Banks and businesses need mutual trust

Bank concerns

Like many other economic sectors, the banking industry is struggling to weather the storm and support the national economy. Commercial banks are tipped to lower interest rates and reschedule debts, making it easier for businesses to access loans.

Despite their continued efforts to restructure, the banks’ operations have yet to meet expectations. Commercial banks experienced ‘negative’ credit growth in the first two months of 2013, and only recovered in March with a slight increase of 0.1 percent.

While credit growth is yet to recover, deposits rose sharply by between 22-36 percent. This means money continues to pour in, and as a result, the banks now have a huge amount of cash in stock.

However, they are now in a tight spot. On the one hand, they have to pay interest on these deposits, while on the other hand, they are required to establish reserve funds to guarantee unpaid bad debts owed by businesses.

Banks rely on clients’ deposits; they cannot refuse deposits or lower deposit interest rates far below the central bank’s benchmark in order to maintain their regular big clients.

Purchasing Government bonds with an annual interest rate of 8 percent is considered a solution to get over this stumbling block. Yet, all Government bonds have a maturity date of over five years while most bank deposits are short-term with an annual interest rate of 7.5 percent.

It is worth remembering that three or four years ago when businesses felt the economic pinch, they lobbied banks to take out loans. Now the situation has reversed. Despite low interest rates and promotions, banks find it difficult to woo business clients. 

Nguyen Thi Kim Nu, director of the Thien Kim Steel Company in Da Nang, says bitterly, “When we performed well, our credit quota was set between VND15-17 billion. Now when we are in a fix, banks have decided to reduce credit limits and even cut the quota …. We had to sell some of our assets to pay debts, but then could not access new loans. How can we maintain production, pay our debts and seek new opportunities in such a situation?”

Mutual trust needed

Trust is essential in corporate culture, and when a crisis of trust arises, time is needed to mend the gap. The credit relationship between banks and businesses has been worsening for a long time, and their trust cannot be restored overnight.

When businesses cannot access bank loans, they have no choice but to borrow high interest loans on the black market to pay back debts. As a consequence, many fall victim to the debt spiral and eventually declare bankruptcy. Statistics show that more than 400,000 businesses were dissolved last year, and capital shortages are one of the causes.

Businesses are now reluctant to take out new loans even though interest rates were recently slashed to between 12-15 percent. They reason there is no use expanding production when they have excess inventories and face a low purchasing market. The best solution, they think, is to wait for further moves from banks and the market.

Meanwhile, banks are also in a dilemma. They are hesitant to lend as their bad debts are equivalent to 20 percent of the country’s GDP. However, if they continue to support businesses, they will probably be bogged down in a financial quagmire.

Against efforts to settle bad debts, the banking industry’s overdue debts amount to a record high of VND260 trillion. Many banks say they have to wait for positive signals in the market to avoid a financial disaster.

Nguyen Ngoc Bao, chairman of the Board of Directors of the Vietnam Bank for Agriculture and Rural Development, says “It’s time we looked for feasible projects from clients who are able to pay their debts.”

Nguyen Phuoc Thanh, director general of the Bank for Foreign Trade of Vietnam (Vietcombank), echoes Bao’s view, stating “Our bank now has an abundant supply of capital. We even offered a lending interest rate of 6 percent for a number of business areas, but we have not found any eligible clients so far.”

If banks and businesses do not find common ground, the task of economic recovery seems to be a hard nut to crack.