Central bank faces uphill battle to lower lending interest rates

In a meeting between Prime Minister Nguyen Xuan Phuc and the Vietnamese business community, State Bank of Vietnam (SBV) Governor Le Minh Hung outlined the banking system’s target of lowering the lending interest rate by one percent this year.

In favor of this commitment, leading banks BIDV, Vietcombank, Vietinbank and Agribank simultaneously cut their lending interest rates by 0.3–0.5 percent per annum and applied a cap on middle and long-term lending interest rates of 10 percent for high-credit-profile customers.

It will not be easy for the State Bank of Vietnam to keep its promise to cut lending interest rates. Photo by VnExpress

Other commercial banks such as Tien Phong JS Commercial Bank and Saigon-Hanoi JS Commercial Bank also said they would apply the 10 percent cap and make a combined VND5 trillion (over $225 million) available for the preferential loan package with a rate of 6.9 percent.

Large banks have also shown a willingness to lower interest rates by cutting hundreds of billions of VND on management expenditure.

According to experts, this move is a positive sign for the business community because it will provide support for enterprises. However, finance and banking experts also said they are worried about the feasibility of the target because many obstacles stand in its way.

Inflation in 2016 is expected to be from three to five percent, which is notably higher than 2015's rate of 0.63 percent. Therefore, depositors expect a higher savings rate to counteract rising prices.

Some commercial banks, including state-owned banks, have increased their long-term deposit interest rates up to eight percent per annum.

Vietinbank and BIDV are leading the way and have increased interest rates for short-term deposits. Vietinbank’s deposit interest rate is higher than the banking system average, with 5.8 percent, 6.8 percent and seven percent per annum for 6-9 month, 24-36 month and over 36 month deposit terms, respectively.

“As the deposit interest rate is high and tending to climb, the lending interest rate is under pressure,” one expert said.

Another factor hampering the government’s promise is that lending interest rates are competing with government bonds. According to the chairman of BIDV’s board of directors, Tran Bac Ha, to relieve the pressure on mid-long term interest rates, the government should slash the rate of bond issuance and strictly limit public expenditure.

Commercial banks are currently the main buyers of government bonds. According to Ha, the government should reduce the issuance by 10 percent.

Another factor affecting lending interest rates is pressure from shareholders on returns and dividends. During this year’s AGM season, shareholders of many banks revealed their frustration at the low dividends.

To pay dividends, commercial banks need their profit to go up. But numerous banks have expressed dismay that the net interest margin (NIM) of the banking system is currently very low and the lending interest rate reduction will slash their profits more severely.

Ha said that with the average lending interest rate of 8.5 percent per annum, banks are facing a very low NIM ratio.

“The prime cost now is 7.8 percent in which the deposit interest rate is 4.9 percent, credit loss provision is 1.22 percent, liquidity reserve to asset ratio is 0.5 percent, banking management expenditure occupies 1.75 percent and NIM is only 0.69 percent, while the NIM of ASEAN banks ranges from 2.2 to 2.5 percent,” the BIDV chairman said.

Bank representatives said that to cut lending interest rates in order to help enterprises access capital, support polices are needed. Ha said that one of those policies could be for the SBV to slash the reserve requirement ratio.

According to Ha, the reserve requirement ratio should be lowered to one percent for VND and three percent for foreign currencies.

The SBV Governor Le Minh Hung admitted that fiscal policies are facing some challenges, including slowing economic growth and rapidly increasing CPI that is leading to high inflation, but the SBV maintains its pledge to stabilize the lending interest rate.

“The existing lending interest rate is low and only equivalent to 40 percent of the rate in 2011. Rate management needs to rely on fiscal policies and inflation, so the SBV has to be cautious,” Hung said.