– businesses are finding it harder to access medium and long term capital because banks have become more reluctant to provide long term loans.
Linh, the owner of a newly established business, felt crushed when a bank turned down his 50 billion dong loan request because of the long term of three to four years. He wants to borrow 50 billion dong to import a production line to develop a project worth 100 billion dong.
The credit officer of the bank which Linh contacted said that his project was feasible. Meanwhile, the bank does not have to worry about Linh’s solvency, since he is prepared to pledge several hectares of land to the bank as security for the loan.
With but a month before Linh must confirm the deal with his foreign partner, Linh approached some other banks, but they all turned him down. Being the owner of a newly set up business, with no experience in dealing with banks, Linh cannot understand why it is so difficult to borrow capital for just three or four years.
“We, like many other banks, are now reluctant to provide medium and long term loans because we need to be careful about our liquidity and asset structure,” said a deputy general director of Military Bank, Cao Thuy Nga.
Military Bank always sets a limit on the capital it ties up in medium and long term lending. In the first six months of the year, medium and long term loans accounted for 40 percent of the bank’s total outstanding loans, which Nga says is a relatively high ratio. Therefore the bank needs to bring the ratio down to ensure the safety of the bank’s operation.
“Bank branches which have nearly used up their ‘quota’ are now more cautious with medium and long term credit contracts,” Nga added.
It appears that the central bank’s request that retail banks pay attention to credit quality is not the main reason which impels them to be cautious about medium and long term loans.
General Director of PG Bank Nguyen Quang Dinh said that banks had already been cautious in giving medium and long term loans. However, they have become even more cautious since the State Bank of
Most of the outstanding bank loans have a term of less than one year, while medium loans last 1-3 years and long term loans have over five years’ duration. Under the current regulations, commercial banks can use 30 percent of short term mobilized capital at the most for long term lending, instead of 40 percent as previously applied.
According to General Director of Lien Viet Bank Nguyen Duc Huong, banks are reluctant to give long term loans partly because they expect interest rates to change.
The basic interest rate has been held at seven percent per annum for many years and is thought likely not to change before the end of the year. This means that banks can charge borrowers no more than 10.5 percent (under the current laws, the ceiling lending interest rate is no higher than 150 percent of the basic interest rate). Meanwhile, banks have to raise the deposit interest rates significantly in order to compete with other attractive investment channels.
Some banks are now offering to pay ten percent interest on deposits, or just 1.5 percent lower than the ceiling interest rate. However, the banks typically aim for a margin between the deposit and lending interest rate of two percent at minimum to ensure their profit.
“If the current situation continues, businesses will find it difficult not only to borrow long term capital, but short term capital as well,” Huong said. “Banks will mobilize capital not to lend to businesses, but only to retain clients and ensure liquidity”.
Lien Viet Bank is currently using only 15-20 percent of its mobilized capital for new medium and long term loans. Medium and long term capital also accounts for 15-20 percent of the total outstanding loans of the bank.
Huong, the Lien Viet manager, said that it is now more profitable to give short term loans than long term loans, because short term lending allows banks to have more rapid capital turnover.
“There will be a serious problem if banks continue to be reluctant to provide medium and long term capital,” Huong warned, explaining that long term capital serves long term economic development.
Linh’s 100 billion dong project languishes because Linh still cannot arrange a loan. He’s not hoping to get a subsidized loan, just a normal commercial bank loan.
VietNamNet/VNE