The government needs a specific plan to revive the production and business activities of small and medium enterprises (SMEs) and launch a national credit guarantee fund. Banking expert Nguyen Tri Hieu share his proposal with Kinh te & Do thi Newspaper about this issue.

Banking expert Nguyen Tri Hieu. Photo: nguoiduatin

Surplus liquidity in the banking system

The latest figures of the State Bank of Vietnam (SBV) revealed credit growth reached 8.46% as of November 27. What do you think about this growth? 

Credit growth has improved much faster than previous months. This shows the recovery speed of enterprises and the economy is rather good. 

By the end of October, the credit growth of the banking system was about 6.15% compared to year-end 2019. In October 2020, credit expansion increased by more than 1 percentage point. As of November 27, it reached 8.46%. Thus, in November alone, credits expanded by 2.11%, double the growth rate of August 2020.

Besides, by November, deposits grew 10.65% (about 2.1% higher than the lending growth), showing that bank saving is still the safest channel although the deposit interest rates have dropped sharply recently. However, deposit rates are maintained in the positive territory and above the inflation rate. 

Inflation rate in Vietnam is currently around 4%. At this rate, depositors still expect a positive interest rate. That is why deposit growth is high and liquidity of the banking system is abundant in addition to cautious lending from banks.

What is the implication of the interbank rate falling to nearly 0%?

The interbank market is the second market (between banks), not linked to the first market which provides loans to people and other economic sectors. However, it also shows the liquidity position of the banking system. The interbank rate falling to nearly 0% showed banks did not borrow from each other because they have abundant liquidity in the first market. 

At the same time, the central bank no longer pays compulsory reserve interest rate which also results in banks’ excess liquidity at present. Banks are not using the maximum amount of money they have mobilized.

Proposal to set up a credit union to save businesses

Banks are offering a series of credit program with preferential interest rates but enterprises complained they could not access such loans. How to solve this problem? 

Right from the beginning of the year, the SBV announced a VND300 trillion (US$13 billion) loan package to support businesses who were adversely impacted by the pandemic. But in fact, not many companies have been entitled to this loan. Borrowing from banks is also not easy because of the lack of collateral. 

Previous support packages of the banks have not been really effective. This package is mostly intended for their loyal clients and borrowers who can repay their debts, especially big enterprises. Small businesses or businesses that are struggling due to the disease are difficult to access. Therefore, credit growth is mainly aimed at good customers of the banks.

I’m proposing to the government and the SBV to organize a credit union which consists of all banks. In the US, they have a similar organization. Contribution will depend on the size of the bank. Credit limit of this union is up to VND300 trillion (US$13 billion) (equivalent to the SBV’s first package). Participating banks will provide unsecured loans without the need of collateral, especially for micro and small businesses affected by Covid-19 have the opportunity to access.

Unsecured loans should have interest rate of 3-5% per year with the first year of grace period when borrowers don’t need to pay for principal and pay only interest. The loan has a term of about five years and is a rollover loan which borrowers can owe money for the first two years. By the end of the second year, borrowers gradually pay outstanding balance for the three following years or until debt-free.

The liquidity in the system is currently very good, especially CASA (current and savings accounts) are about 20% of the total mobilized capital. Commercial banks can take that source of capital to join the "credit union”, from which they can lend at low interest rates of 3-5% per year without the support of the central bank.

Unsecured lending is of course risky, so there must be a mechanism attached to it. It is a credit guarantee fund. In Vietnam, the credit guarantee fund has been established for a long time, but its operation is poor and small. The government should have a national credit guarantee fund. If the government puts money into this fund, the fund size should be VND30 trillion to guarantee the credit union. The reason is that these enterprises are all potential "bad debts" that in fact commercial banks have refused.

Proposal to set up a credit union to save businesses. Photo: KienLong Bank

Is there any risks of profiteering?

Of course everyone is afraid of that. But now, if being afraid, we can't do it, so there must be a mechanism. Clearly, banks can mobilize a lot, give few loans, so why don’t asking them to accompany the economy in difficult times like today. Banking is the brightest industry at the moment, being profitable with good liquidity while other businesses out there, even Vietnam Airline, oil and gas companies, are in trouble. 

Therefore, I propose the banking industry have social responsibility to accompany all economic sectors, especially to support businesses that are affected by the pandemic. Banks join the credit union, lending out with low interest rates. Courts, security agency, the SBV and tax authority must involve in monitoring.

A solution for businesses with weak financial capacity is to encourage them to apply technology to evaluate and manage cash flows. Currently, enterprises that apply technology, digital transformation into production will be prioritized when banks evaluate loans.

In the US, they also form a union, make regulations, elect a management board including evaluation, administration, accounting divisions. It operates like a bank.

Up to now, the number of businesses that can access preferential loans is very small, so some businesses are yearning for banks’ support to continue to hold out until the pandemic is really over. In my opinion, at this time, we should prioritize solutions to tackle difficulties in accessing credits for people and businesses. For the regulator, the calculation of a new, more centralized and powerful credit package is essential at this stage to prepare for economic recovery in 2021.

Running out of room to lower interest rates

The SBV has lowered its policy rate for three times but enterprises said interest rates are still high. What do you think about the current interest rate? Is there any room for further interest rate reduction? 

Our interest rates are still high because inflation is still around 4%. So the interest rate cannot be lower than inflation. While the interest rates of many countries are only about 3-5%, our lending rates are still around 8-9%.

The room is still available but is gradually running out because it depends on the inflation rate. Deposit rates are somewhere around 6%, actually positive 2%. If the interest rate drops to a certain level, the depositors will switch to another investment channel, so the room for reducing interest rates is narrowing. In my opinion, it is likely about 1% lower from now until year’s end. Now, it’s more important to expand access to credit.

Besides support of banks and regulators, what should enterprises pay attention to?

In addition to enhancing the role of the Credit Guarantee Fund, both banks and businesses also need to exercise more efforts to find a balance between credit supply and demand. Because monetary policy plays a very important role in the recovering process. For example, the bank reviews procedures, reduces operating costs and will be better if they can reduce interest rates, service fees... As for businesses, transparency in financial disclosure is important and they also need to build feasible loan application plans towards prioritized sectors.