How to give banks more leeway in lowering lending rates

Agribank has decreased loan rates seven times since early 2023 to help individuals and companies, with reductions ranging from 2-4%.

>> Loan rates could be cut by an additional 1.25–2%

This also helps to promote bank payments, particularly non-cash payments.

Efforts to reduce loan rates

With the banking industry serving as the lifeblood of the Vietnamese economy, it has been highly active in providing many practical solutions to the business community in recent years. While many countries around the world tightened monetary policy and raised interest rates to combat inflation, the State Bank of Vietnam took every opportunity to lower policy rates in order to create favorable conditions for commercial banks to lower lending rates in order to support businesses.

As a result, loan rates have declined significantly since the end of 2022. According to Mr. Nguyen Quoc Hung, Vice Chairman and General Secretary of the Vietnam Banking Association (VNBA), member banks have seriously executed their obligations to lower deposit interest rates and lending rates from 0.5 to 3% in response to the VNBA's appeal.

Agribank, for example, has decreased loan rates seven times since early 2023 to help individuals and companies, with reductions ranging from 2-4% depending on the customer. In general, Agribank provides consumers and companies with billions of dong in assistance through interest rate decreases.

Similarly, BIDV issued 25 preferential credit packages totaling VND 484 trillion in the first six months of this year to reduce loan rates by 0.5-2% for business clients and 1- 1.5% for individual customers.

At a recent VNBA meeting, member banks unanimously agreed with the association's demand to reduce lending rates from 1.5 to 2% while decreasing fees and charges... in order to assist firms and individuals in restoring production and business and promoting economic growth.

"It should be noted that bank support is deployed with their own resources, not from the State budget," a banking expert remarked.

>> Banks cut rates for new loans amid low capital demand

Arrow hits multiple targets

Banks, on the other hand, have operated as companies and encountered several challenges in their operations. First, banks' NIM is now declining because lending rates are falling faster than deposit rates, and banks must still keep deposit interest rates attractive enough to attract depositors. Second, because to low credit demand, deposits cannot be lent out, but banks must still pay interest rates to depositors. Third, the danger of bad debt is high owing to the challenges of businesses, causing banks to raise risk provisioning.

Meanwhile, banks are not benefiting from the Government's recent VAT reduction from 10% to 8%, as required by a National Assembly Resolution. As a result, Mr. Nguyen Quoc Hung advocated that commercial banks pay the same VAT rate as enterprises in order to establish favorable conditions for commercial banks to further cut lending interest rates in order to assist businesses in restoring production and business.

According to the above-mentioned banking expert, the VAT reduction for commercial banks would provide them with additional resources to lower lending rates and service charges for individuals and enterprises. Furthermore, because VAT is an indirect tax, the primary beneficiaries of the VAT reduction program are the bank's clients, most of which are enterprises. Especially, VAT is primarily collected on payment services in the banking sector, the VAT decrease for banks would encourage consumers and businesses to make payments through banks, hence boosting non-cash payments in the economy.