The interest rate for short-term deposits now is hovering around 5%-6% a year, seen as a record low in as many years and having entered the negative real interest rate zone, given the projected inflation at around 6% for this year. For the lending rate, many banks are offering good clients an incredibly low level of 5%-5.5%, and are competing with one another to woo customers, according to local media.

But no one comes knocking, say bankers.

An executive of Eximbank says on Vietnamnet that despite several promotions and preferential loan programs, the bank’s outstanding loans this year to date have increased a mere 0.9%. The bank has managed to lower the lending rate in certain packages to 7% a year on a par with the deposit rate, but that move only triggers competition from other banks.

The interest rate in the past two years has taken a nosedive, from an average of 20% a year in 2011 to around 9-10% for priority sectors now, says Lao Dong, quoting data from the central bank. For certain corporate clients with a good relationship with banks, the lending rate can be as low as 5%-6%.

But many clients are keeping bank loans at arm’s length.

Dau Tu reports that an entrepreneur in Dong Nai Province two months ago refused a special offer from a bank for a loan with an annual lending rate of only 6.5%.

“The entrepreneur rejected the loan offer simply because he could not find buyers for his company’s products,” says the newspaper. This is also the common reason that is putting banks on fire.

“The biggest headache for enterprises now is not the shortage of funding, but rather the market’s consumption,” says Vietnamnet. The lending rate this year has fallen steeply compared to last year, but enterprises dare not take out loans because consumption in the market is weak.

A survey by the HCMC Association of Garment-Textile-Embroidery-Knitting shows that most enterprises in the industry do not care about taking out new loans now, and experts point out that “the interest rate tool is no longer effective and the falling interest rate does not bring about any substantial positive impact,” says the online newspaper.

Economist Pham Chi Lan explains in Thoi bao Ngan hang that since last year, the interest rate has been cut eight times but capital absorption is low as enterprises dare not expand production while consumers tighten their purse string.

The answer to the question of huge idle funds at banks is that the economy as a whole has become very frail and thus cannot absorb capital, says Thanh Nien.

There are, in fact, still many entities in dire need of finances, but such borrowers are not eligible for new loans.

Tran Hoang Ngan, a deputy of the National Assembly, says on VOV Online that certain enterprises cannot ask for loans as their old debts have yet to be settled. Meanwhile, many banks burdened with bad debt have also turned down borrowers’ applications.

Despite huge idle funds in stock, experts warn that banks as well as the whole economy are facing the new risks induced by recent rate-cutting moves.

By reducing the lending rate to below the deposit rate in certain cases, banks will face the threat of negative profits, according to Vietnamnet. Meanwhile, the liquidity trap is still there awaiting banks if the rate goes down further.

As the deposit rate has been slashed, capital can be drained out of banks into other investment channels like gold, foreign currencies, and real estate at a time when the economy still needs investment for development.

“In recent days, the gap between local and global gold prices have been narrowed down, while the U.S. dollar has appreciated, and therefore, there are signs of capital being drained from banks into these channels,” the news website Infornet.vn reports, quoting an expert.

Le Dang Doanh, an outspoken economist, warns in Dan Viet that interest rates should not be slashed in an excessive way, since “a negative interest rate may trigger a strong shift of funds from banks into other investment channels.”

The central bank is now insisting on its target of achieving a credit growth rate of 12% for this year, and has called on banks to step up disbursements via various methods, including cutting interest rates. Such a target now looks increasingly unobtainable as the credit growth as of end-May posted less than 3%, according to Dan Viet.

The solution now should not totally rest on the interest rate, as it might turn out to be a wrong approach for the country’s monetary policy, warns Vietnamnet, referring to the negative response from the business circle towards recent rate cuts. The more urgent solution now, says NA deputy Tran Du Lich on VOV Online, is how to tackle the key bottleneck in the economy, which is the falling market demand.

Source: SaigonTimes.