Higher interest rates to raise competition among banks

The State Bank of Viet Nam has removed the interest rate cap on medium- and long-term loans. Dien dan Doanh nghiep (Enterprises Forum) online spoke to economist Nguyen Dai Lai about bank liquidity

What are the policies good points?

The removal of the interest rate cap may create difficulties for enterprises in the short term due to the high demand for middle- and long-term loans. However, the removal will step by step solve the problem.

The new interest rates for middle- and long-term loans is in line with market demand and the move also helps create competitiveness among the banks.

Is the circular a buffering step towards the removal of the current interest-rate cap ?

It is the first step in what may be a lengthy process.

Last year, the credit market did not work like a market. While other markets such as the securities, foreign exchange and real estate markets were fully operational, the credit market seemed to be frozen due to high interest rates, which were only reduced last year as a result of the stimulus package. That is why the credit market was under pressure from other markets.

The application of negotiated interest for medium-and long-term loans will make the credit market work better under real conditions and connect it with other markets in the financial group.

Will negotiated interest be a chance for commercial banks to increase their rates, creating difficulties for enterprises to access loans?

Everything has a negative side. We need to be careful of the new circular's shortcomings. For example, we should be on the alert against banks collaborating with one another to fix rates.

However, the demand for loans is the key to the rate of credit loans.

Should negotiated interest have been applied earlier?

We should not judge the situation prematurely. We have recognised the open market for long time, but there are reasons that make the credit market not work as a market. The matter also occurred in the forex market. What we should do is to prevent the market from being controlled by foreign currency step by step.

Foreign currency cannot replace the dong as it does not have the function of the local currency. Foreign currency can work in the fields of import/export but cannot work as a means of currency in Viet Nam. We should try and avoid the current problem of two different rates set by the State Bank and the "black market".

Foreign currency should be traded and exchanged on the free market which can develop the relating services. State management should control the use of foreign currency and credit activities involving foreign currency in Viet Nam. The State should also limit the availability of foreign currency through the issue of foreign currency bonds.

Will enterprises benefit from the circular?

If the mechanism is implemented correctly, competition among banks will benefit enterprises, so they should not be worried. They may have to cope with higher interest rates but this may make them think twice before making rash investment decisions.

The market has a voice but it may not say what everyone wants to hear.
For example, inflation will be very high for the time being but it reflects the market and policymakers can make decisions based on market reaction.

Borrowers also chatted about the decision

Nguyen Manh Quan, general director of Ha Long Commercial and Service Joint Stock Company:

Interest rates in Viet Nam have always been higher than in other regional countries. Even during the crisis, banks still offered borrowers official and unofficial fees. Rates are often higher than the published ceiling interest. Of course, we know that the banks must mobilise the money from other sources to grant these loans so they want to set higher interest for borrowers. If the State can control the unofficial and illogical fees, the negotiated interest regulation can be a new start for interest rates.

Tran Van Thang, director of Nam Dinh Vu Industrial Zone Joint Stock Company:

Transparency is needed in the Vietnamese financial market. The management solutions are issued to increase the effectiveness of the market and economic growth.

In fact, banks also borrow from each other and with profit in mind, if they borrow at a high interest, they will ask for higher interest from their borrowers.

The negotiated interest will increase competitiveness among the banks and increase the transparency of loan activities. What the State should do now is to strengthen the tools of management and supervision of the solution. — VNS