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Vietnamese firms put expansion plans on hold as credit tightening looms
Ngan Anh

Lending rates could rise by 1-2 percentage points this year, experts say. Photo: Dao Ngoc Thach Lending rates could rise by 1-2 percentage points this year, experts say. Photo: Dao Ngoc Thach

Nguyen Tu Nhien has planned to borrow more from banks to set up another production line for his woodwork factory in Hanoi this year.
However, possible interest rate hikes are giving him second thoughts. 
“Deposit rates have increased over the past few months, so there's no reason for borrowing costs to stay still,” Nhien said. “Banks have not announced higher lending rates. But I believe they will do that soon.”
In anticipation of the central bank's possible move to further limit the use of short-term deposits for long and medium-term loans, banks in Vietnam have rushed to attract savings, baiting depositors with higher interest rates.
Maritime Bank increased its deposit rates by 25-40 basis points last week. Several other banks have also made similar moves.
The race has raised concern about higher lending rates even as the central bank's governor Nguyen Van Binh last month ordered local lenders to keep lending rates at a reasonable level to "show their sympathy" for their clients.
Nhien, the woodwork business owner, said his company is now paying 10.5 percent on its loans. The current rate, despite being cut sharply from a peak of 23 percent a few years ago, is still too high.
“If it continues to rise, companies will have no profits,” he said.
Former governor of the central bank Le Duc Thuy said lending rates could rise by 1-2 percentage points this year.
Customers now are paying 6-9 percent for short-term loans and 9-11 percent for medium and long-term ones, according to the central bank’s Monetary Policy Department.
High interest rates translate into high production costs, making it hard for local companies to expand their business, Thuy said.
Experts say interest rate hikes will also erode local firms' competitiveness.
Foreign companies could borrow from banks in their countries at very low interest rates, for example, at only 2-3 percent in the US, economist Bui Kien Thanh pointed out.
Credit tightening
The central bank is on track to tighten the use of short-term deposits for medium and long-term loans.
It wants to reduce the limit from 60 percent at the moment to 40 percent in an attempt to keep the housing market from overheating. Loans to the real estate sector grew 18 percent to VND360 trillion (US$15.87 billion) last year, compared to the average growth of around 15 percent in 2012-14.
The proposed rule is part of credit-related amendments which will take effect next year, if approved.
A banker said the new limit will cause trouble to local banks where short term deposits often account for 70-80 percent of total deposits.
Many lenders have already exceeded that proposed 40 percent limit, he said.
But banks are not the only ones who are waiting for the new rule with bated breath.
With 70 percent of funding for his firm’s operation coming from bank loans, Luong Van Thu, director of a garment company in Hung Yen Province, is very worried about a possible credit crunch and higher interest rates.
His company has taken out a loan from a local bank at 9 percent.
“At the current rate, we can at least keep our business running, even though expansion is off the table. If borrowing costs rise, we may suffer losses,” Thu said.
Higher demand for government bonds has also created pressure on medium and long-term loan rates, said Bui Quoc Dung, head of the Monetary Policy Department.
Banks have invested a lot of money in bonds, now holding up to 95 percent of all government bonds, higher than the 80 percent ratio in late 2014. Most of the bonds have long maturities and that may mean smaller amount available for corporate lending.
The central bank said it would target annual credit growth of 18 percent in 2016, though this could be raised to as much as 20 percent.
However, the target is too high in the context that inflation could pick up this year, according to the Vietnam Center for Economic and Policy Research (VEPR).
Vietnam saw record low inflation of 0.63 percent in 2015, but that could rise to 5 percent this year on anticipated increases in electricity, education and healthcare prices, according to the General Statistics Office.
Inflation could rapidly increase if monetary flows are not strictly monitored, VEPR said. 
It suggested the country cut its credit growth target to 12-15 percent, and take measures to ensure that bank loans will be increased for production. Now, loans are poured mainly into the property sector while many manufacturers are not interested because of high borrowing costs.
“We look for the central bank to rein in credit growth if the expansion in lending volumes begins to routinely exceed the 18-20 percent target for 2016,” HSBC said in a recent report. “Already, the central bank is considering implementing several administrative tightening measures for the real estate sector, where it sees nascent risks of overheating.”
Bad debts
Bad debt in Vietnamese banks fell to 2.55 percent of total loans at the end of 2015 from 3.25 percent a year earlier, according to central bank data. That was the lowest since 2010, when a debt crisis started to emerge in the beleaguered banking sector.
The figures released last week are lower than those of the government's National Financial Supervisory Commission, which said non-performing loans were 2.9 percent of credit by the end of 2015, down from 3.7 percent a year earlier.
If there are not any more measures to deal with bad debts, they will continue to be a barrier to the development of the banking sector this year, said Vu Viet Ngoan, chairman of the National Financial Supervisory Commission.
To handle bad debts, the Vietnam Asset Management Company (VAMC), since its July 2013 launch, has helped banks get $10 billion in non-performing loans off their books.
In return, banks have received $8.5 billion in special bonds which they can pledge with the central bank to obtain liquidity.
The VAMC does not actually buy the non-performing loans but only helps banks restructure them or sell them off. The risk thus stays with the banks, who must fully write off unrecovered debts over time by making provisions from their annual profits.
Ngoan said the banking sector is facing liquidity risks after long and medium-term loans grew 55 percent last year, while long and medium-term deposits increased only 10 percent.
The use of short-term deposits for medium and long-term loans also rose 31.8 percent in 2015, compared to only 20.2 percent in the previous year.
“If relevant agencies have not taken timely measures to deal with the issue, liquidity pressure will increase in many banks, raising risks of bad debts,” Ngoan said.
The fragmented banking sector has undergone major reform in the past few years, with stricter lending and debt classification, forced takeovers and numerous fraud investigations.