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Free-fixed lending on the backburner
The State Bank has poured cold water on banks and banking association’s burning desire for a free-fixed lending rate mechanism by claiming it needs more time for consideration.
Since the application of the rate cap mechanism since June, 2008 local banks have been finding it hard to deploy some kinds of services such as consumer lending and credit limits. Last week, the State Bank held a meeting with four state-owned banks and Vietcombank on monetary policies including the application of the rate cap.
However, in legal documents released last week the State Bank adjusted the market guiding rates by keeping the rate cap mechanism unchanged regulating that the market interest rate should not exceed 150 per cent of the State Bank’s base rate currently set at 10 per cent.
According to a State Bank source, the authority needed more time to consider the rate cap management abolishment and in the short-term, there would be no change in regulations. Nguyen Thanh Toai, Asia Commercial Bank’s deputy general director, said that local banks expected rate cap to be abolished.
“Over the past few months, we have almost stopped providing consumer lending and credit limit services. Even charging at the allowed highest interest rates, this cannot cover our costs,” said Toai. Following internal meetings between members, Vietnam Banking Association’s general secretary Duong Thu Huong said that the association would petition the government and the State Bank for free-fixed interest rate for a consumer lending line and then to all other credit products.
In general, the credit risk for unsecured retail lending is much higher than the risks associated with secured lending. Operational costs are also higher, as lenders must employ sophisticated risk management systems and expand operations outside of traditional urban markets. Foreign banks are also calling for an abolishment of rate cap management mechanism.
In the Vietnam Business Forum held last week, Banking Working Group (BWG) comprising foreign banks in Vietnam said that consumer lending control was good as it aimed at curbing consumer credit for speculative business which led to bubble in some areas.
“However, consumer lending to meet legitimate life needs should not be curtailed, as this support domestic consumption by providing fund for buying products of local manufacturers,” said the BWG. According to Nguyen Ngoc Bao, the State Bank’s Monetary Policy Department head, the authority did take consumer lending into consideration when issuing Decision 16 for rate cap applications and was well aware of the negative impact on this market segment.
“In normal practice, consumer lending interest rates are higher than corporate lending ones. But, given that the first priority of the government is to control inflation and reduce the trade deficit, the monetary policies would limit the consumer lending in order to reduce imports and to save the capital for economic development purposes,” said Bao. He also said that when the economy got back on track, the State Bank would review its current policy approach.
VIR
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