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Thursday, January 28, 2021

Why it’s tough for lending rates to go lower

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This year, commercial banks have so far revised down many times their deposit and lending rates. However, lending rates are thought to be high. Why are these rates difficult to be further slashed?

On December 4, information released from the State Bank of Vietnam, the central bank, showed that the current short-term lending rate ceiling in some industries in Vietnam dong is 4.5% per year.

That rate is already 1.5%-4.5% lower than those in 2019. It is applicable to several industries where the maximum rate is fixed by the central bank to encourage production in line with the Government’s decisions, such as agriculture and export production relevant to the support program for small and medium enterprises.

According to the State Bank, the present annual deposit rates in Vietnam dong are commonly at 0.1%-0.2% for no-term and less-than-one-month deposits; 3.3%-3.9% for terms from one month to less than six months; 4.2%-6.0% for terms from six months to less than 12 months; and 5.8%-6.9% for terms longer than 12 months.

That means deposit rates are lower than those at the end of 2019: 0.1%-0.6% lower for no-term and less-than-one-month deposits; 1%-1.1% for terms from one month to less than six months; and 0.6%-1% for terms from six months to less than 12 months.

Lower interest rates for no-term deposits and those with less-than-six-month terms seem to be enough only for banks to balance short-term loans for priority industries, those whose caps are set by the State Bank or some lists selected by the respective banks in line with their business strategies.

For a long time, banks have maintained high interest rates for six-month term deposits, at over 6% a year, which makes it difficult for their lending rates to further plunge.

Credit management and banks’ profit targets

In March, May and October this year, the central bank ordered the cuts of deposit rates to 0.8%, 0.5% and 0.2% for no-term deposits, and 5%, 4.7%, 4.25% and 4% for less-than-six-month terms. The average deposit rate ceiling was about 4.42%/year.

The central bank in March, May and October also requested banks to cut the lending rate ceilings for short-term loans to 6%, 5%, 5,5% and 4.5%. As a result, the average lending rate ceiling is about 5.16% per year.

It can be said that to carry out management by specific objectives, each bank must implement its own strategies and policies to keep their customers and partners loyal to them. In lending activities, VIP clients are often eligible for banks’ incentives, including preferential lending rates, which are sometimes very low, even lower than the deposit rate for the one-month term. That’s why banks often have to keep interest rates in other sectors high to offset these cases.

Meanwhile, to comply with the State Bank’s regulations, commercial banks have to implement standards for balancing efficiency and risks. Loans must be evaluated in line with risks. Consequently, loans for industries facing high risks have to bear high interest rates. For instance, real estate is one of the high-risk industries whose lending interest rates are more or less 10% at present.

In a broader perspective, it’s hard for banks to cut deeper both their deposit and lending rates because credit institutions have to retain interest rates suitable for 2020 when enterprises across the board issued corporate bonds at an annual interest rate between 10% to 15% per year. The total value of corporate bonds successfully issued during the first 10 months of this year amounted to more than VND222.3 trillion, or a third of all the deposits attracted by the entire banking system in the same period.

To fix the right lending rate for a specific industry, it needs to compare it with the profit margins of that industry and of the entire economy. Regrettably, such figures are not available or are unofficial at the moment.

To make banks’ lending rates more compatible with the new economic situation, it requires each bank to calculate the difference between lending rates and deposit rates in a more conspicuous and appropriate way. A lending rate is often fixed by adding a certain margin to the corresponding deposit rate. However, such a margin must rely on some concrete base, not a 3.5% gap applicable universally to all loans at all times.

At the same time, banks’ credit management and the application of preferential credit programs should be consistent and transparent. In this process, the State Bank must play a crucial role in checking and inspecting banks’ operations and making information on their mobilization and lending activities available to clients.

By Pham Nhu Lien

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