The State Bank of Viet Nam (SBV) has warned local commercial banks to improve control of loans that use savings books as collateral to ensure the safety of the banking system.

Commercial banks are required to strictly oversee capital use purposes
and the disbursement of loans related to savings books. - Photo cafef.vn

According to the SBV, commercial banks are not allowed to let their clients use savings books as collateral to take out loans, pointing out that this process is illegal if these borrowers have no plans to use the capital.

The warning was made after several banks offered loans to customers using savings books as collateral, but these customers did not present capital use schemes as required in the SBV’s Circular 39/2016/TT.

Therefore, the lending process violates the central bank’s rules on using non-cash means of payment for loan disbursement, the SBV said.

Holders of long-term savings books prefer this form of lending as they will not have to close their savings book before the maturity date and can still receive high interest rates for the savings if they unexpectedly need the capital before the maturity date.

According to banks’ policy, savings books closed before the maturity date will get an interest rate of below 1 per cent as applied for demand savings. Meanwhile, interest rates for long-term savings are much higher, ranging between 7 and 8.5 per cent per year depending on the bank.

To stabilise the monetary market and ensure the secure operations of the banking system, SBV has asked credit institutions to shun unhealthy competition and follow regulations on lending and interest rates and the use of non-cash means of payment for loan disbursement.

Banks are required to strictly oversee capital use purposes and the disbursement of credit guaranteed by such collateral as savings books. The central bank will take strict action against credit institutions caught breaking the rule, according to the notice.

Banking expert Nguyen Tri Hieu told Viet Nam News that the tightening was necessary as loans to customers using savings books as collateral without plans to use the capital could cause risks to the safety of the banking system.

“This form of lending is called ‘phantom loan’ and many developed countries in the world forbid such loans as it could distort total assets of banks,” Hieu explained.

In Viet Nam, at the end of the year, some banks which wanted to increase their total assets use this technique.