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Vietnam Financial News

Vietnam Business » Vietnam Financial News » Lending interest rates may become unbearable

Lending interest rates may become unbearable

Negotiated interest rates for medium and long-term loans have reportedly reached 18 percent per annum, which financial experts believe is nearly the outer limit that businesses can afford.

According to Ly Xuan Hai, General Director of Asia Commercial Bank (ACB), the bank's credit growth has been slow in part due to liquidity difficulties. Hai identified that an important problem is interest rates increasing to levels unbearable for many enterprises that survived the economic downturn. Analysts noted that 17-18 percent per year are now the most popular rates on the market. Yet only businesses with high feasibility projects can bring high profits can obtain loans. 'I think that 17-18 percent is still acceptable. Businesses will not be able to afford any higher rates,' Hai remarked. In 2002-2007, when the national economy was stable and enterprises did good business, Vietnamese enterprises borrowed two dong if they had one -- the ratio of loans was always double the capital that they had. The ROE (Return on equity) of small and medium enterprises was between 25-30 percent. The lending interest rate at that time was 12-14 percent per annum. As such, if the lending interest rate increases by 5-6 percent to 18-19 percent, ROE will then fall to 15-18 percent, the same as the deposit interest rate. In this scenario, Hai explained, businesses would rather make bank deposits than make business deals. With deposits, they will receive 15-18 percent profit with no risk involved. According to Dao Trung Kien, MA, Lecturer of HCM City Economics University, with the lending interest rate of 18 percent, businesses must make 25 percent in profit to cover expenses. The 2010 strategic report released earlier this year by HCM City Securities Company predicts that businesses will have to bear lending capital costs higher by 63 percent than in 2009 (in 2009, total outstanding loans were 273.16 trillion dong, while businesses enjoyed the four percent interest rate subsidy program). With the subsidy, businesses paid interest in the amount of 21.8 trillion dong (the actual interest rate is 8 percent) for outstanding loans. With a lending interest rate of 13 percent per annum, businesses will have to pay 35.5 trillion dong in interest. Financial experts comment that the improvement in bank liquidity is a good sign. According to the State bank, the overnight interest rate in the interbank market last week was 7.44 percent per annum, a sharp fall from 10.69 percent of the week before. Hai said that lending capital costs now tend to decrease in comparison with three or four months ago, when all banks had problems in liquidity. 'Now ACB can lend at 15-16 percent per annum, which it could not do previously,' Hai maintained.

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

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