In early October, the State Bank of Viet Nam (SBV) made adjustments on basic interest rates with the aim of improving the effectiveness of monetary policies and regulations of interest rates.

The re-financing interest rate was adjusted from 14 per cent to 15 per cent. For the overnight rate for inter-bank electronic payments and the rate for loans, the bank increased the rate from 14 per cent to 16 per cent.

The new interest rates were created in accordance with the Government's request to keep this year's credit growth rate at between 15 and 17 per cent, and means of payment at 12 per cent.

The central bank's move aims to place stricter control over money supply in the banking sector in order to avoid inflationary pressure later.

Under the new adjustments, commercial banks will pay higher costs if they want to borrow from the SBV. This prevents banks with large numbers of valuable papers from taking advantage of cheap capital sources in the re-financing channel to promote their lending activities on the inter-bank market, and even outside the economy.

However, the central bank's interest rate adjustments have influenced the liquidity of small commercial banks that often have capital problems.

After the central bank's interest-rate adjustments, rates on the inter-banking market increased sharply, to between 14.5 and 15 per cent for overnight loans and 15.5 and 16 per cent for two-week loans.

On October 12, one bank said it had to accept an inter-bank rate of 22 per cent for a one-month loan and 17 per cent for overnight loans.

Most small commercial banks' capital mobilisation depends largely on loans from the inter-bank market and the central bank's refinancing activities. Thus, it is more difficult for them to mobilise capital with an increase in the inter-bank rate.

With these new adjustments, small banks' liquidity will not improve particularly as deposit interest rates are now capped at a maximum of 14 per cent.

Now that rates are similar, people would prefer depositing their savings at large, not small, banks.

Leaders of many small banks admit that the capital they mobilised over the last month fell significantly, even by 10 and 12 per cent, after the bank began implementing the 14 per cent deposit interest rate.

Techcombank's General Director Nguyen Duc Vinh said most banks faced capital-related problems, except the major banks.

A representative of BacABank said that the bank's capital mobilisation drop had begun on September 7. To ensure liquidity, the bank had to sell valuable papers and accept high inter-bank interest rates to ensure enough capital for its business activities.

To support the small banks, experts have offered various suggestions. They have proposed that the central bank place an interest-rate cap on the inter-bank market, thus forcing major banks to assist small banks in lending for production and trading activities.

Another measure would be for the central bank to have specific polices for small banks because, with the use of a common interest rate as has been imposed, capital sources will mainly be poured into major banks, not small banks.

Duong Thu Huong, general secretary of the Viet Nam Banking Association (VNBA), said the agency might ask the SBV for two kinds of deposit interest-rate levels, 14 per cent for small banks and 13.5 per cent for major banks.

The measure is expected to help balance the capital sources poured into the banks, Huong said.

VNBA said another alternative would be to place a cap on interest rates on the inter-bank market to create conditions for small banks to improve their liquidity.

Some experts, however, oppose this method, saying that the inter-bank market operates on the principle of real supply and demand so applying an interest-rate cap to this market should not be done.

The liquidity of many banks is insufficient mainly because their management is weak. As a result, they must suffer high interest rates.

Firms struggle to raise funds

Deposit interest rates are being strictly controlled by the central bank at 14 per cent per year. Banks have to cope with fierce competition to mobilise people's savings and small banks' liquidity has become significantly weaker, so they are not ready to offer loans.

As a result, only a few companies can access bank loans at the interest rates of between 17 and 19 per cent per year. The remainder have to take out loans between 21 per cent and 22 per cent.

To access bank loans at more reasonable interest rates, at least three listed companies announced in early October they would issue bonds at attractive interest rates.

The Sai Gon Thuong Tin Joint-Stock Real Estate Company (SCR) issued 99 bonds worth VND99 billion (US$4.7 million) with a term of 18 months and a floating coupon rate which will be adjusted monthly.

The interest rate for the first month will be 17 per cent per year, and the rate for following months will be similar to the rate of the bank's 12-month deposits plus 2.5 per cent. These bonds are exchangeable.

Two other companies involved in the securities sector also sought to raise capital by issuing bonds.

They are Sai Gon-Ha Noi Securities Joint Stock Company (SHS) and the Viet Nam Agriculture and Rural Development Bank's Securities (ARG). SHS carried out a three-tranched bond issue worth a combined VND350 billion (US$16.7 million) with a coupon rate of 20 per cent per year, while ARG also issued five-year bonds worth VND3 trillion (US$142.8 million) with floating interest rates.

Last month, Khang Dien House Trading and Investment Co (KDH) issued VND50 billion (US$2.4 million) worth of bonds at a fixed interest rate of 21.5 per cent. Song Da Urban and Industrial Zone Development and Investment Co (SJS) also raised VND700 billion (US$33.3 million) by selling bonds with a coupon rate of up to 22 per cent.

Also thanks to offering attractive interest rates, HCM City Securities Joint-Stock Company (HSC) issued 600 bonds with a five-year term for two foreign investors.

Viet Nam Bond Market Association director Do Ngoc Quynh said raising funds through bond issues would help companies become less dependent upon financial institutions.

Compared to raising capital via stock issuance, bond issues will not dilute existing share value or affect the ownership or control of the enterprises.

The fact that companies are willing to seek funding with such high yields is a clear sign that enterprises are desperate for capital. However, this method will only be effective for medium – and large-sized companies with a high degree of transparency.

Tax relief for automakers

Automakers are now relieved that the Ministry of Finance has spared them trillions Vietnamese dong in payable tax, following the recalculation of tax rates for auto components.

Honda Viet Nam and Ford Viet Nam do not have to pay import taxes of VND3.34 trillion (US$160.5 million)and VND32.5 billion ($1.6 million), respectively, as proposed earlier by customs offices, according to the Ministry of Finance's guiding document.

Other automakers enjoying the relief include Vinamotor, Toyota Viet Nam and GM Daewoo.

The document, which was issued following instructions from Deputy Prime Minister Hoang Trung Hai, states that automakers importing incompletely knocked-down (IKD) auto parts will still enjoy the preferential rate of under 27 per cent if the value of each set of components is below 10 per cent of the total value of all components used to assemble a vehicle.

Under current regulations, IKD components are subject to a high tax on completely-built vehicles, in the range of 72 per cent to 83 per cent.

Under the new instructions, for auto parts imported from mid-April in 2006 until the end of 2010, the total value of IDK parts must not exceed 10 per cent of the total parts' value.

In addition, the total value of IKD auto parts imported since the beginning of this year must not be higher than 10 per cent of the total value of parts needed to assemble a vehicle. If auto parts do not meet the above criteria, the customs departments will apply the tax rate for completely built-up vehicles.

VNS