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Vietnam Financial News

Vietnam Business » Vietnam Financial News » Heated growth of foreign currency loans triggers alarm

Heated growth of foreign currency loans triggers alarm

Businesses now prefer borrowing in foreign currencies because the dong lending interest rate is 8-9 percent higher, leading to an alarmingly high amount of outstanding loans in foreign currencies

Financial experts believe that a foreign currency loan growth rate rising much higher than the Vietnam dong loan growth rate would be abnormal.

According to the State Bank of Vietnam (SBV), by the end of May 2010, outstanding dong loans had increased by only 3.51 percent over the end of 2009, while those in foreign currency increased by 20.23 percent.

Export companies can borrow dollars for 3-6 months at interest rates of 5-5.5 percent per annum, while import companies can borrow for 6-9 months at 5.5-6.5 percent. This is clearly lower than the dong rate of 15 percent per annum. Meanwhile, the dong/dollar exchange rate has been stable for three months, so borrowers dont worry about exchange rate fluctuations.

Bankers admit that export companies now borrow in dollars and then sell some of the dollars to banks for dong to purchase materials for production. After that, the companies sell dollars they earn from export contracts to banks. As for import companies, banks have a responsibility to sell dollars to borrowers so they can pay bank debts.

According to Dr. Le Xuan Nghia, Deputy Chair of the National Finance Supervision Committee, banks should not chase short-term profits by lending foreign currencies at overly high levels. As for businesses, they should take short-term loans in foreign currencies or borrow in dong since the dong interest rate is decreasing.

Financial analysts believe that it would be "abnormal" if foreign currency loan growth rates rise much higher than dong loan growth rates.

Presently, the trade gap is increasing and, in the first five months of 2010, Vietnams excess of imports over exports reached $5.4 billion, an increase of nearly one billion dollars over the trade gap in the first four months. Meanwhile, the euro has lost its value against the dollar due to the debt crisis in Europe.

Financial experts say SBV should follow a flexible exchange rate policy. In an effort to control the foreign currency loan growth rate, SBV has instructed commercial banks to provide loans based on capital mobilization capability. Banks must be sure that the foreign currency outstanding loans are lower than the mobilized capital balance.

Vietnam Business And Financial News Network. Source [english.vietnamnet.vn]

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