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SBV considering reigning in banks’ loaning fees
The State Bank of Vietnam is considering prohibiting banks from collecting loaning fees from clients, or limiting the fees. And this is not good news for commercial banks.
Currently, commercial banks’ lending interest rates must not be higher than 18% (the basic interest rate announced by the State Bank for June is 12%, and under the current laws, the lending interest rate must not be higher than 150% of the basic interest rate). The rate proves to be not high enough to ensure profit for banks. Therefore, banks have been dodging the laws by collecting loan fees from clients, 2-3% on average, which makes the actual lending interest rates as high as 20-21% per annum.
The State Bank of Vietnam, in an effort to cap the lending interest rates at levels affordable for businesses, is considering asking banks to stop collecting loaning fees from clients.
18%, the overly low ceiling
Borrowers complain that they have to borrow money at high interest rates, which do not allow them to make profit with their production and business plans. Though banks quote the lending interest rate of 18%, in fact, the actual interest rates businesses have to pay are 20-21%.
In response, banks say that they have to do that because they are mobilising capital at high interest rates of 15-16%. If they don’t demand higher lending interest rates they will suffer losses.
In fact, there are many ways of collecting additional interest rates from clients. The director of a company in Tan Binh district in HCM City related that a bank asked him to sign a contract saying that the bank would lend VND110bil to the business but disburse VND90bil only, while the other VND20bil would be kept at the bank as an asset guaranteeing the payable interest. As such, the business would have had to pay interest on the sum of VND110bil, but get VND90bil only.
No fee? OK, but it’s necessary to raise basic interest rate
Ngo Phuoc Hau, Chairman of the An Giang Seafood Import Export Company, said that banks will not bear losses; they will find other ways to offset expenses. Therefore, if the central bank prohibits them from collecting fees, they will close their doors to businesses, which will result in a more serious lack of capital.
Banks, when hearing that the central bank will examine the fee collection and consider prohibiting banks from collect fees, talked about several scenarios in the context of no fee collection.
First, the central bank has to raise the basic interest rate, in order to pave the way for banks to raise the lending interest rate.
Second, banks have to lower deposit interest rates if the central bank refuses to raise the basic interest rate. However, the scenario proves to be unfeasible in the context of the high inflation.
Third, the central bank still allows banks to collect fees, but the fees are controlled, only slightly increasing the basic interest rate.
The first scenario proves to be the most wanted. In theory, for every 1% of basic interest rate increase, banks have to right to raise their lending interest rates by 1.5%.
While the inflation rate in May 2008 increased by 3.91% over April, and 15.96% over the end of 2008, the basic interest rate remains 12% per annum for June, the same as for May.
VNN
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