Nov 17, 2012

Vietnam - What Vietnam focuses on, reducing interest rates or clearing bad debts?

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VietNamNet Bridge – It is certain that the credit growth rate in 2012 would be very low, which means that the national economy would lack capital. However, bankers say it is impossible to push up credit until the “bad debt iceberg” is demolished.

Credit grows up slowly

A senior official of the Monetary Policy Department of the State Bank said at recent workshop that the lending interest rates have decreased more rapidly than initially thought. The Governor previously said the interest rate would go down by one percent every quarter. Meanwhile, in fact, the interest rates have reduced sharply by 4-5 percent in comparison with the end of 2011.

However, despite the interest rate reductions, the outstanding loans remain very modest. A report by the State Bank of Vietnam showed that by October 19, 2012, the credit growth rate of the whole banking system had reached 2.77 percent only.

Explaining this, the official said though commercial banks have been making every effort to push up lending, the capital demand remains low due to the low market demand. Since enterprises still cannot see the market demand improvement, they do not intend to borrow money to reorganize production.

Curbing inflation remains key task

The official has affirmed the central bank’s viewpoint that it does not urge commercial banks to push up lending at any cost. The principle it is pursuing strictly is to keep tight control over the interest rate performance.

Dr Le Xuan Nghia, a well-known economist, said the biggest success made by the State Bank of Vietnam is that instead of regulating the monetary policy in accordance with the economic growth, it has shifted to regulate in accordance with the targeted inflation.

Right at the beginning of 2012, the State Bank requested the government to give the nod to the bank on regulating the cash supply in accordance with the inflation rate.

This explains why the State Bank has been pumping money into circulation and withdrawing money from the market in a very cautious way, despite the repeated calls for credit expansion.

Analysts have agreed that curbing inflation remains a key task for now. In the first months of the year, the core inflation rate was 0.18 percent only, but it has gradually climbed to 0.85 percent, which shows that the high inflation would return at any times.

“The high inflation may return in 2013 if the cash supply increases unreasonably. Therefore, we need to be very cautious with this,” Nghia noted.

Bad debt settlement not to be settled overnight

Nghia pointed out that bad debt is the biggest problem of the banking system and the core issue of the Vietnamese economy.

He said if the bad debt cannot be settled, the credit iceberg would not defrost. And if the iceberg still exists, it would be impossible to slash the interest rates, which means that enterprises would not be able to access low cost capital.

Regarding the importance of the bank credit to the national economy, official sources said it has 82 percent influences to domestic enterprises and their investments, and 32 percent to the public investment sector. The bank credit also has impacts on 28 percent of foreign direct investment.

According to Nghia, if letting banks handle the bad debts themselves, only 1.5-2 percent of bad debts would be settled. Meanwhile, the bad debt ratio announced by the central bank is 10 percent, which does not include the loans of the Vietnam Development Bank.

As such, it may take seven years to settle bad debts, during which banks would stop lending and would only focus on recovering debts.

“The seven years of no credit growth would be long enough to kill an economy,” Nghia said.

Ngoc Son

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