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Lenders eye end-of-year credit targets

Update: December, 23/2013 - 09:29
target is 12 per cent but banks have achieved only 8.83 per cent growth, forcing lenders to be offer credit at drastically lower interest rates.— Photo laisuuat

Compiled by Thien Ly

The State Bank of Viet Nam has deflated banks' hopes of achieving the credit growth target by lending at low rates to prime customers, warning it will penalise those lending at below deposit interest rates.

The central bank fears that the low interest rates some banks are offering could spark off unhealthy business practices.

But some analysts refuse to buy into what they deem as specious logic, pointing out credit institutions' liquidity has improved significantly and many are facing the pressure to hit their credit growth targets set for the year.

The target is 12 per cent but banks have achieved only 8.83 per cent growth, forcing lenders to be offer credit at drastically lower interest rates.

In the last year or so lenders' deposit growth has been several times higher than lending growth, causing them to sit on a pile of cash even as companies are wary of borrowing at high rates.

As a result, banks have been forced to vie with each other to launch preferential credit packages to attract customers.

HDBank recently earmarked VND1.5 trillion for loans on which the interest rate is zero for the first month and 12 per cent for the next 11.

Asia Commercial Bank is offering loans worth VND500 billion (US$23.8 million) to small traders in markets and trading centres at 0.79 per cent per month.

TPBank is offering loans to buy, build, or repair houses at a mere 5.8 per cent for the first few months.

OceanBank is willing to lend at 7 per cent for the first three months of the loan.

The head of a commercial bank in HCM City's Tan Binh District said banks are not losing on these loans since a majority of their plentiful deposits are non-term.

Banks pay 1 per cent interest on average on current accounts.

Usually non-term deposits are used to lend on the inter-bank market, but at present interest rates and demand there are too low to attract banks' interest.

Investing in government bonds is also not a profitable business for them since their liquidity is not high.

The non-term-deposit situation is rather stable, enabling banks to use some of them to lend at low rates for a short term to lure customers.

An executive at another bank in the city's District 5 explained why lending at low rates made sound sense.

His bank too offers loans at 6-7 per cent to companies which have feasible projects and good credit records.

"With this we can help enterprises overcome their difficulties and also retain good customers.

"These borrowers also bring other benefits to the bank by paying service charges and crediting their employees' salaries to their accounts.

"Banks always do business in such a way that they make profits."

He admitted however that the banks need to carefully monitor how their loans are used.

Some companies borrow at low rates and deposit the money at other banks that offer high interest rates, a common practice in international markets known as carry trade.

But the bottom line is that most banks lending at the low interest rates continue to make profits.

Stable inflation

Analysts expect inflation as measured by the consumer price index (CPI) to be contained at around 6.74 per cent next year after the Government managed to gradually rein in the earlier runaway price rise.

This year it will be within 6.3 per cent, the National Financial Supervision Committee has predicted in a report on the economic situation.

Vietcombank Securities Company forecast an even lesser rate – 6 per cent – and said GDP growth would be around 5.3 per cent.

All this indicates that the Government has had success this year in keeping the inflation within the targeted level.

The inflation rate has decreased consistently from 23.2 per cent in August 2011 to 7.5 per cent in August this year and 5.78 per cent in November.

Analysts explained that the trend is likely to continue next year also because the banking sector is struggling with bad debts and quality of credit, thus keeping lending at low levels.

However, the taming of inflation means that lenders are likely to start thinking again about lowering credit interest rates and lending again to facilitate companies' production and business recovery.

This could also result in an improvement in the quality of credit and the collection of bad debts, laying the foundation for the next lending boom.

Thus, the inflation fight is likely be a big challenge, especially for monetary policy makers, in 2014 since the country's economic growth target for the year is expected to be higher at around 5.8 per cent.

There are also plans to raise the budget deficit cap to 5.3 per cent of gross domestic product, which will also bring inflationary pressure.

And so it goes … round and round.

Downsizing units

The law stipulates that apartments have to be at least 45 square metres in size, but abolishing this provision could be one solution for reviving the property market.

If it is done, housing developers can rearrange unit sizes, making them smaller if required, and selling them to low-income buyers since the high – and medium-end segments seem to have been abandoned.

However, before the area cap is lifted, there are some issues that need careful consideration.

If there is no limit on the minimum size, kitchens and bedrooms could shrink or even be dispensed with.

This would restrict the use of many apartments and make them suitable only for certain customers like single people or small families.

But in that case many of them may not choose to buy, preferring to rent a place instead.

So, the Government needs to allow developers to offer these tiny apartments for lease, which would then meet many people's demand for shelter while also enabling developers to make enough money to finish many stalled projects.

Another problem with downsizing units is that this would push up management costs since developers have to spend more especially for expanding common spaces like parking lots and parks.

They would also need to make changes to the designed power and water supply capacities.

This is likely to work, however, only in suburbs and outlying districts. — VNS

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