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Is it true that all businesses are losing money?
Businesses say they are dying because of the high credit interest rates, while banks complain that they have to mobilise capital at high cost. Meanwhile, experts believe that businesses and banks are not suffering as great of losses as they are contending.
Businesses, banks all reporting losses
The owner of a sauce establishment in district 6, HCM City, said that he was going to borrow VND5bil from banks to expand his workshop. However, as the interest rates of bank loans have become overly high, he has decided to forego the plan.
Other businesses have similarly stated that they cannot make profit nowadays due to the overly high bank interest rates. Now businesses have to pay the interest rate of 18% on average, and other types of fees, which may make the capital cost as high as 25%.
Commercial banks also complain that they cannot make any profit with the high deposit interest rate of 15-16% and the lending interest rate of 18% on average. Meanwhile, banks have to bear a lot of expenses, including paying for deposit insurance and compulsory reserve.
So are all businesses really losing money?
Experts say that in order to determine if businesses are suffering losses, it is necessary to compare capital costs with the cost of goods sold, not with businesses’ profit.
Let’s take Bien Hoa Sugar Joint Stock Company as an example. The financial report of the company showed that the ratio of financial cost to the cost price of goods sold was 4.02%. Supposing that in 2007 the lending interest rate was 12-13%, and the debt to equity ratio does not change this year, financial costs would increase by another 4.02% this year at maximum. The increase, according to experts, is not overly high.
Experts say that the real profit of enterprises should not be calculated by the subtraction of the profit from production and the bank loan interest rates.
For example, a company has the investment capital of VND50mil, and VND50mil worth of capital borrowed from banks. The pre-tax and pre-loan interest profit is VND30mil, and the bank loan interest rate is 25%. As such, it will have to pay VND12.5mil in loan interest. After deducting the loan interest (VND12.5mil), the pre-tax profit of the company would be VND17.75mil, not VND5mil as calculated by other calculation methods.
If the corporate income tax is 28%, it would have to pay VND4.9mil in tax, and get the post tax profit of VND12.6mil. As such, the return on equity would be 25.2%, not a low percentage at all.
And banks…?
Experts have also pointed out that it is unreasonable to say banks are suffering losses. In fact, banks can mobilise capital from many other sources at low cost, not just deposits. These sources include businesses’ deposits for making payments, demand deposits of individuals and institutions.
In principle, banks calculate their profit based on average capital costs, not on the highest capital cost.
Dr Le Tham Duong, Dean of the Business Administration Faculty of the HCM City Banking University, also said that he believes banks are not facing as many problems are they are saying.
“It is true that banks now have more difficulties than they had previously. However, they are not as miserable as they complain,” he said.
He added that it is now the right time to filter the banking system. Overly weak businesses and banks will have to be dissolved, giving way to stronger ones to march forward.
VNN
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