and newly established banks have also been eyeing the rural market. Lien Viet Bank has kicked off a plan to develop lending to agricultural and rural areas in the Mekong Delta in the period of 2010-2013 with plans to disburse VND5 trillion. The plan will be first carried out in a trial basis in Hau Giang province, and then will be undertaken in other Mekong Delta’s provinces.

The appearance of newcomers in the market of lending to rural areas has created a new competition in the market, which experts believe has great potential. Economists believe that the new policy on developing credit for agriculture has been serving as the main driving force encouraging banks to bring capital to rural areas.

However, they have pointed out that the demand for capital is still very big and rural areas still need more and more capital in order to stop the reliance on the black credit market. Currently, due to the lack of capital from official sources, farmers still have to borrow money on the black market at exorbitant high interest rates. Banks have been urged to take action to get ready for the disbursement of capital to the agriculture sector. The readiness of banks to do this can be seen in the commitment on reserve credit limits for rural areas and also in the efforts to simplify procedures.

Profits low, but capital safe

In the last 10 years, the outstanding loans to agriculture and rural areas have increased nine fold, accounting for 16.7 percent of the total outstanding loans of the national economy. The growth rate of the outstanding loans to the areas is 21.78 percent per annum. Of the amount of capital lent, medium and long term capital accounted for 40 percent.

Commercial banks have realized that lending to rural areas can be a profitable business. Though the lending cannot bring high profits, it is not too risky. The safety of the loans in rural areas, plus the preferences given by the State Bank, have made lending to rural areas more attractive in the eyes of banks. In the last three years, due to the State Bank’s tightened monetary policies, banks have been told to restrict the real estate, securities and consumer loans and they have to shift to lend to rural areas as an alternative.

The preferences offered by the State to the banks that provide credit to rural areas are very big. Agribank, for example, now can enjoy the compulsory reserve ratio at zero percent, which allows it to have profuse capital to lend at low interest rates.

C. V