Saturday, 18 Nov 2017

State Bank of Vietnam cuts interest rates: good signals for economy

Updated at Thursday, 13 Jul 2017, 14:22
The Hanoitimes - The State Bank of Vietnam (SBV) has issued signals of easing monetary policies after a long time of keeping key interest rates unchanged.
SBV’s reduction in interest rates is a good sign for the economy and the growth rate in overall. However, regulations need to be changed to reduce interest rates for all economic sectors and to allow enterprises to gain easy access to capital. 

Reduced interest rates for 5 priority areas 

The SBV reduced all types of interest rates by 0.25% per year. As the interest rates of capital injection for commercial banks reduced, these banks will have to reduce lending interest rates for organizations and individuals. This move shows that the SBV has begun to act in a market-oriented way, rather than simply calling on banks to reduce costs to lower interest rates as they have done so far. However, the SBV only reduces interest rates in prioritized sectors instead of reducing mass interest rates. 
Transaction at NCB Bank in Hanoi.
Transaction at NCB Bank in Hanoi.
In particular, the SBV reduced an amount of 0.5% per year of short-term interest rates complied with Circular no. 39/2016/TT-NHNN dated December 30, 2016. As a result, from July 10, provisions to decrease short-term interest rates are applied to capital demands serving agriculture and rural development, export and supporting industries, small and medium enterprises (SMEs) and high-tech enterprises. Interest rates for group of customers in this category will reduce from 7% per year to 6.5% per year. The maximum short-term lending interest rate in VND of the People’s Credit Fund and Monetary Financial Institution (MFI) for this capital requirement decreases from 8% per year to 7.5% per year. 

The director of a company specializing in purchasing agricultural products in Hanoi shares that interest rates have a significant impact on revenue and profit of enterprises. If the interest rate is reduced by 0.5% per year, the interest expense of businesses will reduce tens of billions per year. The reduction of loan interest is one of the factors that will influence directly the cost of products and indirectly the purchasing power of the whole society. 

Important for capital access

For approximately two years, the SBV has been quite active in managing market interest rates, particularly when the balance of interest rates declined significantly in the first months of this year. However, it is important how credit institutions comply with this requirement. For business that have outstanding loans with banks, the benefits are considerable. However, newly established businesses will not earn profits immediately. Starting an agricultural project in early 2017, Mr. Cao Minh Thang (Dong Anh, Hanoi) said that bank loans typically require collateral. Startup businesses have nothing except ideas, so they cannot borrow anything with just a plan. “In addition to the collateral requirements, the legal procedures are too cumbersome for a project that has not had a definite or concretized format. Furthermore, the preferential interest rates are applied only in a very short amount of time, which is not suitable for startup companies. As a result, startup companies will be pressured on how to repay for the project. Meanwhile, the bank proposes that the companies need to make profits after two years so they can withdraw their funds. Regardless of success or failure, how to return the funding to lending banks is impossible,” Mr. Thang expresses. 

Many SMEs cannot get access to high or low interest rates because most of their properties, market conditions and documents do not meet the bank’s standards. Therefore, SMEs can be rejected right after they propose their requests. Some import-export enterprises also say that the reduction of lending interest rates is suitable for the production businesses at the end of the year. However, in the medium and long term, businesses need more capital to develop in the second half of 2017 and in 2018, as import-export activities and competition between enterprises will become fiercer. As a result, these enterprises hope that commercial banks and the SBV to issue policies that will reduce interest rates more strongly and effectively. 

This adjustment, at first, will only affect the interest rates of prioritized sectors in the short term. With regard to normal lending areas, the impact will be slower. If we solve short-term problems such as inventory issues, bad debt of real estate, etc., the reduction of interest rates for the first time in two years by the State Bank will not only contribute to supporting cost reduction for institutions but also create a foundation to lower the lending interest rates in all areas of the market – Mr. Bui Kien Thanh, economic expert.
Nguyen Tung
Tram Anh -
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