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Banks flush with dong, expect another key rate cut   2009-01-14 - TN

Banks are awash with liquidity since businesses remain reluctant to borrow because of the high interest rates, bankers said.

This has pushed the interbank rates lower, a Hanoi-based dealer at a foreign bank said.

Rate fixings for overnight loans eased to 4.41 percent Monday from 5.96 percent a week ago, and 12- month dong loan rates eased to 8.92 percent, from 10.05 percent last Monday.

“The surplus of dong funds has been building up as lending is slowing,” he said.

The State Bank of Vietnam could cut its base rate by 1 percentage point this week from 8.5 percent, according to a central bank source quoted in this week’s edition of the Vietnam Investment Review, a weekly published by the Ministry of Planning and Investment. Commercial banks are allowed to set interest rates on dong loans at a maximum of 50 percent above the benchmark rate.

“The rate cut would not have much effect on long-term loans but it could help ease short-term rates,” the Hanoi-based dealer said.

While some banks said the benchmark rate should be slashed to 7 percent to encourage enterprises to take fresh loans, others said they could not cut lending rates further since they would incur losses.

“The speculation about another rate cut is getting stronger in the past few days,” said Tran Kieu Hung, a Hanoi-based trader at Bank for Investment & Development of Vietnam (BIDV). “Everyone expects the central bank to cut the rate this week.”

Last week, BIDV, Vietnam’s second-largest bank by assets, cut dong lending rates to 6.5 percent for clients who have mounting stocks in billets and other steel products, fertilizer, cement and drugs, becoming the first to offer loans at lower than the central bank’s base rate.

Analysts said the government should now focus on stimulating investment and consumption, instead of on just tweaking lending rates.

If businesses can expand their production, they would have need for bank loans and also the ability to repay them, they said.

A bank director, who wished not to be named, said all banks want to provide credit to businesses since “banks cannot exist without businesses.”

But there are some businesses now that have no chance of surviving even if they are given interest-free loans, he revealed.

Rate cap

Vo Van Chau, general director of Orient Commercial Joint Stock Bank, told Dau Tu Chung Khoan (Securities investment) magazine it is necessary to lower lending rates to help struggling businesses.

But at the same time, the government should allow commercial banks to negotiate borrowing costs with clients to help banks overcome their own difficulties, he said.

The Vietnam Banks Association recently asked the government to remove the cap on the interest rates that banks charge borrowers.

Removing the cap on interest rates would help commercial banks “successfully carry out the government’s measures to boost consumption,” the association said in a statement on December 30. They want to offer “different types of credit and services to promote production,” it said.

“The interest rate is like the price of a product,” said Ly Xuan Hai, chief executive officer of Ho Chi Minh City-based Asia Commercial Bank, a lender partly owned by Standard Chartered Bank.

“When the product is high-risk, the price should be high and vice versa,” he explained.

For consumer loans and certain kinds of businesses, the borrowing costs should be higher than the lending cap, currently at 12.75 percent, he said.

It is difficult to stimulate the consumer credit market if commercial banks are not allowed to negotiate lending rates with borrowers, Dau Tu Chung Khoan Monday quoted an analyst as saying.

The National Assembly recently issued a resolution saying banks can negotiate borrowing costs when lending for highly profitable projects.

But many bankers say there are no criteria to decide if a project is, indeed, highly profitable. Besides, they add, banks are always willing to lend at low rates for profitable projects, with or without the approval of the government.

Dollar tight

But while there is a dong surplus, the supply of dollars remains tight due to slowing exports and a narrowing difference between dollar and dong deposit interest rates, which has prompted depositors to stick to the greenback, bankers said.

Last year, exports rose 29.5 percent to US$62.9 billion, but the government has forecast export growth to slow to 13 percent this year.

“The central bank’s selling of dollars has helped ease demand,” but overall demand remains high, keeping the quotation against the dong at the 3 percent outer limit of the daily trading band, a banker said.

On Monday, the dong weakened 0.02 percent to 17,479 per dollar as of 2:23 p.m. in Hanoi, according to data compiled by Bloomberg.

The central bank fixed the dong’s reference rate at 16,974 a dollar, versus 16,973 last week, according to the bank’s website.

The State Bank of Vietnam weakened the dong by 3 percent on December 25 to spur exports and boost the economy. Last year, the dong fell around 8 percent against the dollar.

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