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Ceiling interest rate scheme clips banks’ wings
Duong Thu Huong, Secretary General of the Vietnam Banking Association, once again, asked for the removal of the ceiling interest rate scheme, stating that this does not suit the market economy.
Huong said that when she was Deputy Chairwoman of the National Assembly’s Economics and Budget Committee, she opposed the regulation that the ceiling lending interest rate must not be higher than 150% of the basic interest rate. Now, she finds it necessary to propose the removal of the ceiling interest rate scheme again in order to help banks take initiative in their capital.
You once contributed idea to the Civil Code. What do you think about the provision of the law to the current situation on the monetary market?
The regulation, by the Civil Code, that the ceiling interest rate must not be higher than 150% of the basic interest rate does not suit the market economy. The aim of lawmakers when setting the regulation was to fight against usury. If so, the regulation should only be used when settling disputes, and this should be applied to people only, not credit institutions.
The application of the single ceiling interest rate for all kinds of credit proves to be unreasonable, as small loans for individuals and households will have management costs that are much higher than those of big loans worth several hundreds of billions VND. The interest rates should also be different for different areas and different clients. Rates of 15-16% per annum would be high for businesses, but the rates for consumer credit should be higher, at 20% for example.
Do you mean that the currently applied ceiling interest rate has forced banks to apply close to the same interest rates for different kinds of credit products, thus making a lot of products unattractive for clients?
The negotiation-based interest rate scheme will allow for a truer reflection of the capital supply and demand. However, I have to say that it would be a blunder if blaming the current quiet credit market and slow disbursement to the ceiling interest rate scheme. In fact, enterprises are hesitating to borrow money at this moment as they are finding it difficult to do business now.
In fact, in 2006-2007 banks still applied the negotiation-based interest rate scheme even though the Civil Code, with the provision on ceiling interest rate scheme, had become effective. What should we do now to help banks become more flexible in setting lending interest rates?
When the Civil Code was drafted, I once said that the ceiling interest rate scheme would create difficulties for banks.
As far as I know, the State Bank of Vietnam also had a document asking for the amendment of the provision, but this was not accepted. At the forums of three associations, including the banking association, small and medium enterprises’ association and securities association, I have also proposed to amend Article 2 of the Civil Code. How to amend the article would be the job of the law makers.
The financial crisis in the US market showed that the direct reason behind this was that banks have been providing credit with easy conditions. The high inflation in Vietnam recently has also been thought to come from the credit booming. Do you think that the resumption of the negotiation-based interest rate scheme would cause risks to the market?
DTCK
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