On July 10, 2023, the State Bank of Vietnam (SBV) assigned two important tasks to credit institutions together with a credit growth rate limit of 14 percent for 2023.

First, promoting credit safely; improving credit quality; driving credit into production, business and priority fields; and satisfying capital demand of the people and enterprises.

Second, checking and cutting unnecessary administrative procedures, and simplifying and shortening required procedures for lending to ensure compliance with regulations and favorable conditions for borrowers.

The instructions by SBV were released after the government assigned many duties to the banking sector. The government’s regular meeting in June 2023 continued to ask for a cut to lending interest rates by at least 1.5-2 percent, to be applied to both new and existing loans.

Slashing interest rates is a difficult task since SBV has four times lowered operating interest rates by 0.5-2 percent per annum since the beginning of the year. Vietnam is one of very few countries in the world that have slashed interest rates.

Commercial banks are trying to ease interest rates. The average interest rate has decreased by one percent compared with late 2022, while the average deposit interest rate offered by commercial banks stands at 5.8 percent per annum, down 0.7 percent compared with late 2022, and the average lending interest rate is at 8.9 percent, down 1 percent.

However, though there is a wave of banks slashing deposit interest rates in the last couple of weeks, the average lending interest rates are still high. 

This is explained by the fact that credit institutions do not have excessive capital. As of June 20, 2023, capital mobilized by credit institutions had increased by 3.26 percent (the growth rate was 3.97 percent the same period last year), and the total means of payment by 2.53 percent compared with late 2022 (the growth rate was 3.3 percent the same period last year).

By June 30, 2023, outstanding loans had reached VND12.4 quadrillion, up 4.73 percent, just half of the growth rate in the same period last year (9.35 percent).

Thus the credit growth rate of the national economy is unusually low. On one hand, credit institutions can only lend 80 percent of the capital they have mobilized, and on the other hand, the enterprises’ capability of absorbing capital of the economy remains weak.

Uncertainties

Analysts all agree that cutting lending interest rates will still be challenging as the business performance of enterprises is getting worse. Credit demand has decreased sharply, and export companies don’t have orders, while real estate and stock markets are declining.

Meanwhile, the procedures for disbursement remain confusing to both banks and clients, and there are uncertainties in the exchange rate though dollar prices remain relatively stable.

While deposits are increasing slowly, credit institutions have high demand for capital to lend, settle bad debts and ensure capital adequacy ratios. Many small banks have had to maintain high deposit interest rates to attract capital

All these factors are hindering efforts to force lending interest rates down.

In such conditions, lowering operating interest rates won’t have any real effect.

In order to slash lending interest rates, the central bank has to increase the money supply and pump a large amount of money into circulation. SBV has pumped VND140-150 trillion so far this year to buy dollars. However, the figure is too modest.

Economists believe that interest rates won’t decrease significantly, though the government has approved policies inclining towards GDP growth rather than inflation control.

This is because core inflation is still relatively high (predicted to be below 4.5 percent this year) compared with the overall inflation (consumer price index - CPI). Meanwhile, it is core inflation which is the basis for long-term monetary policy regulation.

That is why the central bank has been trying to slash operating interest rates. But lowering interest rates to the expected levels seems to be impossible.

Meanwhile, credit institutions mobilized capital at high interest rates in the fourth quarter of 2022, so they cannot impose low lending interest rates.

Credit in the second half of 2023, therefore, will grow much faster than in the first half. 

Tu Giang