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July 21, 2008

Vietnam: Loan rate cuts may not help lift business sentiment – analysts

Vietnam’s largest partly private bank, Vietcombank, joined other big lenders in cutting loan rates on Friday but analysts doubted this would do much to lift business sentiment in an economy hit by double-digit inflation, reported Reuuters.

Vietcombank is the third bank to announce a reduction in lending rates this month after similar cuts by BIDV and Agribank. These three plus state-run Vietinbank are the country's largest lenders, accounting for 70 percent of the loan market.

Hanoi-based Vietcombank said in a statement it had cut its preferential lending rate on the dong by 1 percentage point to 20 percent and cut its dollar lending rate by 0.5 point to 8.5 percent.

One Hanoi-based banking analyst said Vietcombank, which numbers state firms among its clients, had more leeway on rates than many of the other private banks.

"It all has to do with liquidity. The private banks have to keep deposit rates high if they want to attract more funds, and consequently keep loan rates high to stay alive," he said.

"The state-owned banks have a different kind of clientele, which are state-owned companies and state-owned projects, so the lower rates don't really apply to everyone," he added.

The government is seeking to restore business confidence after tightening policy to contain inflation.

The authorities have cracked down on banks that charged customers more than the ceiling rate of 21 percent on loans, ordering some bank officials to be sacked or demoted, and lenders have been directed to provide foreign currency loans to the garment and textile sector.

Still, the supply of funds remains tight. The authorities have told banks that their loan growth this year must not exceed 30 percent, compared with 54 percent in 2007.

Private banks are struggling as a depreciating dong and tough competition make funds scarce, with many paying the maximum 18 percent for deposits and barely breaking even with loans priced just 300 basis points higher.

"We are not taking any application for dong loans from consumers for now, whether it's car purchases or home mortgages," a banker at the Hanoi-based Military Bank said on Thursday.

State-run Agribank, Vietnam's largest lender by assets, said on Thursday it would cut rates on Vietnamese dong and dollar loans. Even so, loans seem hard to come by.

"We have stopped all consumer loans and we do not know when we will resume lending," an official at the credit department at Agribank's branch in Ho Chi Minh City said.

Vietnam has cut its economic growth target for this year to 7 percent from between 8.5 percent and 9 percent, giving priority to inflation, which has been in double-digits since last November, and a tripling of the trade deficit.

The central bank, the State Bank of Vietnam, has raised its base rate three times this year.

However, it could consider cutting its 14 percent base rate, which banks use to set lending and deposit rates, Governor Nguyen Van Giau said last week.

Unlike Agribank, which now gives cheaper loans to all customers, Vietcombank applies its lowest rates to selected clients, such as farmers, producers of goods that can replace imported items and importers of oil products and medicine.

Vietcombank handles about a quarter of Vietnam's export and import payments.

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