Banks set conditions to lower interest rates

(SGI) - The recent news by several Commercial Banks to lower lending interest rates can be considered good for businesses in particular and the economy in general. 
Illustrative photo.
Illustrative photo.

However, lowering loan interest rates is difficult to achieve. Deputy Governor Dao Minh Tu of the State Bank of Vietnam had assigned the Vietnam Banks Association (VNBA) to gather consensus on reducing of  interest rates. After VNBA held an online meeting, a record sixteen Commercial Banks agreed to reduce interest rates to support businesses facing difficulties during the current ongoing Covid-19 pandemic.

It is believed by many, that reduced interest rates at this time will prove to be a salvation for businesses, besides also providing support for banks. In a nutshell, it will be a boon for businesses, and also lend support to debtors in recovering from their debts. If enterprises are in trouble and unable to pay their debts, it causes more bad debts, besides increasing risk provisions, and as a result, reducing profits. Most interest rate cuts usually take place under such pressure. This time too, sixteen banks have agreed to simultaneously reduce interest rates because the State Bank of Vietnam intervened after recommendations from businesses and business associations.

However, although the banks have agreed, they have also set certain conditions. There will be no mass reduction in interest rates for all businesses in general, and banks will remain selective, only reducing for those businesses in real difficult crisis. This selection process will cause loan interest to decrease in nominal terms as compared to the needs of the business community.

It is understandable for banks to make such a proposal because the question of reducing loan interest when the period of low interest rates is coming to an end is a challenge for them. Lending and deposit interest rates in the world are increasing under the pressure of rising global inflation. Inflation in our country is higher than that of many countries in the region and the world, and this year as forecast, it has touched the risk factor.

If the State Bank of Vietnam reduces the operating interest rate at this time, it will be pouring more fuel on fire. Therefore, the State Bank of Vietnam must mobilize Commercial Banks. Most Commercial Banks are in a difficult position when the pressure to balance benefits for depositors increases when low deposit interest rates are maintained for more than a year, creating a trend of shifting idle money to other highly profitable investment channels such as real estate and securities.

Recently, some banks had to slightly increase deposit rates to hold their position to attract capital. As deposit rates increase, the risk of Vietnamese enterprises also increases in the context of the pandemic, so the loan interest rate cannot be too low. Therefore, the banks can only support a target group as per their criteria.

The calculation of the banks is not wrong, because they are in reality only credit institutions. They do business and earn profit by depositing and lending, while enjoying the difference in the interest rates. This difference is currently higher than usual, but it is the law of the market that high risk is high interest rate. The profit commitment to shareholders is still there, and it is wrong for shareholders to criticize. As a leader of a joint stock commercial bank shared, if the interest rate is reduced by 1% for the total loan balance of about VND 350,000 bn, the bank profit will decrease by about VND 1,000 bn, equivalent to 40% of the bank profit plan.

At this time, enterprises that are facing immense difficulties can hardly resolve their serious ongoing issues by just waiting for Commercial Banks to come up with solutions to bring down interest rates. What is needed now and immediately is financial support to help businesses with more liquidity to stay afloat and maintain their operations and retain their workers.

However, at this time with a raging pandemic and a tight and limited budget, the Government has to prioritize more towards its fight against the pandemic. Designing an economic support package for 2021 will be much more challenging than it was in 2020. Even the proposal to reduce interest rates by 2% on all existing loans for a term of at least one year, in which the budget provides 1% compensation and 1% support comes from Commercial Banks, is not an easy task at all, but extremely difficult to achieve.

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