Circular No.06/2023/TT-NHNN: The policy-reality gap remains enormous

Differentiation among banks

Individuals borrowing for home or automobile purchases are now permitted to return their debts to other banks, in addition to manufacturing and business firms, according to State Bank Circular 06/2023. As a result, banks are compelled to offer competitive interest rates in order to compete for clients and contribute to credit expansion.

Circular 06 is part of the State Bank's strategies to boost credit development and divert credit away from specific industries. The primary policy interest rates have been reduced multiple times recently, but they are simply policy rates. The question is determining how to reduce market interest rates for new loans, which is a huge concern for the banking industry.

According to experts, this is a method to boost credit expansion and move banking capital to regions with solid collateral assets and trustworthy loan repayment capabilities, thus lowering the economy's average interest rates.

Previously, "debt flipping" was only permitted for loans used for commercial purposes under Circular 39. Circular 06, on the other hand, has lifted this prohibition, allowing persons with borrowing requirements from one bank to settle their obligation to another.

Looking at the positives, Circular 06 has various advantages when implemented: For starters, it promotes credit development in industries that can absorb capital, so contributing to economic growth. According to statistics, Vietnam had negative credit growth in July 2023, with just a 4.56% credit growth since the beginning of the year. In comparison, the State Bank forecasts for 14-15% lending growth in 2023. However, due to current obstacles, reaching this aim poses various problems.

Banks are currently beginning to differentiate themselves. Some banks with low financing costs and good CAMEL scores (Capital adequacy, Asset quality, Management, Earnings, and Liquidity) would provide better loan conditions than weaker banks. Vietcombank, for example, provides a special interest rate of 6.9% per annum for the first six months and 7.5% per annually for the first twelve months. Other banks, such as ACB, give an 8% interest rate for the first year, while BIDV offers a 6% interest rate for the first year.

Banks with strong CAMEL rankings have flexibility to grow their lending and are keen to provide low-interest rate packages to the market.

Besides, the strategy seeks to lower interest rates on loans made by banks with sound management. Preferential interest rate packages may be offered by state-owned banks or major commercial banks with low financing costs.

Circular 06 is also intended to address the issue of bad debts. The financial system's bad debt issue is steadily worsening. If a bank's interest rates are high and another bank can provide lower rates or a better financial solution, the bank has the right to transfer the loan to another bank.

Circular 06, according to Mr. Tuan, has three key policy objectives: to enhance credit growth, lower loan interest rates, and minimize the ratio of bad debts in the banking sector.

One consideration is that banks with existing bad debts will find it difficult to transfer these obligations to other banks. Banks with good management systems, on the other hand, will gain from recruiting consumers with above-average loans, resulting in a dynamic and differentiated banking market.

High lending costs

Aside from the favorable features, the "debt flipping" practice has certain drawbacks to consider. In actuality, there is always a mismatch between managers' expectations and the market, and those looking to transfer loans must weigh the attractive interest rates on loans.

It's also worth mentioning that there are costs associated with this process. Borrowers who use existing loans for consumer purposes may face prepayment penalties of up to 2%. When the credit contract is settled with the original bank, this cost is levied just once. Furthermore, when moving to a new bank, there are costs for collateral asset evaluation, guarantee transaction fees, and many other charges that borrowers should consider when calculating the financial cost.

Borrowers seeking loans must transfer various collateral assets in order to get loans from the new bank. Then they must raise the cash required to repay the original bank's debts.

When comparing old and new loans, experts believe that people with strong repayment capacities will find it difficult to explain the necessity for loan transfers. As a result, the question is whether the loan is considered poor; in such circumstances, borrowers may try to transfer in order to benefit from initial incentives from a bank seeking credit expansion.

Recent evidence reveals that borrowing from one bank to repay another may not be as simple as it appears. In fact, bridging the policy-reality gap remains difficult, particularly in terms of providing banks with methods to disburse rapidly, maintain their financial safety, and offer cheap prices and interest rates to individuals in need.

Another factor to consider is that for banks to give low-interest loans, the cost of acquiring capital must be low as well. The greater a bank's market share, the lower its costs. In general, certain banks' expenses have climbed to roughly 8% in 2023, which, combined with a bank's Net Interest Margin (NIM) of 3%, makes it difficult for them to cut lending rates. For example, OCB has a NIM of 7%, VPBank has a NIM of 7%, and so on.

"I believe the root of the problem is the need for banks to lower their cost of capital, which is dependent on a relatively unnoticed development: beginning October 1, the ratio of short-term funds raised for medium- to long-term lending will be reduced to 30%." If this official guideline is followed, the banking system's expenses would stay high, making it difficult to maintain the system's safety while also lowering lending rates," Mr. Tuan stated.