Illustrative image. (Photo: SGGP)

Widespread decrease in interest rates

One of the factors that caused lending interest rates to rise sharply in the past was the increase in deposit interest rates. After many banks agreed to lower their deposit interest rates to below 9.5 percent per annum at the end of 2022, it was recorded that around 18 commercial banks cut their 12-month deposit interest rates to below 9 percent, namely ACB, MSB, PVcomBank, Saigonbank, OCB, and Sacombank.

Among them, the Big 4 group, including VietinBank, Vietcombank, BIDV, and Agribank, has the lowest 12-month deposit interest rates in the market, at 7.4 percent per annum. Currently, six-month deposit interest rates are around 8.2-9 percent per annum, while interest rates for 12-month deposits are at 9-9.4 percent per annum. Therefore, the deposit interest rates have dropped by an average of 1 percent compared to the peak period in 2022, while lending interest rates have retreated by 1.5-2 percent per annum.

Mr. Nguyen Dinh Tung, CEO of OCB, said that as of March 1, OCB reduced its deposit interest rates for terms under 12 months by 0.5 percent to 7.4-8.4 percent per year. Three weeks ago, the bank cut its lending rates for priority sectors and working capital loans for production and business activities to below 10 percent per annum. In the next 1-2 weeks, there will be a package for home loans with interest rates ranging from 10 percent to 10.5 percent per annum.

"With the widespread trend of interest rate reductions, especially when lending rates tend to decrease faster, deposit interest rates may continue to decline by 1-2 percent in the next few weeks," Mr. Tung predicted.

Mr. Nguyen Duc Lenh, Deputy Director of the State Bank of Vietnam (SBV) - Ho Chi Minh City Branch, said that credit growth in HCMC in the past two months was low, so SBV recommended that commercial banks reduce interest rates to support businesses. To reduce borrowing costs, commercial banks have also lowered deposit interest rates to have a basis for further interest rate cuts in the coming time.

These are positive developments related to concrete actions to support businesses by commercial banks. In recent times, commercial banks have deployed many preferential lending packages to provide capital at reasonable costs for enterprises. Accordingly, in the first two months of 2023, the total loan amount to support businesses, cooperatives, and small business households in HCMC reached VND469 trillion.

At the regular Government meeting on March 3, the SBV announced that, so far, 22 credit institutions have lowered their lending interest rates by an average of 0.43 percent, and this agency will continue to regulate interest rate cuts in the coming time.

Transferring resources of 2-percent interest rate support package

In 2023, the SBV sets an annual credit growth target of 14-15 percent, higher than in 2022, with adjustments depending on market developments. In February 2023, the SBV announced credit rooms for credit institutions, but by the end of February 2022, the credit growth of the banking system remained low, at only 0.77 percent. The SBV explained that there were many reasons for slow credit growth despite abundant credit room and excess liquidity.

In particular, besides the fact that the first two months of the year coincided with the Lunar New Year, the health of many businesses was still affected by the aftermath of Covid-19, making it hard to meet borrowing conditions. The number of orders of many businesses dropped, leading to lower demand for loans compared to the previous year.

Additionally, in previous years, real estate credit grew strongly, accounting for over 20 percent of the total outstanding loans of credit institutions. However, this year, the real estate market faces difficulties primarily due to legal issues, resulting in slow real estate credit growth.

Moreover, the low demand for credit is because high interest rates have caused businesses to produce in moderation and limit  their business expansion. Meanwhile, the current interest rate support packages face many obstacles, resulting in slow disbursement progress.

For instance, the 2-percent interest rate support package with VND40 trillion from the State budget issued in 2022, according to Resolution No.43/2022/QH15, was longed by businesses, cooperatives, and business households, especially in the context of high interest rates. However, after one year of implementation, the disbursement results are slow, reaching only VND134 billion, accounting for 0.3 percent of the total resources.

The reason for the slow disbursement of this package is that the prerequisite condition for access is that customers must have a plan for recovery ability. However, the criteria for determining the recovery ability have not been regulated, so both banks and businesses are struggling to implement them.

Currently, the SBV has submitted to the Government a proposal to amend Decree No.31/2022 in the direction of expanding the scope and removing current obstacles to create favorable conditions for implementation. However, even if Decree No.31/2022 is revised, the SBV believes it will be difficult to fully disburse the fund in 2023 (roughly VND2.35 trillion).

With over VND37.5 trillion of unused resources, the effectiveness of this support program will be affected. Therefore, the SBV proposes to transfer the source of this interest rate support package to disbursement tasks with a better absorption capacity.

To use the support resources from the State budget effectively and quickly, experts also suggest that the Government consider transferring the undisbursed 2-percent interest rate support to the source for tax, fee, and charge exemptions and reductions for businesses in the current difficult situation and at the same time, shift other support packages that are no longer suitable to more feasible programs.