Create more room to cut long-term loan interest rates

All four state-owned commercial banks (Agribank, Vietinbank, Vietcombank, and BIDV) concurrently reduced deposit interest rates for terms shorter than 12 months by 30 basis points and 12-month deposit interest rates by 50 basis points. 

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Many bank experts suggest the State Bank of Vietnam should reverse the plan to reduce the percentage of short-term capital for medium- and long-term loans in order for interest rates on medium- and long-term loans to fall quicker.

Medium and long-term loan interest rates are still high

Deposit interest rates are continuing to fall. All four state-owned commercial banks (Agribank, Vietinbank, Vietcombank, and BIDV) concurrently reduced deposit interest rates for terms shorter than 12 months by 30 basis points and 12-month deposit interest rates by 50 basis points. As a result, the 12-month term deposit interest rate at these four banks is presently 5.8%/year, which is only 20 basis points more than the same period last year. Following these institutions' acts, other commercial banks continued to decrease deposit interest rates.

Banks lowered their loan interest rates as well. However, the fall in lending interest rates has been significantly slower than the decline in deposit rates, with commercial banks only decreasing by roughly 1.5% - 2% since the beginning of the year.

Lending interest rates range significantly amongst commercial bank client segments. According to SSI Securities Company, lending interest rates for enterprises with acceptable credit quality have reduced to around 8-10% every year. Meanwhile, enterprises with weak credit must borrow at a rate of 12-15% every year.

Many enterprises, in particular, reflect that medium and long-term loan interest rates at banks are still relatively high.

According to experts, interest rates for medium and long-term loans are higher than those for short-term loans, which is also appropriate given the higher cost of long-term funding and the increased risk associated with long-term loans. However, the fact that the interest rate on medium and long-term loans is significantly greater than the interest rate on same-term deposits should be considered.

Mr. Dao Minh Tu, Deputy Governor of the State Bank of Vietnam, stated at the Workshop "Enhancing the ability of businesses to access and absorb capital" on August 22, 2023, that a difference of about 3% in loan and deposit interest rates is enough for banks to balance costs and ensure financial safety.

>> How to give banks more leeway in lowering lending rates

Delaying the roadmap under the Circular 08/2020/NHNN

According to one bank analyst, loan interest rates fell more slowly than deposit interest rates since banks still had a big quantity of high interest rate deposits in the past, requiring longer time to neutralize it.

Furthermore, banks remain the primary source of funding for the economy, and credit capital is in high demand. Currently, the loan-to-deposit ratio in the 1-tier market exceeds 100%, despite existing legislation requiring banks to maintain a maximum ratio of outstanding loans to total deposits of 85%. As a result, the demand to raise interest rates is intense.

In addition to the reasons stated above, the medium-long-term loan interest rates remain high due to the plan to lower the short-term capital ratio for medium-long-term loans.

According to Circular 08/2020/TT-NHNN, banks' short-term capital for medium and long-term loans would continue to be decreased to 30% from 34% as of October 1, 2023. While up to 88% of bank deposits are classified as less than 12 months, more than 52% of the banking system's outstanding loans are classified as medium and long-term loans, according to the State Bank of Vietnam.

As a result, the drop in the short-term capital ratio for medium and long-term loans will put further pressure on interest rates for medium and long-term loans. "There is a lot of demand - little supply, higher interest rates) are unavoidable," the financial expert said.

During the Vietnam Banks Association (VNBA)’s recent conference, representatives from numerous member banks requested the SBV to consider modifying the ratio of short-term capital to medium and long-term loans to reflect the current scenario.