According to Nguyen Duc Kien, vice chairman of ACB’s board of founders, the State Bank of Vietnam is trying to reduce the deposit rate in a bid to help lower the lending rate but a lending rate reduction should be of substance.

In reality, the deposit rate is down while the lending rate remains high. The average lending rate of the whole banking system is high, at over 17% rather than the expected 14-15%.

With such a high rate, enterprises who suffered a high rate last year will not be able to pay the interest. Therefore, business operations of Vietnamese enterprises this year have almost ground to a halt.

Kien said the deposit rate was below 10% a year in the pre-2007 period, thus keeping the lending rate stable at 12-13% for 10 consecutive years. However, in the past three years, interest rates have been running wild, so it is time to stabilize them, probably at 10-11% for deposits and 12-13% for loans, for a next couple of years, not months, to instill confidence in enterprises, Kien said.

For example, the interest rate volatility has led enterprises to hold back their investment plans, so Kien proposed the lending rate should be pulled down below 10% this year to make life easier for businesses.

The stability of the interest rate also depends on inflation while inflation relies on external factors and the stability of the economy.

Kien said the first thing that should be done is to stabilize the macro economy and monetary policy in order to lower the interest rate.

Besides, the banking system restructuring should be intensified, with large and State commercial banks plagued by high bad debt ratios put on the radar this time. If not, it will be difficult to attract capital flows and lower interest rates.

Enterprises have been under the pressure of paying loan interest for banks in the past years, and as a result they will borrow less. Kien said the situation would cut into credit growth.

In addition, public spending should not be tightened so much to eschew a liquidity crunch, Kien said, adding the efficiency of capital use should be boosted instead.

Regarding the rate cuts, Tai Hui, regional head of economic research for Southeast Asia of Standard Chartered, spoke at a conference last week that Vietnam’s inflation has dropped in the past few months and may stay under 8% in the year’s second half. This will make the Government cut interest rates further in the coming time.

Tai Hui, however, warned the Government should be careful in lowering interest rates since instability might occur.

Meanwhile, according to a report by HSBC, Vietnam’s inflation is in single-digit territory, which is 8.3%, after the economy had been struggling with double-digit inflation for nearly two years. This achievement has resulted from monetary tightening since early last year.

The low domestic demand has pulled down food prices and economic growth, and this is why the central bank has revised down interest rates three times over the past months.

The credit growth declined in the first quarter, which is proof of the tough business environment in Vietnam. It was because enterprises were unable to get access to loans over high interest rates and they lacked mortgages for loans.

Source: SaigonTimes