VietNamNet Bridge – Businesses do not intend to borrow money at this moment, because they hope the interest rates may drop further in the near future. However, they have been warned not to expect the interest rates to go down further.

Banks making fat profit?

Commercial banks now mobilize capital at the interest rate of nine percent per annum at maximum as stipulated by the State Bank of Vietnam. Meanwhile, the ceiling lending interest rate has been set at 15 percent, which means the large margin of six percent per annum.

Businesses believe that the margin is too large which can bring fat profit to banks, and that banks still can slash the lending interest rates further, if they really want to share the difficulties with businesses.

Some analysts believe that the lending interest rates of 11-12 percent, i.e. the margin of 2-3 percent, would be high enough to bring profit to banks.

However, no move has been taken by commercial banks, which shows that the banks may continue slashing interest rates.

Dr Nguyen Dac Hung, a well-known banking expert, has argued that the margin six percent between the mobilization and the lending interest rates does not mean that the whole six percent would go to banks’ pocket.

Banks cannot lend all the money they mobilize, while they cannot collect interests from all of their loans provided. The two factors, according to Hung, show that the real profit for banks is much lower than six percent.

Suppose that a bank can mobilize 100 dong in capital from the public under the mode of 12-month term deposit with the interest rate of 9 percent per annum.

The bank would have to pay 3 percent of the 100 dong as compulsory reserve and 10 percent as payment reserve. As such, in principle, the bank would only have 87 dong to lend. However, in fact, 87 percent is an overly high proportion which proves to be unreachable for many banks.

In this case, the actual interest rate of the capital would be 10.34 percent instead of 9 percent, while the margin between the capital mobilization and lending interest rates would be 4.66 percent instead of 6 percent.

Meanwhile, if the bank sought capital from longer term deposits (more than 12 months), it would have to pay 11-13 percent per annum instead of 9 percent.

Businesses told not to expect further interest rate reductions

Besides, commercial banks also have to spend money to maintain their operation. In general, the expenses would be not less than one percent of every dong mobilized.

The operation expenses are understood as the spending on asset amortization, deposit product designs, office leasing, salaries for workers, Internet fee, marketing, security measures, electricity bills…

As such, if counting on the one percent in expenses, the capital cost would be 11.34 percent, and the margin would be 3.66 percent.

Meanwhile, banks would also have to pay for the bad debts and irrecoverable debts. In other words, they cannot collect interests from all the loans provided. In general, banks would have to make provision against the risks with the loans, about 0.75 percent of the outstanding loans.

Therefore, the final margin would be 2.91 percent only, which, according to Hung, is too low if comparing with other investment channels.

In related news, the State Bank of Vietnam on August 16 announced that 10 commercial banks have been granted more “quotas” for the credit growth rates in 2012. These are the banks with healthy financial situation and had the credit growth rate in the first half of 2012 higher than 50 percent of the yearly plan.

Compiled by Thu Uyen