Saigon Tiep Thi: After SBV allowed the negotiation-based interest rate plan to be applied to medium and long-term loans, the commercial interest rate went up to 14-18 percent per annum, an unaffordable rate for the majority of businesses. Do you think that the Government will take action to force the interest rate down?

Le Xuan Nghia: The Government also believes that the current interest rates are overly high and will lead to businesses’ investment demand decline. With such high rates, obtaining a 6.5 percent growth rate in 2010 will be unachievable. Therefore, the Government believes that it is necessary to force prices down.

In order to do that, SBV needs to apply a reasonable loosened monetary policy. In other words, SBV must increase the money supply through open market operation (OMO), thus helping the banking system improve its liquidity. This will assist commercial banks in cutting deposit and lending interest rates.

When the interest rates reach reasonable levels, we need to liberalise interest rates by removing the current interest rate ceiling and allowing the market to define interest rates.

However, we have a barrier to interest rate liberalization. The Civil Code stipulates that the lending interest rate must not be higher than 150 percent of the basic interest rate.

Now, the National Assembly has released a solution to allow commercial banks to apply the negotiation-based lending interest rates when they fund effective projects. As such, if banks appraise projects as effective, they can then lend at negotiable interest rates, no matter the length of the loans.

SGTT: Do you think that interest rate liberalization will lead to a new interest rate race?

Nghia: I think so. Right now, the interest rate will go up as there is no cap for interest rates. After that, interest rates will go down as decided by the market.

Commercial banks may enter a new interest rate race, but they will not be able to race all the way. Banks should ask themselves that if they mobilize capital at very high interest rates, will they also be able to lend.

SGTT: After interest rates are liberalized, which interest rate will SBV use to orient interest rates at commercial banks?

Nghia: In fact, commercial banks have many reference sources to set their interest rates. They can consider the refinancing interest rate set by SBV. The “channel” can reveal the monetary policy of SBV, whether loosened or tightened. They can also consider the rediscount interest rate or the OMO rate.

Besides, SBV can also announce a rate like the prime rate of the US, which is the interest rate of the biggest and best bank applied to its best clients. Other commercial banks can refer to it to decide their own rates, depending on the level of risk for the loans.

Source: Saigon tiep thi