Fresh doubts axe is sharp enough to cut high rates

Many small businesses have found themselves at the sharp end of the interest rate manoeuvring

Newly-appointed State Bank Governor Nguyen Van Binh said he expected the Vietnam dong lending rate could drop to 17-19 per cent, per year from the fourth quarter of this year.

However, Western Bank general director Dang Duc Toan said small-scale banks now had to offer depositors  17-19 per cent, per year so lending out at 22-23 per cent was rational.

“The high interest rate is putting pressure on banks and banks do not like high interest rates either. But with year-on-year consumer price index (CPI) growth of over 22 per cent by end of July, it is hard to attract depositors with lower deposit rates,” said Toan.

July’s national month-on-month CPI came in at 1.17 per cent nudging the year-on-year CPI up to 22.06 per cent.

Standard Chartered Bank general director Louis Taylor said that 2011 was a tough year for everyone.

“The real test for banks is likely to be the second half of the year, when the cap on credit growth starts to bite, [and] when borrowers may find difficulty continuing to pay high interest rates,” said Taylor.

Binh further explained that liquidity in the banking system was good now and this was the good condition to bring market interest rate down.

“Low [lending rates on the] interbank market have demonstrated that banks now have enough funds. So, why can’t they bring down the deposit rate to 14 per cent, per year for instance, then lend out at 17-19 per cent per year?” said Binh.

Over the past two months, the interbank market where local lenders make short-term loans from each other has seen lending rates of 12-15 per cent per year, much lower than over 20 per cent experienced in the first quarter of 2011.

However, one financial expert said that interest rates were set according to market laws and the demand-supply relationship and though all banks wanted a lower market rate, interest rates would be largely affected by depositors. Whether they would accept a lower rate was remained unknown, said the expert.

Sumit Dutta, CEO of HSBC Vietnam, said local businesses were also hurting because of the current high interest rates.

“We anticipate that the second half of the year will remain challenging – most banks have reached their credit growth caps and have to reduce their non manufacturing lending in line with the State Bank directives. However, we expect interest rates to come down,” said Dutta.