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Banks facing increasingly high NPL   2008-08-19 - VNN

Most banks had reportedly slashed deposit interest rates by August 15; however, they have not lowered lending interest rates yet. Why?


Analysts say the prevailing lending interest rates applied by state-owned banks are 20.5% per annum on average, with the lowest 19.5-19.8% per annum, and the highest 21% per annum. Meanwhile, most joint-stock banks are lending at 21% per annum.


In fact, banks really do not want to require overly high lending interest rates. It is because high interest rates will make enterprises’ operations more difficult, and will affect the solvency of businesses. The director of a branch of Vietinbank said: “If interest rates are overly high, enterprises cannot afford the loaning cost. And if the situation prolongs, enterprises will fall into insolvency, which will result in the decline of the national economy and deflation. Commercial banks will be the biggest sufferers as the bad debt ratio will increase.”


As such, neither clients nor banks want high lending interest rates. However, lending interest rates have not been slashed, why?


The more banks lend, the bigger losses they suffer


Enterprises are complaining that though input material prices are skyrocketing, they cannot raise the sale prices of products. The same situation is now facing banks. Bankers said that 60-70% of their capital comes from short-term (less than 6 months) deposits, for which state-owned banks have to pay 17.5% on average, and joint-stock banks 18%. With such capital costs, the lending interest rate of 21% does not bring profit to banks as they also have to pay for compulsory reserves, management fees and provisioning.


While banks cannot get profit from loans, they are really worried about the solvency of clients. The increased input material prices in the first half of the year and lower purchasing power both have led the production and business, especially of small- and medium-size enterprises, to become worse.


There are two ways businesses react to the high interest rates. The businesses with healthy financial conditions and good corporate governance skills have been trying to reduce loans (by cutting unnecessary projects, cutting labour costs and management expenses). Meanwhile, the businesses in difficulties and thirsty for capital have been trying to borrow as much money as possible, even at the high interest rate of 21% per annum.


The General Director of a joint-stock bank said: “Banks are now facing increasing non-performing loans as clients cannot pay debts. Some clients, though they have money, still do not want to pay bank debts. It is because the previously applied interest rate was 12% per annum only, which meant that it would be better to bear the penalty interest rate for debt payment than paying the new interest rate of 21%.” Moreover, enterprises fear that they will not be able to get new loans after they pay the old debts as banks are tightening credit.


Statistics show that the capital mobilisation growth rate has been slowing down. In Hanoi, by the end of July 2008, the mobilised capital in both VND and foreign currencies had increased by 0.76% only, while the outstanding loans had increased by 19.5% over the end of 2007. The VND mobilised capital decreased by 8%, while the VND outstanding loans increased by 13.7% during the same time.


That explains why banks are still cautious when providing loans. High interest rates prove to be necessary technical barriers which help lower the demand for bank loans.


It’s time to slash lending interest rates


The national economy has shown signs of recovery, the mobilised capital in July saw a slight increase over June. The deposit interest rates have decreased. The CPI in August is expected to be not overly high. It is highly possible that some banks will have profuse VND capital.


These prove to be the convincing factors for banks to consider slashing lending interest rates. Many banks lend at less than 21% per annum to good clients. However, there are not many clients who can enjoy the interest rates.


In fact, banks are waiting to hear about the CPI for August and the capital mobilised in August to decide whether to cut VND lending interest rates or not.


The director of a branch in the Agribank system said that his bank has slashed the lending interest rate to 19.2% per annum. Most enterprises have the return on equity index (ROE) of less than 20% per annum, and they cannot afford overly high interest rates, he said.


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