Negotiation-based interest rate scheme to return?
Loosening the monetary policies will help prevent economic recession, but sharp interest rate cuts within a short period will put pressure on commercial banks.
The State Bank of Vietnam is trying to loosen the monetary policies in order to support the investment and consumption stimulus package. Le Xuan Nghia, Deputy Chairman of the National Financial Supervision Committee, said that the loosening could lead to three risks: high inflation, high trade deficit and bad debt.
Non-performing loans (NPL) may increase
According to Nghia, it is not very likely that high inflation will return as material prices have been on the decrease, which makes push-cost inflation unlikely. Meanwhile, domestic demand remains very weak, which makes demand-pull inflation impossible.
It is thought that the trade deficit in 2009 will not be big, with the current account deficit estimated at 6% of GDP, lower than 2008’s level at 10%.
Meanwhile, Nghia said, NPL could be a problem in the medium term. The State Bank of Vietnam has estimated the NPL ratio in 2008 at 4% of outstanding loans, while the figure may rise to nearly 5% in 2009. However, the ratio is still lower than the expected ratios in the banking development strategy for 2006-2010.
This means that NPL will stay within the central bank and commercial banks’ control.
Nghia said that loosening the monetary policies at this moment can help prevent economic recession, but the sharp interest rate cuts will put pressure on commercial banks, including big ones. The banks will have to set aside larger fund provisions and their business results may worsen.
Negotiation-based interest rate scheme proposed
After several months of skyrocketing, bank interest rates have been decreasing to levels equal to those at the end of 2007. The interest rate cuts will help businesses reduce capital costs.
However, experts say that in order to stimulate demand, it is necessary to apply a more flexible interest rate policy. Bankers have called for the central bank to re-apply the negotiation-based interest rate scheme. With the current ceiling interest rate scheme, banks are finding it hard to push capital into circulation.
The Bank for Development and Investment of Vietnam (BIDV) has asked the central bank to remove the ceiling interest rate scheme and re-apply the negotiation-based scheme. BIDV said that the basic interest rate should just serve as the benchmark for the market, it should not be used to fix the maximum interest rates for the market.
Nghia has revealed that the government is thinking of applying the negotiation-based interest rate scheme, and is preparing necessary legal framework.
Dr Cao Sy Kiem, Member of the National Advisory Council for Monetary Policies, also said that the current conditions favour the return of the negotiation-based interest rate scheme.
With the negotiation-based interest rate, clients can borrow money at either very low or very high interest rates, depending on the capital supply and demand and the risks of the loans.
Kiem rejected the possibility that banks would loan at exorbitant interest rates, saying that this would not occur thanks to the highly competitive market.
NLD
|