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Banks urged to ‘sacrifice’ profit to rescue businesses

Many commercial banks have set high profit targets, which makes it difficult to reduce lending interest rates. However, there is still room for banks to cut interest rates if they can accept lower profits.

Nguyen Bich Lam, former Director General of the General Statistics Office (GSO), said that Vietnam’s inflation rate this year may reach 4.5 percent this year and exceed the 5 percent threshold in 2023. The increase in input material prices and disruption of supply chains are factors behind high inflation.

Of these, supply chain inflation is especially causing pressure as Vietnam’s economy has high openness and domestic production heavily depends on import materials. When input material prices increase by 1 percent, the prices of finished products increase by 2 percent. 

The risk of inflation is unavoidable as Vietnam’s large and important trade partners, including the US, EU and South Korea, have predicted high inflation rates. 

Also, the sharp increase in demand for goods and services after a long period of being impacted by the pandemic puts pressure on inflation in the time to come. 

Economists believe that with pressure on inflation and recovery of the economy, deposit interest rates will increase. The interest rate increases will depend on the recovery of the economy and inflation rate.

From the end of March to the end of April 2022, a number of banks raised deposit interest rates, by up to 0.6 percentage point per annum. In March 2022, some banks once again raised interest rates by 0.1-0.3 percentage point.

SHB, for example, has announced an interest rate increase of 0.2-0.4 percentage point, applied since May 9. The bank offers interest rates of 6.5-6.6 percent for 36-month deposits, and 6.1-6.2 percent for 12-month deposits.

Eximbank has also raised its deposit interest rate to 6.5 percent at the highest, applied to online 15-month-or-longer deposits.

NamA Bank has raised deposit interest rates to 3.95 percent for 3-month deposits, 5.6 percent for 6-month, 5.9 percent for 9-month, 6.4 percent for 12-month and 6.7 percent for 18-23 month deposits.

Economists believe the deposit interest rates will continue to rise further in the time to come.

Nguyen Duc Long, Director of the State Bank of Vietnam’s (SBV) Monetary Forecasting and Statistic Department, said interest rate cuts will be made only if inflation is controlled. If not, an interest rate cut is impossible.

Banks’ profits

Le Xuan Nghia, a respected economist, said the US FED has once again raised prime interest rates. The move is not expected to have a big impact on Vietnam, but interest rates in Vietnam, to some extent, will be influenced. The pressure to raise deposit interest rates is expected to increase from now to the end of the year, especially if inflation rates are high, which will force banks to raise deposit interest rates. This will lead to higher lending interest rates.

The banking system is bearing another pressure – bad debts. Reports about bad debts still don’t truly reflect the real situation because of the regulation on debt payment extension.

From June 2022, the regulation will no longer be valid. If so, bank bad debts will increase and they will have to make higher provisions against risks. As such, the amount of money ready for lending will decrease and the deposit interest rates will increase, thus affecting lending interest rates.

Meanwhile, bankers said that  lending interest rates would be stable in the short term to help enterprises recover. However, in the long term, interest rates may change in accordance with inflation and input cost of capital mobilization.

According to enterprises, they now are borrowing short-term capital from banks at interest rates of 8.5-9 percent per annum, and medium- and long-term capital at 9.5-10 percent per annum.

Nguyen Quoc Viet, Deputy Head of the Vietnam Institute for Economic and Policy Research (VEPR), said businesses are hoping the Government initiates a 2 percent interest rate subsidy package.

However, banks’ bad debts are coming back and pressure from inflation has caused lending interest rates to increase. This will lessen the efficiency of the package.

Vo Tri Thanh, former Deputy Head of the Central Institute of Economic Management (CIEM), said that reducing lending interest rates by 0.6-1 percentage point is a difficult task in the context of the FED’s decision about the interest rate increase and pressure from inflation.

However, he said that there is still space for an interest rate cut. If banks make every effort to cut operation costs and ‘sacrifice’ a part of their profits, they will be able to ease interest rates.

Commercial banks have reported huge profits for 2021 and Q1 2022. Twenty-five banks have released Q1 2022 finance reports, which show total profits of VND68 trillion, an increase of 16 trillion over Q1 2021 (31 percent). Of these, 15 banks have had profits of over VND1 trillion.

Banks have set high profit targets for 2022, which may lead to higher deposit and lending interest rates. Meanwhile, the Prime Minister, National Assembly Deputies and professional associations have called on banks to ‘sacrifice’ their profits to help the economic recovery.

Tran Thuy

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