The cash flow is blocked in a situation alarming to all stakeholders, from depositors to banks and enterprises as well as the entire economy. It has been earlier lamented that the high interest rate has blocked enterprises’ access to bank loans, but fresh moves and outcries by bankers this week indicate another culprit: the capital absorptive ability of the economy. The blood vein – as the money circulation channel is likened to – is now clogged by the receptive organs, so to say.

Several giant banks, including Vietcombank, BIDV and Vietinbank have this week lowered the deposit rate by around one percentage point to 7% annually for short-term savings, while Agribank has even slashed the deposit rate to 5% for one-month savings. Normally, such deep cuts heap praise from borrowers as they signal a corresponding fall in the lending rate, and funds for the economy will normally surge as well. This time, however, the confidence is sapped.

Nguyen Phuoc Thanh, general director of Vietcombank, complains in Tuoi Tre that his bank has to cut the deposit rate since the bank is now awash with funds, while the problem now is how to find eligible borrowers. In the first four months of the year, the credit growth at the bank was still minus 1% compared to end-2012.

“The problem now is how to spur demand… so banks have to lower lending rates to lure clients,” Thanh explains, adding the lending rate at his bank is hovering around 7-8% a year, almost on a par with the deposit rate.

Thanh asserts that the credit growth problem now rests with how to stimulate demand in the economy, since the interest rate no longer poses a hindrance.

Truong Van Phuoc, CEO of Eximbank, echoes Thanh’s view.

“Certainly interest rates are not the problem, but it is the low demand for funds in the economy,” Phuoc is quoted as saying in Sai Gon Giai Phong. Eximbank offers credit packages at annual lending rates of only 8% or 9%, but the bank finds it difficult to disburse funds, he stresses. For instance, Eximbank has announced a credit line of VND5 trillion for consumers since end-2012, with the lending rate now lowered to 10%, but just a small fraction of hundreds of millions has found borrowers.

In fact, liquidity at banks in HCMC now is ample as deposits have outpaced credits, according to Sai Gon Giai Phong. The newspaper, citing data from the HCMC Branch of the central bank, shows that mobilized funds at all banks in the city in the first four month total over VND1,033 trillion, rising 4.06% over end-2012, while the total outstanding loans amount to only VND868.7 trillion, rising 1.55%.

The big question is why borrowers become so scarce now.

Many enterprises are distancing themselves from funds, according to local media, because their production has become stagnant with rising inventories. As long as their products fail to find outlets, enterprises dare not take out loans to expand production. Rising inventories have also pushed many enterprises to the verge of bankruptcy.

In the past ten years, as many as 700,000 new enterprises have been established, but only 300,000 of them remain operational, Vietnamnet reports, citing data from a survey conducted by the Vietnam Chamber of Commerce and Industry (VCCI). Up to 73% of such enterprises are experiencing a near-death situation with their rising inventories, according to the survey.

The situation remains gloomy now, the Ministry of Planning and Investment reports. In the first four months of the year, as many as 16,600 enterprises have either gone bust, or stopped operation, a staggering increase of 17% year-on-year, says Vietnamnet.

Meanwhile, a big proportion of operational enterprises are disqualified for fresh bank loans due to the huge amount of bad debt. Banks cannot take risks to extend new loans as long as such borrowers fail to settle their old arrears.

New moves by banks to cut both the deposit rate and the lending rate, therefore, are not considered solutions for the gloomy situation now. Instead, such changes expose striking problems in the economy.

Vietcombank, the first credit institution to slash the deposit rate this week, hints that the new rate might not be the final cut. But the low deposit rate, says Tuoi Tre, is pushing the monetary market to a new turning point as depositors may rethink their savings and may look for a new safe haven for their asset.

“Since interest sums are minimal and no longer attractive, savings can be shifted to foreign currencies or gold, exerting stronger pressure on the foreign exchange rate,” says the paper. The big problem now is how to channel the people’s idle funds to the right place, says the paper.

The low deposit rate may also trigger a liquidity trap, when depositors withdraw their money to shift to new investment channels, says Dau Tu newspaper.

“If the liquidity problem recurs, risks to the banking system will be even more challenging than bad debt, and banks may enter a new race to hike interest rates to attract funds, thus destabilizing the whole system,” warns the newspaper.

Source: Saigon Times