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Over the past few months, the State Bank of Vietnam (SBV) has closely observed the monetary developments in both domestic and international markets, envisaged inflationary fluctuation in order to adjust interest rates appropriately in line with Vietnam’s macro balances, inflation, and its monetary policy objectives. The SBV, thereby, has directed the credit institutions to cut down on their operational costs and reduce lending interest rates, which ultimately aims to support the domestic economy to recover and strengthen business operations.
Highlights of Banks: More Lenders Cut Rates
By the end of February 2023, the common interest rates in the market were stabilized. The average lending interest rate for new loans has decreased by 0.43% per annum (p.a.), compared to that of the end of 2022. Until now, a total of 22 commercial banks have reported a reduction in their average lending interest rates.
Two weeks later, Decision No 313/QĐ-NHNN issued by the SBV has readjusted several policy rates down by 50-100 basis points, starting from March 14th.
Accordingly, the rediscount interest rate has been reduced from 4.5% p.a. to 3.5% p.a. while interest rates for loans to offset capital shortages in clearance between the central bank and commercial banks have also decreased from 7% per year to 6% per year.
Notably, since early March 2023, the group of the four biggest State-owned banks (including Agribank, BIDV, Vietinbank, and Vietcombank) has come together to set up preferential loan packages with a maximum value of VND 382 trillion ($15.98 billion).
Agribank
From March 15th to the end of June 2023, Agribank agreed to offer favorable credit loans to companies with a maximum capacity of VND 100,000 billion depending on the type of business.
The bank stated that it will continue to support companies with efficient business operations that require a short-term loan (under 12 months) with a low interest rate to rotate working capital for expansion and export activities. In this case, the interest rate will only be 1% p.a. for loans in USD and 1.5% for loans in VND.
BIDV
In order to meet customers’ capital requirements for both manufacturing and commercial purposes, BIDV has introduced a new loan package with the highest loan amount of VND 70,000 billion while the interest rate only starts at a modest 7% annually.
Of which the loan package of VND 20,000 billion is exclusive to businesses operating in the greenfield with the lowest interest rate of 7% and 8% yearly based on the lending durations. Meanwhile, the loan package of VND 50,000 billion will be targeted at clients in other industries, with the interest rate ranging from 7.5% to only 8.5% p.a.
VietinBank
VietinBank has launched a VND 10 trillion package with a preferential annual interest rate of 7.1% to support small and medium-sized enterprises (SMEs) in growing their business during the first half of 2023.
However, the incentive package is only applicable to SMEs who are borrowing from VietinBank for the first time or have not been disbursed any loan within the past six months.
Vietcombank
As of now, Vietcombank is applying an annual lending interest rate ranging from 7.5% to 8.8%, depending on the lending period.
According to the bank, interest rates will continue to decrease for both individual and corporate customers by 0.5% annually from January 1, 2023, through April 30, 2023, with the exception of clients in high-risk sectors such as real estate and securities.
Others
Besides the group of State-owned banks, many other private banks such as Sacombank, SeABank, and ACB have also announced plans to cut down lending interest rates while offering preferential packages to support customers. Following SBV’s direction of reducing interest rates, the banking sector continues to mobilize stable resources, meeting fully and promptly the demands for the credit growth of the economy.
Why do banks rush to slash lending interest rates?
Reducing lending interest rates as a way to support economic growth
According to experts, lowering interest rates is inevitable because, in the past few months, the speed of disbursing credit to the market by commercial banks has been slow.
Purchasing Managers Index (PMI) rose back to 51.2% after a three-month period of decline, signaling a renewed strengthening in the health of the manufacturing sector. However, despite showing some improvement in PMI, enterprises still produce in moderation, and business expansion is still limited, which resulted in low demand for loans. Meanwhile, if banks mobilize deposits but are unable to lend because of high interest rates, they will not make any profits. That’s why interest rates need to be lowered.
Also, in the recent macro report, Bao Viet Securities Company claimed that with high interest rates, the real estate sector would face difficulties and the economic outlook would be less positive, with credit growth for the whole year 2023 would be only about 13%. Moreover, the pressure to raise interest rates of the US Federal Reserve (FED) gradually decreased along with the system liquidity gradually stabilizing. These are conditions for deposit interest rates to be stable or further reduced, facilitating loan interest reduction.
Under-controlled inflation pressures
According to the SBV, the rate cut was made as the country’s inflation is under control. Data from the General Statistics Office (GSO) showed the consumer price index (CPI) last month increased by 0.45% against the previous month. For the first two months of 2023, the CPI increased by around 4% against the same period last year.
ACB Securities analysts are positive about the prospect that there will not be a surge in inflation at least in the first half of this year, and they forecast that the government will succeed in controlling inflation within the 3-4.5% range. The Vietnamese government’s goal is to keep inflation below 4.5% this year.
Stabilize economic growth amid fears of sharp global slowdown
Global growth is slowing sharply, with worldwide economic output projected to be just 1.7% in 2023, according to the latest analysis from the World Bank Group. This is the lowest growth rate since the early 1990s, outside of global recessions. World Bank economists are warning that the downturn would be widespread and any adverse developments risk pushing the global economy into recession.
According to the Director of the World Bank’s Prospects Group – Ayhan Kose, Global growth has slowed to the extent that the global economy is perilously close to falling into recession. It affects 95% of advanced economies and nearly 70% of emerging markets and developing economies, including Vietnam, with the potential for increasing poverty rates in some regions.
How do interest rate cuts impact the economy?
Lowering lending interest rates to boost the economy is a key part of national monetary policy.
In general, lower interest rates increase business investment by making it cheaper and easier for businesses to borrow money to finance new projects. They have much the same effect on consumers, who might act on a major new purchase or even buy a home because low financing rates make it achievable. This not only helps businesses grow with operating capital pumps but also supports customers with more opportunities to purchase high-value commodities. Ultimately, this will lead to a boost in domestic purchasing power and promote economic growth.
According to SBV, reducing lending interest rates is a flexible strategy that can be utilized to foster Vietnam’s economic recovery after a period of downturn due to the outbreak of the Covid-19 pandemic. When interest rates are lowered and credit demand is stimulated, inflation will be contained and the economic outlook will be more positive, not only for the real estate sector but also for other industries as well.
The bottom line
Looking forward, Vietnam’s economy is expected to experience a significant bounce back as banks continue to offer favorable loan packages while committing to keep lending interest rates at a low level. This, to many experts, can be considered a golden ticket for businesses that are looking to expand their operations and branch out to other territories but fall short of capital resources.
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