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NEWS UPDATES Asean Affairs        23  May 2011

Tight credit in Vietnam

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Credit institutions including domestic and foreign banks have been asked by the central bank to maintain stricter control over their lending activities to minimize risks.

The request was made via an official letter sent last Friday by the State Bank of Viet Nam (SBV) to credit organisations, branches of foreign banks in Viet Nam, inspection agencies, banking supervision agencies and SBV branches nationwide.

In the letter, central bank governor Nguyen Van Giau required credit institutions to outline a specific plan to ensure credit growth rate of less than 20 percent for 2011.

He also asked them to significantly reduce outstanding loans for non-manufacturing sectors, especially real estate and securities, compared to figures recorded in 2010.

He said the central bank would not approve any credit growth plan that exceeded 20 percent. With the continuous escalation of interest rates, enterprises have been put into a very difficult situation.

To survive, many of them have had to approach non-bank capital sources, creating opportunities for a high-risk black market to develop.

Under the SBV's current regulations, the interest rate for dong deposits is capped at 14 per cent per annum while the annual lending rate stands at between 17 and 18 per cent. In reality, many banks have already broken the rules, offering higher deposit interest rates of between 15 and 19 per cent per annum.

This also means higher lending rates, charged directly or through extra fees.

Tran Van Thanh of the Long Thanh Transport Company in Thu Duc District, told the newspaper that," banks' lending interest rate has recently increased to such a high level that we've had to sell half of our vehicles to a partner to have the cash for repaying the loans".

The Phuong Binh Mechanical Engineering Company in Binh Tan District is in a similar predicament. The 10-year-old company now is on the edge of bankruptcy because of high borrowing costs.

"I am now borrowing VND10 billion (US$476,200) from a bank at an interest rate of 20 per cent. Although this rate is considered to be rather low compared with rates other borrowers are paying because I am a regular customer and have assets for mortgage, I've still had to pay VND600 million in interest over the last 6 months," said Vo Minh Phuong, the company's director.

"The money is equivalent to what is needed to operate the whole company for the same period," Phuong said.

Nguyen Van Thu, Chairman of Viet Nam Association of Mechanical Engineering, said many commercial banks were charging lending interest rates of over 25 per cent per year. The profit margin for the mechanical engineering industry alone was between 3 and 5 per cent.

Even when enterprises are ready to accept such high interest rates it is not still easy to get the credit they need in terms of time and value, the newspaper reported.

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