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Bankers ask Vietnam to eliminate all interest rate lending caps   2009-06-02 - Bloomberg

Bankers ask Vietnam to eliminate all interest rate lending caps
Vietnam should eliminate all lending caps on interest rates linked to the central bank benchmark, a group of financial institutions with offices in the country told the government.


Under Vietnamese law, financial institutions cannot charge lending rates that exceed the base rate by more than 1.5 times. The cap was removed this year for consumer loans, according to a January posting on the website of the State Bank of Vietnam.

With the central bank’s benchmark rate set at 7 percent, the maximum that banks can charge on dong-denominated loans other than consumer loans is 10.5 percent, said Ashok Sud, chairman of a group that includes more than 30 foreign financial companies operating in Vietnam.

“This is grossly inadequate, and is likely to have an adverse effect on the health of the banking industry in Vietnam, especially as recently banks have had to increase their deposit rates well beyond the 7 percent base rate,” Sud said at a conference Monday in Ho Chi Minh City.

At current interest rates, the margin between lending and deposit rates isn’t sufficient to account for administrative costs and credit and country risk, Sud said. Banks’ net interest margins in Vietnam have been squeezed by the lending-rate caps and higher funding costs, the IMF said in April.

The bankers’ group “strongly urges that this cap of 150 percent on lending rates be removed, as has been already done in the case of consumer lending,” said Sud, who is chief executive for Vietnam, Laos & Cambodia for Standard Chartered Plc.

Inflation and credit

The lending cap has helped Vietnam slow inflation and also helped to ensure that companies have access to credit, said Nguyen Van Binh, a deputy governor of the State Bank of Vietnam, responding to Sud’s comments at the conference.

Vietnam’s inflation rate reached 28.3 percent in August 2008, the highest year-on-year figure since at least 1992. The figure slowed to 5.6 percent in May.

Still, “in the long run, the regulations on the benchmark interest rate and on lending caps aren’t suitable for commercial banks’ operations” and will probably be revised, Binh said.

New regulations implementing the elimination of the cap may take place within the next year, Sud said in an interview at the conference.

The current system is “making one part of the economy grow, because people get cheaper loans,” Sud said. “On the other hand, you’re really compromising the strength and effectiveness of the banking system.”

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