Central bank requests control on foreign currency loans

Governor of the State Bank of Vietnam (SBV) Le Minh Hung has recently directed the entire banking industry to strictly control foreign currency lending to better minimise dollar speculation and fight against dollarisation in the economy.

central bank requests control on foreign currency loans hinh 0
Source: cafef.vn
According to the SBV’s current regulations, commercial banks can still provide short-term loans in foreign currencies to export firms that need funds for production and have turnovers in foreign currency until the end of this year. After receiving such loans, the exporters must immediately sell the amount of foreign currency borrowed to the lenders to get VND, using the spot forex trading method, except in cases where the foreign currency will be used to make payments.

It was estimated that outstanding foreign currency loans, mainly in USD, of banks, especially State-owned ones, were significant at nearly VND300 trillion (US$13.21 billion).

VietinBank topped the list with outstanding foreign currency loans of almost VND110 trillion by the end of June, followed by Vietcombank with VND99.2 trillion and BIDV with 86.2 trillion.

Some private banks also reported high foreign currency loans, such as Sacombank with VND12.7 trillion, Eximbank with VND10.4 trillion and Techcombank with VND10.1 trillion.

Exporters prefer borrowing in dollars as the interest rate for dollar loans is lower than those in VND. Currently, banks are listing interest rates at 2.8%-4.7% per year for short-term dollar loans and 4.5%-6.0% for medium and long-term dollar loans. Meanwhile, interest rates are 6-9 percent per year for short-term VND loans, and 9-11 per year for medium- and long-term VND loans.

According to the SBV’s regulations, the interest rate for dollar deposits at banks is zero percent, but banks said that they have to spend 0.7%  for provision funds in dollar loans and some 1.5% for operating costs.

Experts also recommended the SBV tighten foreign currency lending, especially when the pressure on the country’s dollar/VND exchange rate is forecast to rise.

If the SBV prohibited foreign currency lending, banks would have to sell the dollars to the SBV and get VND for lending. Meanwhile, it would help the SBV increase the country’s foreign reserves, better control foreign currency supply and exchange rate, as well as fight against dollarisation of the economy, the experts said.

Banking expert Phan Minh Ngoc said that dollar lending makes dollarisation of the economy more serious. As more local people use the dollar in their daily transactions, the effect of the central bank’s policies would be reduced.

Ngoc took inflation as an example. When inflation is high, the central bank wants to increase interest rates to control it. However, due to the dollarisation in the economy, local people will prefer borrowing in dollars rather than in VND, which will mean the central bank’s interest rate hike policy to fight inflation will have little effect. This has been seen in some countries with hyper-inflation, where the dollar replaces the local currency while the countries’ central banks are unable to do anything.      

Though the SBV had planned to stop foreign currency lending several times, it decided to extend such loans to help local exporters increase competitiveness and boost exports since their businesses and production face difficulties according to the Government’s incentive policies.

However, the SBV affirmed that it was only a short-term policy. In the long run, the central bank will discontinue the policy, and firms must gradually shift from borrowing to buying and selling foreign currencies.

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