VietNamNet Bridge – The central bank's move last week to cut the dong interest rate cap from 1-month to 12-month terms by 0.5 per cent to 7.5 per cent per annum has caused economists to wonder whether it would also be a good move to lower the lending rate and help businesses to recover their sluggish production.

Staff at VietinBank's branch in Ha Noi count money. The State Bank has cut interest rates to help spur businesses in the economic downturn but experts doubt the move will have much of an impact on ailing small firms because they don't have collateral for loans.

The decision is also aimed at further cutting lending interest rates since businesses still face many difficulties. If the lending rate is further cut it would help spur economic development and minimise the cost for businesses while encouraging depositors to invest in business activities.

Despite the deposit rate cut, lending interest rates remained high at roughly 15 per cent, too high for many businesses to afford while consumption remained low, experts said.

Financial guru Nguyen Tri Hieu said if the health of the banking system remained weak and consumption remained low, the lending interest rate would be difficult to cut.

Experts said cutting interest rates was necessary in the context of the economic downturn, however, the move was not strong enough to assist ailing businesses to bounce back.

If businesses were not eligible to borrow money and did not have assets for mortgage loans, while their stockpiles remained high, a further lending interest rate cut would not save them, the said.

Viet Nam Association of Rural Small and Medium-sized Enterprises chairman Le Diem said the central bank's rate cut policy was the right move but businesses' access to cheap loan remained difficult. Most businesses really wanted to borrow money for their production but they did not know how to access preferential interest rates offered by commercial banks.

Strict and cumbersome rules at commercial banks still prevented many firms from borrowing to invest in expansion.

A director of a wood processing company in Hung Yen Province said borrowing money to invest in production was not the right solution as their inventory situation remained unresolved.

It was too soon to say how lending interest rate cuts would impact on businesses, said Hieu, adding that it would take at least three months. The lending interest rate cut really assisted healthy firms only. Lowering lending rates would not be enough to stimulate consumption.

Essential

Hieu said lowering interest rates was essential to assist firms in reducing their cost while removing difficulties for the whole economy was mostly a matter for businesses.

Hieu suggested that the Government should guarantee credit institutions to lend to small businesses who found it difficult to access to bank loans.

Banking experts said that lending rates should be cut to between 8-11 per cent to help businesses.

SBV governor Nguyen Van Binh also said high lending rates demanded by commercial banks were hindering firms from borrowing. He called on banks to cut lending rates to roughly 13 per cent this year in order to recover production.

In spite of cutting lending interest rates and high liquidity, banks have struggled to find borrowers.

Nguyen Dai Lai, former deputy general director of the SBV Banking Development Strategy Department, told Dau Tu newspaper that many banks had lowered interest rates but could not find companies eligible for loans.

Economist and lawmaker Tran Du Lich blamed the low lending on the high risk of bad debts, rising inventories and decreased purchasing power.

Doan Trong Ly, general director of the Livestock Breeding, Processing and Import-Export Company, advocated cutting the lending rate to less than 10 per cent to help businesses resume activities.

As of late January, loan interest rates for businesses not in the four priority sectors had stood at 11-15 per cent per year for short-term loans and 14.6-17.5 per cent for long-term loans.

With the deposit interest rate ceiling coming down to 7.5 per cent, banks could lend at 11.5 per cent and still make a profit, analysts said.

Source: VNS