Reducing interest rates to support businesses - how much is appropriate?

Banks have committed to reduce interest rates with the reduced amount of VND20,300 billion. Photo: BIDV

Simultaneous recommendations

According to calculations, the lending interest rate in the first seven months of 2021 has decreased by about 0.5% compared to the end of 2020, while this time, the interest rate has decreased from 1.2-1.5 % compared to 2019.

Therefore, the maximum short-term lending interest rate in VND in some priority sectors and fields is at 4.5%/year, the long-term lending interest rate is about 10-11%/year. The average USD lending interest rate is at 3-6%/year.

Some businesses have commented that the lending interest rate has never been as low as it is today. But because production and business are still facing difficulties, and many businesses and associations continue to petition for an exemption or reduction in lending interest rates.

Recently, the Ho Chi Minh City Real Estate Association has proposed that banks reduce lending rates by 2% for real estate businesses and homebuyers. In the petition sent to the Prime Minister at the recent Government-to-enterprise online conference, the Hanoi Association of Small and Medium Enterprises asked the State Bank of Vietnam (SBV) to direct the banking system to reduce from 3-5% of lending interest rates; expanding the subjects entitled to a 2% reduction in interest rates for direct loans and indirect loans under Resolution No. 84/NQ-CP dated May 29, 2020 not only for small and medium-sized enterprises but also more businesses in industries affected by the pandemic, such as aviation, tourism, hotels, transportation, etc.

Similarly, the Vietnam Young Entrepreneurs Association also proposes to reduce interest rates on all current loans of enterprises by 2% for at least a year, of which it is proposed that the budget compensate 1% and commercial banks bear 1%; there is a solution to reduce lending interest rates from 1.5-2%/year, applied for 12 months from July 2021.

Hard to reduce as expected

In fact, in July 2021, 16 large-scale commercial banks agreed to reduce interest rates for each customer from now until the end of 2021 with a reduction of VND20,300 billion. In addition to this joint commitment, under the direction of the State Bank of Vietnam, four state-owned commercial banks, namely Vietcombank, VietinBank, BIDV, and Agribank, also reduced another VND1,000 billion for businesses in Ho Chi Minh City, Binh Duong and some other locations under social distancing.

Reducing lending interest rates means that banks have shared a part of profits for businesses. For example, a representative of Sacombank said that the total outstanding loan of Sacombank is about VND350,000 billion, if the loan interest rate is reduced by 1% for 5-6 months, the bank will reduce its profit by more than VND1,000 billion, equivalent to 40% of the planned profit. Therefore, banks said that they would choose corporate customers facing serious difficulties to have appropriate support policies, as they are unable to reduce interest rates in the same way.

Talking more about this issue, Assoc. Prof. Dr. Ngo Tri Long, former director of the Institute for Price Market Research (Ministry of Finance), said that the ability to reduce lending interest rates of banks is limit  ed, but every business wants a reduction, so this is a very difficult thing to do.

Because banks are also businesses, the difference between deposit interest rates and lending rates is currently about 3%. So if the lending interest rate drops sharply, but the deposit interest rate cannot be reduced equivalently because in order to attract cash flow, banks will have no profit or even suffer losses if they reduce more.

In particular, many businesses are profitable. Business results of listed companies in the second quarter of 2021 by FiinGroup showed that profit after tax of real estate, construction and materials businesses increased by nearly 76%; consumer goods production enterprises increased by 27.3%; garment enterprises increased by 141%; seafood enterprises increased by nearly 26%.

Banking is also a highly profitable industry, up to 41%, but in the financial statements of many banks, accrued interest also increases, these are just profits and can potentially turn into bad debt. Moreover, many big banks also made big profits thanks to a reduction in provisioning and a sudden increase in revenue from service activities.

Therefore, according to experts, supporting businesses does not need too low interest rates, but should be accompanied by other solutions such as: increasing the ability to borrow capital and longer loan terms.

On the other hand, there are suggestions for the interest rate support package of about VND50,000-60,000 billion for small and medium enterprises. The State will support the interest rate of about 3-4%/year, as the market interest rate is about 8%/year, enterprises only have to pay 4-5%/year, the rest of the budget will provide support.

Banking and finance expert, Dr. Nguyen Tri Hieu proposed to establish a credit complex with a scale of about VND300,000 billion to support businesses and business households affected by the Covid-19 pandemic. This credit complex comes with credit guarantee funds to help increase access to and secure loans.

Interest rates are not the only solution for businesses, because the interest rate is much lower than before. However, in the current context, all resources to support businesses are valuable, so policies to reduce loan interest and loan fees need to be further promoted to accelerate the recovery of production and business for the economy.