The State Bank of Vietnam (SBV) on February 26 issued a regulation that allows the application of negotiated interest rates to loans for medium and long term projects. This has helped to strike a balance between monetary supply and demand on the local market.

Balancing input and output

Previously, commercial banks offered a deposit interest rate of 10.5 percent/year, but they are not allowed to impose any lending interest rates higher than 12 percent/year. According to rough calculations, in this case, commercial banks are unlikely to make a profit.

The SBV’s recent regulation has legalized the borrowing and leading rates which surpass the ceiling levels. Accordingly, commercial banks can negotiate with businesses to reach consensus on a certain interest rate by paying extra fees.

Although banks are allowed to apply negotiated interest rates, they find it difficult to meet the increasing demand for capital from businesses. This has pushed commercial banks to join the race of increasing deposit interest rates.

Nguyen Van Le, General Director of the Saigon Hanoi Bank, says that some commercial banks have to raise their deposit interest rates up to 12-14 percent/year to attract more deposits.

Currently, there are strong fluctuations in gold prices and the exchange rates between the Vietnamese Dong and the US dollar. The SBV decision to maintain the basic interest rate at 8 percent/year in March is said to be not attractive enough to mobilise capital from individuals and organisations. This may also cause difficulties in banks’ liquidity.

Obviously, it is essential to consider the removal of the ceiling rate carefully in order to resume the balance between supply and demand in the banking sector.

In this context, shortcomings related to short-term loans which are not allowed to apply negotiated interest rates will soon be resolved. Le Duc Thuy, Chairman of the National Financial Supervision Committee, says that the Government has agreed to allow banks to apply the negotiated interest rates to loans for medium and long term projects, as well as for short-term ones which prove effective. If commercial banks do not reach the negotiated interest rates, they can ask borrowers to pay extra fees. This will help businesses gain easier access to loans, he elaborates.

Interest rates depend on “relationship”

Many people are raising concerns over the rapid changes in banks’ interest rates as most small-and-medium-sized enterprises (SMEs) are unable to take out loans with high interest rates. Some say that SMEs have to use a “lobby” policy to access loans more easily.

The SBV should inspect the negotiated interest rates reached by commercial banks and big companies while many SMEs still have to wait to get loans.

The fact is that many big businesses can take out loans from banks at different negotiated interest rates that depend on their relationship. The director of a major plastics production company says that if the State fails to control the negotiated interest rates, there will be new interest rate levels which are higher than the current levels.

According to Tran Xuan Mai, Director of the Wood Fine Arts Moulding Engineering Export and Construction Company (Amiexco), many businesses will benefit from negotiated interest rates. However, he says, the SBV should also apply such rates to loans for short-term projects (under 12 months) because most SMEs have an urgent need to borrow capital to develop production.

Before the SBV’s recent regulations came into effect, the interest rate had stood at 12 percent/year. At present, the rate has increased to approximately 15-16 percent/year for medium and long terms. For special loans which serve consumption purposes, the rate may reach up to 20 percent/year. Currently, commercial banks still hesitate to announce a detailed interest rate for the medium and long terms, while businesses are trying to get acquainted with the rising interest rate of 15-16 percent/year, according to the calculations of economists.