Home » Banking & Finance » Stability rocked by lowering bank loans

There iStability rocked by lowering bank loanss growing concern about the decision of financial institutions to lower interest rates as banks are struggling to ensure the adequate supply of capital.

Businesses taking advantage of lowering rates on bank loans

One to six month interest rates for bank deposits have fallen to 7 percent since June 28, with priority ceiling loan rates hovering around 9 percent. This is putting banks in a fix.

One reason cited by VPBank Director General Nguyen Duc Vinh is that only a couple of every 10 businesses can meet the conditions required to borrow capital.

Vinh argues that banks are under pressure to inject capital into the economy, but it is no easy task due to the limited number of eligible businesses which are affected by the weak purchasing power. Banks cannot simply lower credit standards as it is just a hasty action, he adds.

Vice General Director of the Bank for Investment and Development of Vietnam (BIDV) Phan Thi Chinh says banks are managing hard to attract any businesses with AA confidence index or above. Rates can drop from an annual 8 percent one day to 7.5 percent, 7 percent, or even 6 percent only a few days later, posing a serious threat to the integrity of the banking system.

As a case in point one business aimed for only VND80–100 billion in profit in the first half of the year but finally earned more than VND200 billion, including VND120 billion from borrowing capital at a low rate and then re-depositing it at a higher rate.

Many of the banks with interest rates hovering around 6 percent are foreign invested which are capitalizing on the interest rate parity between VND and foreign currencies.

Instability

Commercial bank leaders support the State Bank of Vietnam’s decision to lower loan rates and remove deposit ceiling rates as the liquidity of the banking system is improving to a certain extent. In fact, as some institutions have much more capital than others. It’s practical to remove deposit ceiling rates to help weaker banks. But credit quality remains a matter in question.

Vinh says in response to the falling credit growth some banks have taken rash measures like debt re-purchases and lax personal loan standards.

An interest rate balance below 2 percent increases the likelihood of suffered losses.

Chinh says the percentage of bad clients has increased from 30 percent to 50–60 percent at present.

Chinh warns the State Bank of Vietnam should consider lowering interest rates based on the flow of national capital. If it falls to help the economic growth there is risk that inflation will rear its ugly head again sooner or after.

(VOV)

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