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Interest-rate cut too low for many businesses

Update: March, 19/2012 - 10:18

Early last week, Prime Minister Nguyen Tan Dung ordered an interest rate cut of one percentage point following reports about a drop in the inflation rate and improved liquidity in the last few months of 2011.

Following his decision, local banks lowered their deposit and lending interest rates, a move expected to help enterprises and have a strong impact on the entire economy.

However, interest-rate cuts will not be enough for enterprises to thrive. Banks and enterprises most affected by the interest rate cut are still facing barriers and haven't benefited from the cut.

Some lenders, particularly small ones, said that in previous months banks found it difficult to mobilise capital resources when the deposit interest rate was capped at 14 per cent. Some even had to apply interest rates beyond the central bank's cap to raise capital to ensure liquidity.

Thus, many banks' capital mobilisation will become much more tense as the deposit interest rate now has been cut to 13 per cent per annum.

This could lead to unhealthy competition between banks to raise capital.

Many banks continue to have problems attracting corporate borrowers, even though they had already cut lending interest rates under the request of the central bank.

A senior executive of a bank in HCM City said the bank had set aside a VND1 trillion (US$47.6 million) credit line for enterprises with an annual interest rate of 18-20 per cent. However, the number of firms asking for loans remains small.

A representative of the Viet Nam International Joint Stock Commercial Bank (VIB) also said that his bank was trying to disburse capital for customers. At this time, VIB is offering exporters and importers loans at rates 1.5 per cent lower than normal levels.

The problem is that the banks want to look for qualified businesses to prevent overdue debts from occurring, but few enterprises meet this requirement now. In addition, many enterprises' sales have dropped so they do not want to borrow money to expand production.

While local banks struggle to lure corporate borrowers, many enterprises complain that the recent interest rate cuts are so minor that they would not encourage enterprises to borrow capital.

Duong Hoan Tuyen, general director of Ninh Khuong Company specialising in the production of children's fashion products, said the lending interest-rate cut was insignificant.

According to Vo Thanh Liem, chairman of the Nguon Sinh Thai Company, the cut was welcomed but enterprises expect the lending interest rate to fall to 11 or 12 per cent per year. Only with such low lending interest rates could enterprises develop, he added.

Many enterprises also said that they could not get access to bank loans with low interest rates because of the lenders' strict requirements.

Many banks admitted that they offered loans with preferential interest rates to a small number of customers who had a long-term relationship with them and had effective operations.

Nguyen Tri Kien, director of Minh Tien Bag Manufacturing Company, said interest-rate cuts would only be significant when enterprises could begin to access more capital.

Enterprises' capital difficulties have been due not only to high interest rates but also to the banking sector's rigid credit rules that have barred access to loans for many of them.

Many economists agreed, saying that proper credit distribution at banks, rather than just interest-rate cuts, were more important.

They said that credit should be distributed in ways to ensure that enterprises with feasible projects beneficial to society could access bank loans whether they had assets or not.

Pricy petrol adds pressure

The increase in petroleum prices

that took effect on March 7, between VND600 and 2,100 per litre, has created pressure on enterprises in most industries, but many of them plan to maintain current prices in an aim to keep market share.

After a prolonged period of credit tightening, interest rates have soared and production has stalled. Many companies have gone bankrupt.

The bad performance of the corporate sector plus high inflation has lowered discretionary incomes of workers. The inevitable outcome is that people's purchasing power has dramatically decreased.

Many companies said capital was not the most important issue but the public's purchasing power. Therefore, they were seeking ways to keep customers.

Kim Hang Aluminium&S Steel Company is one example. According to its director Dang Chi Hung, the fuel price hike immediately affected transport and distribution activities, weakening the company's competitive ability.

Company sales are facing difficulties as most consumers are tightening their belt to cut expenses.

Hung said the company had decided not to raise product prices after the petrol price hike because it did not want to lose customers.

The Co.op Mart supermarket chain also has no plan to raise prices for at least one or two months.

According to Co.op Mart deputy general director Nguyen Thanh Nhan, modern retail activities account for only 20 per cent of the domestic retail market. If prices of goods at the supermarket increase, sales would drop.

Co.op Mart has worked with suppliers on cutting prices, and both sides have come to an agreement that prices will be maintained as long as possible.

To date, no enterprises or suppliers working with Co.op Mart have proposed price increases.

Anticipating a hike in fuel prices, Phong Phu Textile Company made necessary preparations and will not raise prices immediately. Some raw materials such as cotton and fibre have fallen, so this lowered production costs, offsetting any losses caused by the fuel hike.

More foreign CEOs

Several local banks have made

dramatic changes to keep up with leading banks as the domestic and global economies have suffered setbacks in recent years.

The banks altered their advertising logos and trade names, modernised technology and upgraded services, and sought strategic partners with strong potential. Many local banks have also employed foreigners to raise their quality.

At its annual shareholder meeting in 2012, the Viet Nam Maritime Commercial Joint Stock Bank (Maritime Bank) approved a decision to invite a foreigner to fill the position of general director.

With the new foreign CEO, the shareholders expect the bank to have better administration and be managed according to international standards, and create a staff capable of leading in the future as well.

Earlier in 2010, Maritime Bank hired many foreigners to hold important positions.

All of these changes were made to increase the bank's competitiveness and develop it into one of Viet Nam's five leading banks by 2013, according to a report in the Sai Gon Tiep Thi newspaper.

In addition to Maritime Bank, the Mekong Development Joint Stock Commercial Bank, which has a charter capital of VND3.750 trillion ($179 million) and headquarters in the province of Tien Giang, has also handed over authority to manage the bank to Lau Boon Tuan, a Singaporean CEO from the bank's strategic partner Fullerton Financial under Temasek Group. Several other foreign employees have been hired as well.

After one year of operation, Mekong Bank raised its charter capital from VND3 trillion ($143 million) to VND3.750 trillion and completed an IT system to support customers. Its pre-tax profits reached VND500 billion ($23.8 million), meeting 139 per cent of the plan. The bank's bad-debt ratio was only 2.08 per cent while dividends were 10.5 per cent.

Earlier in December last year, Morris Simon was hired as CEO of the Viet Nam Technological Commercial Joint Stock Bank (Techcombank).

According to banking sector insiders, changes such as these will force the country's top banks to adapt further to remain competitive.

Transfer of power to foreigners at CEO level was also done in order to have more transparent operations and maintain the banks' sustainable development. — VNS

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