Banks stop foreign currency loans

By implementing Circular 42/2018 from 1 October 2019, which amends and supplements a number of articles of Circular 24/2015 of the State Bank of Vietnam, commercial banks and foreign bank branches will stop offering medium and long-term foreign currency loans for payment of import of goods and services, even though the borrowing enterprises receive sufficient foreign currencies from production and business revenues.

Illustrative photo.
Illustrative photo.

eaking with Saigon Investment, Dr. Nguyen Tri Hieu, a finance and banking expert, said that the application of this Circular is appropriate, and it will help enterprises to gradually implement a roadmap to gradually shift from foreign currency for mobilization and lending to buying and selling. This is also an important step towards implementing the anti-dollarization in the Vietnamese economy.

Previously, according to this Circular, short-term foreign currency loans to pay abroad for the import of goods and services for manufacturing and trading to meet domestic demand was also terminated on 1 April, 2019.

JOURNALIST: - Is it appropriate to stop foreign currency loans altogether for import businesses at this time?

Dr. NGUYEN TRI HIEU: - I support the SBV decision to stop offering medium and long-term foreign currency loans to importers. On the beneficial side, this decision strictly complies with the Government anti-dollarization policy. This is an important step for banks in Vietnam to reduce foreign currency loans, and have only VND currency loans.

Currently, the exchange rate is stable, foreign currency reserves are high, and SBV can balance the foreign currency position, so it is reasonable to restrict and stop offering foreign currency loans. Moreover, SBV has also created this roadmap in advance, so that enterprises can be well prepared.

On the disadvantageous side, previously import businesses borrowed foreign currencies at interest rate that was half that in VND. Now, businesses have to borrow VND and exchange it into foreign currencies to pay for imports, which will increase financial and capital costs. But between the advantages and the disadvantages, I think that it is necessary to restrict and stop offering foreign currency loans to implement the anti-dollarization roadmap.

- In your opinion, is the implementation of anti-dollarization feasible in the current context in Vietnam?

- The process of anti-dollarization has been drastic and successful upto this period. However, anti-dollarization has not yet been completed. Currently, Vietnam runs on two currencies, the Vietnamese dong and the US dollar.

For example, Vietnamese receive remittances from relatives in foreign countries, and they can still hold USD or open foreign currency savings accounts to deposit USD. Therefore, the next step not only completely stops foreign currency loans, but also no longer allows anyone to hold foreign currencies, and overseas remittance must be exchanged for VND. So, the process of anti-dollarization will be complete.

However, it takes a long time to apply a policy that does not allow foreign currency in bank accounts and holding of USD in cash, as all foreign currencies must be exchanged into local currencies. Because Vietnam is also encouraging to receive overseas remittance, if Vietnamese are not allowed to hold foreign currency at this time, overseas remittance will stop completely.

Therefore, the roadmap from now until 2030, within the next 10 years, will be to stop all foreign currency loans and only use local currency for trading in Vietnam. The VND will be mobilized and lent to overcome the anti-dollarization of the economy. This is a feasible goal, and consistent with the economic and real situation in Vietnam.

- Importers are not allowed to borrow USD at low interest rates in foreign currency loans but have to exchange to VND loans at double interest rates. Will it increase financial costs and import prices?

- Businesses must accept the State policy on lending in foreign currencies. In the US, businesses can borrow any foreign currency because the USD is a hard currency and can be exchanged into any currency, so they are free in this situation.

But VND is not a freely exchanged currency. We are still in a foreign exchange control regime, so using local currency will help stabilize the currency market, and all developing countries like Vietnam, as banks will only allow local currency loans.

Increasing financial costs can be considered as a price for completing the anti-dollarization policy. However, businesses are more flexible, and are looking for other cheap funding sources.

For example, businesses can use tools such as bond issuance, or find ways to use capital of trading partners through negotiating with material suppliers about longer payment time period. Although these sources cannot be cheaper than foreign currency loans, it is also an appropriate tool for businesses to have capital to replace loans with higher interest rates in VND.

- Thank you very much.

Translated by Hoa Nam

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