Banks cut lending interest rates on gov't advice

Monday, May 16, 2016 08:10

Vietcombank set its rates for medium- and long-term loans at 10 per cent a year, down from 10.5 per cent. — Photo

Last week several banks cut their lending interest rates on the recommendation of the State Bank of Viet Nam.

State giant Vietcombank set its rates for medium- and long-term loans at 10 per cent a year, down from 10.5 per cent. The bank also earmarked VND300 billion (US$13.4 million) to lend to companies for expansion. Vietcombank said this package was made possible by its cut in operational costs, strong risk management, and maximised efficiency.

BIDV, another large State-owned lender, has also reduced its short-term rates by 0.5 per cent for selected borrowers.

Medium- and long-term loans for manufacturing and business can now be obtained at less than 10 per cent interest, down from the previous 10-11 per cent.

Vietinbank, Agribank, Sai Gon-Ha Noi Bank and many others have since followed suit.

The banks' rate cut decision came after Prime Minister Nguyen Xuan Phuc met with 300 business executives in HCM City on April 29. At the meeting he urged the central bank to maintain reasonable interest rates on loans for manufacturing and business, keep foreign exchange rates under control, and provide all assistance to the business community.

However, many other banks, particularly small ones, have said it is very difficult for them to lower the lending interest rates at this time and asked for support from the Government and shareholders.

Though the Government has been keen to bring interest rates down since early 2015, they stood stubbornly high, even showing an upward tendency recently.

Analysts blamed this on many reasons including increasing dollarisation, rising public debts and banks' bad debts.

Over the last year, despite the low inflation rate that during many months remained under 1 per cent, banks kept hiking deposit interest rates, which have now reached rather high levels.

Some banks now offer 8 per cent for deposits of over one year.

There is increasing dollarisation because of the economy's recovery and devaluation of the dong.

The SBV decided to weaken the currency by 3 per cent in response to China's depreciation of its yuan by 5 per cent last August. This made people reluctant to keep the dong and shift instead to US dollars.

With regard to public debt, some analysts said the Government recently issued more bonds mainly to serve rollover of debts because many short-term debts had fallen due.

Consequently, the government had to compete with businesses to get loans from banks, thus putting upward pressure on interest rates.

But bad debts are believed to be the main reason for making interest rates at least 2 per cent higher than the average inflation rate of the last few years.

VietinBank's bad debt ratio as of March 31 was 0.96 per cent, or equivalent to VND5.3 trillion, more than half deemed irrecoverable.

For Vietcombank, the figure was 1.84 per cent, equivalent to VND7.6 trillion.

But these are official figures, and speculation has been rife for long that the actual figure could be in double digits.

The dampening effect on liquidity and profits means the banks cannot lower lending interest.

Some analysts expect the interest rates to dip by a further 0.5 per cent this year since the dollarisation could decrease thanks to the central bank's new mechanism to manage foreign exchange rates more flexibly.

The policy is expected to increase risks while reducing rewards at the same time for those keeping dollars.

The dong is unlikely to see any major devaluation also since the possibility of the US central bank increasing rates is low as the inflation rate is still much below the 2 per cent target.

The central bank's determination to limit loans to the property sector is likely to help reduce bad debts and constrain credit growth, easing the pressure on lending interest rates.

Some analysts said to bring down the interest rates the central bank should not rely solely on banks'efforts since the latter face many difficulties themselves.

Instead, it needs to instil market discipline by severely punishing all violations of interest rate regulations, they said.

The national lender should also seek ways to regularly reduce the benchmark interest rates, which has been kept unchanged since 2014.

Latex price surges

The Gia Lai-based Hoang Anh Gia Lai Corporation announced losses of VND589 billion ($26.4 million) for the fourth quarter of 2015, the first time it has been in the red since its stock market listing in 2008.

HAGL chairman Doan Nguyen Duc said he has "to sell his house" if he wants to continue growing rubber trees.

But luckily for him, there has been a strong increase in latex prices, which have risen from VND22 million per tonne to VND37-38 million.

This enables rubber companies to earn VND12-13 million per tonne.

After rising to a peak in 2011, latex prices have been falling relentlessly, badly affecting natural rubber producers.

The sharp increase in latex prices is attributed to certain reasons, one of which is the recovery in global rubber prices.

As the trading session ended on March 10 on the Tokyo Commodity Exchange, rubber futures contract prices were Y173 per kilogramme, up 18 per cent from the beginning of the year.

That major rubber businesses in Thailand, Indonesia and Malaysia decided to reduce exports by 615,000 tonnes over a six-month period beginning on March 1 is another reason for rubber prices to increase.

The sharp increase in global oil prices is also an important factor in the rise in natural rubber prices because oil prices are correlated to those of synthetic rubber, a downstream oil product. As synthetic rubber prices harden, consumers turn to natural rubber.

The question is whether Vietnamese rubber producers can capitalise on the price hike.

Many said however that they might miss out on the opportunity due to seasonal factors.

In the first and second quarters of the year, Vietnamese rubber firms have to stop tapping latex to maintain their equipment and wait for the trees to shed their leaves.

The tapping will resume in mid-May and most companies do not have large inventories.

HAGL and Quang Nam Rubber Company said they have no latex inventories. The Hoa Binh Rubber Company has an inventory worth just VND600 million.

The Rubber Phuoc Hoa Company is said to have the largest inventory, one that is worth VND53.547 trillion.

Many rubber businesses are still worried about price volatility because rubber prices are linked to oil prices.

Because of this, many are still running a tight ship, cutting the cost of cultivation and laying off workers.

It looks like the rubber industry is set to miss the boat. — VNS

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