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Banks embrace Gov't bonds despite tougher competition

Update: December, 22/2012 - 10:21

Using Government bond money effectively is a tough issue, economic expert Vu Dinh Anh told the newspaper Cong Thuong (Industry and Trade).

I don't understand why banks are still interested in Government bonds when their interest rate is lower than that of bank loans. Could you please explain?

The answer is simple. There are two reasons. First, the banks want to be safe. At present, lending money to enterprises may expose them to risks involving both principal and interest. Yet buying bonds is absolutely safe because they are guaranteed by the Government.

Secondly, it is just only an assumption, if tomorrow businesses throughout Viet Nam recover, they will need credit - and the banks are entitled to lend the capital people have invested in bonds to enterprises. The State Bank of Viet Nam says that money flowing into Government bonds is for public investment.

Do you agree with this?

There are various types of Government bonds. First, bonds are for public investment. A total of about VND 225,000 billion (US$10.71 billion) is being used at present for mid-term investment over several years for the development of transport, irrigation, education and health care. The sum invested in 2012 was VND 45,000 billion ($2.14 billion).

Secondly, bonds are for filling in gaps in the State Budget. This year, the Budget supplied about 44 per cent of its public needs, the remaining 56 per cent was from bonds and from foreign loans.

Thirdly, bonds issued by various State financial institutions are also considered as Government bonds as they are guaranteed by the government. These financial institutions include the Bank for Investment and Development of Viet Nam (BIDV), the Bank for Social Policy and others.

How do you evaluate the use of bond money?

It is not easy at all to make an evaluation as there are no reports available. There was a report saying that some years ago money collected from selling bonds was piled up in trunks. However, more recently the National Assembly decided that money mobilised from the general public must be disbursed immediately. I don't know if such a decision will be turned into reality.

The concept of selling Government bonds is to support public investment when there is a funding shortage from the State Budget. The nature of Government bonds is loan money. This means borrowers have to pay back both the principal and the interest. However, in reality, money mobilised from bonds is used to invest in non-profit areas. This is a big issue in the use of Government bonds.

Principally speaking, the bond money must be used in areas or sectors that can generate income to pay back at least the principle.

So in your opinion, what's the real nature of Government bonds?

We need capital for public investment. However, if we borrow a lot of money for that purpose, the debt burden will increase. As a result, we may end up in losing financial control.

Government bonds are a way of mobilising money from the people. However, if the money is not properly used, it can cause negative impact on other sectors.

For example, this year, enterprises are facing many difficulties and challenges, so the banks don't want to lend money to them. So buying Government bonds is an option for the banks. As a result, there is competition between the banks and the private sector to buy bonds.

Government bonds are a financial tool. In a normal circumstance, that tool is circulated in both primary and secondary markets. But in Viet Nam, the bonds stop at the primary market. As I have mentioned, Government bonds are actually a loan. That's why using this resource is of critical importance and requires us to think carefully. — VNS

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