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Banking & Finance

PM seeks interest cuts given low credit growth

Released at: 18:03, 10/01/2018

PM seeks interest cuts given low credit growth

PM Nguyen Xuan Phuc spoke at the January 9 State Bank of Vietnam (SBV) meeting (Photo: VGP)

Call met with positive response at SBV meeting on January 9.

by Duy Anh

Following the first official interest rate cuts in three years last July, the banking sector should further ease rates by another 50 basis points (bps) to spur growth this year, Prime Minister Nguyen Xuan Phuc has said.

He called on all local banks to conduct “reasonable” rate cuts in order to boost economic growth. “Together with any rate cut, banks should also expand credit, prioritizing loans for manufacturing and processing firms, small and medium enterprises (SMEs), and exporters,” he told a January 9 State Bank of Vietnam (SBV) meeting on implementing banking tasks for 2018.

SBV Governor Mr. Le Minh Hung replied that the central bank will direct the entire system to implement planning tasks in 2018, in which reducing loan interest rates is a central issue. He also suggested a fall in the rate on open market operations (OMO) to assist credit institutions in lowering their lending rates.

Leaders from State-owned banks were responsive to the call, with Vietcombank Chairman Mr. Nghiem Xuan Thanh saying it would lower lending rates for five priority sectors, startups, and high-tech agricultural businesses as early as January 15, while leaders from Agribank and VietinBank said they will cut rates as soon as this week.

Representatives from both Agribank and VietinBank, however, touched on a common concern: State-owned commercial banks did not receive funds in 2017 to increase their charter capital, which hit credit growth.

“Without receiving more capital in the first quarter of this year, our capital adequacy ratio (CAR) would fall below the minimum regulated by the SBV, and that would be a drag on credit growth,” VietinBank Chairman Mr. Nguyen Van Thang said.

Despite the Prime Minister’s call last August for the full-year credit growth target to be raised to 21 per cent, total outstanding loans grew only 18.17 per cent in 2017, which was the initial target set by the SBV, and down on the 18.71 per cent recorded in 2016.

Some 80 per cent of total credit has gone to production and business, especially priority sectors, while lending for sectors deemed risky, such as real estate and securities, has slowed, according to the SBV.

One interesting aspect of the July rate cut – which included 25 bps cuts to both the refinancing rate, to 6.25 per cent, and the discount rate, to 4.25 per cent - is that although commercial banks moved swiftly to cut lending rates, they didn’t do likewise on deposit rates, triggering concerns that the gap between credit and deposit growth rates will create liquidity and systemic issues.

Yields on five-year government bonds have fallen about 90 bps year-to-date, while short-term interbank interest rates fell from 5 per cent earlier this year to 1 per cent in December. Nearly every weekly government bond auction since mid-July has essentially failed, signaling that interest rates have reached sustainable equilibrium.

The SBV targets credit growth of 17 per cent this year.

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