Lending rates dropped after benchmark interest rate cut

Banks race to reduce rates to stimulate demand for loans, which has softened as global demand slumps.

Local banks have lowered interest rates to boost lending, following the central bank’s rate cut earlier this week.

The State Bank of Vietnam on Tuesday cut interest rates for the fourth time in six weeks to sustain the economy as the global financial crisis undermines growth. The key rate will fall to 10 percent from 11 percent, effective today.

Commercial banks will be allowed to set interest rates on dong loans at a maximum of 50 percent above the benchmark rate, which is now 15 percent a year.

But many banks said they would offer loans for less than 15 percent a year.

Tran Phuong Binh, chief executive officer of Ho Chi Minh City-based DongA Commercial Bank told Thanh Nien that the interest rate for business loans at his bank would be adjusted down to 13.8 percent per year.

State-run BIDV, Vietnam’s second-largest bank, said Thursday it would cut dong lending rates by up to 300 basis points from Monday, in line with government measures to try to prevent an economic downturn.

The unlisted Hanoi-based Bank for Investment and Development of Vietnam will slash short-term dong loans to 10-11.5 percent from 13 percent now. It will be the bank’s fifth rate cut since early November.

Vietcombank, the country’s largest partly-private lender, has cut its monthly interest rate for business loans to 1.04 percent, or about 12.5 percent per year. The new rate, currently the lowest among banks, will take effect today.

Nguyen Phuoc Thanh, Vietcombank general director, said although loan interest rates were now as low as at the same time last year, few businesses have applied for loans.

As a result, the bank’s credit growth rate so far this year was only 10 percent, Thanh said. The bank asked shareholders last month for approval to halve its credit growth projection this year to 15 percent from 29 percent.

He said interest rates were no longer a pressing issue because businesses did not need loans after cutting back on production. The production cutbacks are a result of slowing demand from key markets, including the US, Europe and Japan, which are all in recession.

Thanh said banks could not continue to cut lending interest rates because they would also have to lower deposit rates, possibly leading to a shortage of cash reserves.

Many banks said they are now having difficulties dealing with the large amount of capital set aside for loans that customers are no longer interested in taking out.

Asia Commercial Bank, for instance, has asked a team of more than 300 financial consultants to search for customers who need to borrow money from the bank.

DongA’s Binh said banks should be allowed to set interest rates for high risk loans at twice the benchmark rate so that banks could boost personal lending.

Many bankers suggested the policy of allowing banks and borrowers to negotiate lending rates should be resumed.

A bank manager said banks could be more flexible, providing business loans at low rates and imposing higher rates on riskier loans.

Further cuts expected

The Asian Development Bank anticipates more interest rate cuts in Vietnam and a further widening of the currency's trading band. However, the bank said it would be concerned if the government stepped up the pace of the measures.

Asian Development Bank resident director Ayumi Konishi said Thursday the bank planned to offer Vietnam US$1.6 billion in assistance next year, and could give even more if the economy faced serious troubles.

“The actions being taken by the government, particularly on the monetary policy side, (are) understandable. We can certainly support them,” Konishi said of the central bank’s decision to cut interest rates.

“I certainly anticipate that there may be some further lowering of interest rates, then probably their foreign exchange regime, so the band may be widened,” he said.

“I do hope, and I do believe, that all these steps will be gradual... So far I don't think they have been going too fast. If they were to go faster than this, I probably would be worried.”

Last month Prime Minister Nguyen Tan Dung told parliament Vietnam should keep lowering interest rates next year and manage the exchange rate flexibly in the face of a worsening global economy.

The key rate will probably fall to 7 percent by mid-2009 as the government tries to maintain growth, Deutsche Bank predicted last month.

Source: TN, Agencies