Banks, borrowers struggle with tighter credit

Tuesday, May 27, 2008
The recent move by the State Bank of Viet Nam to raise the prime rate to 12% means that commercial banks are allowed to charge customers up to 18% interest on individual or commercial loans.

"An 18-per-cent lending rate is unsustainable for small- and medium-sized enterprises that operate on profit margins of only around 7 or 8% per year," said chairman of the Viet Nam Association for Small- and Medium-sized Enterprises, Cao Si Kiem.

Perhaps even more alarmingly, few borrowers are getting approved, even at this high, 18-per-cent interest rate. Most banks are generally only granting loans to existing borrowers.

"We obviously have to save ourselves before supporting enterprises. If we lack capital, how can we lend to them?" said the director of one HCM City-based bank who requested to remain anonymous.

"If the central bank wants us to give loans to domestic firms, they should pump more money into the system to solve the lack of liquidity," he added. "Pumping in a certain amount of money would be okay and would not harm attempts to control inflation."

Some other commercial banks say that the structure of interest rate regulations, not a lack of liquidity, is to blame for the tightening credit picture.

They point to the need to pay deposit rates of around 15% in order to attract capital to lend, plus other costs of raising and lending capital at a margin of 1.5-2%, so that their total lending costs are about 16.5-17%.

If these same banks are limited to charging no more than 18% interest on loans, the tight profit margins may actually represent losses in some cases, factoring in risks of non-performing loans, operating costs and other considerations, including asset appraisal, obtaining security interests, and collection costs.

Add all these in, they say, and the costs of lending can easily surge to 20% in the present interest rate environment.

Accordingly, lending rates charged to borrowers had surged to as high as 22-23% per year in recent months, until the central bank recently reminded them that prime rate regulations and the nation’s Civil Code mandated that lending rates not exceed one-and-a-half times the prime rate, or 18% per year.

Limiting loans

State Bank of Viet Nam governor Nguyen Van Giau has confirmed to Viet Nam News that the State Bank would soon issue new regulations reasserting this 18-per-cent interest cap.

The commitment is part of an overall Government policy to restrain credit growth to no more than 30% per year, a policy reaffirmed last week.

In other words, banks are under official pressure not to grant credit too freely, and many have begun focusing their lending priorities

Sacombank, for instance, announced that it would priorities loans for core lines of business and production, turning down applications to finance new ventures.

Asia Commercial Bank yesterday announced a new lending policy that would prioritise and limit lending to established customers and specific industries or sectors, although they have not yet announced which would receive this priority designation.

Vietcombank, meanwhile, said it would give lending priority to importers and exporters, customers servicing international loans, and enterprises seeking to invest in overseas markets or projects. (VNS)