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Economist ponders negotiation-based interest rate scheme   2010-03-08 - VNE

“The Prime Minister himself also thinks that we would not adjust the basic interest rate, but we should extend the negotiation-based interest rate scheme to short term as well instead of applying to medium and long term loans only,” said Le Duc Thuy, Chair of the National Finance Supervisory Council. 

 

Negotiation-based interest rates to be applied to medium and long term loans

Banks avoid high expectations for 2010 profits

Higher interest rates to raise competition among banks

 

 
The stock market woke suddenly to the news that negotiation-based interest rates would be applied to medium and long term loans, borrowers and lenders as well as businesses and banks have more concern than joy.

 

With the decision, banks can only apply high interest rates for medium and long-term loans. Short-term loans are exempt, meaning that banks will still endure losses. Businesses fear that banks will dodge the law by forcing them to take medium and long term loans.

 

VNExpress explored the issue in an interview with Thuy.

 

VNExpress: As you may know, businesses worry that they may be compelled by commercial banks to borrow long-term. What is your opinion of these fears?

 

Le Duc Thuy: Businesses have every reason to worry. They should understand that prior to the decision, they were under more pressure. When the negotiation-based scheme is applied, commercial banks need to compete with each other, which will benefit businesses.

 

We have even suggested applying the negotiation-based scheme to short-term loans, so that farmers and importers can also benefit. If we only apply the scheme to medium and long-term loans, the market may become distorted. The 366 day-loans could be considered medium-term loans, while 365 day loans are considered short-term. This could really complicate monetary policy management.

 

VNExpress: As you may know, the deposit interest rate is still capped at 10.5 percent. Banks complain that, with such a low interest rate, they cannot mobilize enough capital to serve the national economy. Why don’t we remove the rein on deposit interest rates like we did with the lending interest rate?

 

Thuy: We well understand that banks find it difficult to mobilize capital once the deposit interest rate is capped at 10.5 percent. People all expect the inflation rate to increase further and only make short-term deposits, which places hard pressure on banks’ capital sources. We have reported that to the Prime Minister and he has agreed that the ceiling should be removed. He has also requested the Governor of the State Bank of Vietnam to consider the issue.

 

VNExpress: It is clear that we need to offer high deposit interest rates in order to attract capital. But on the other hand, the interest rate needs to be low enough so that production is not pressured. How should we deal with the problem?

 

Thuy: Interest rates are a market product. The State can only intervene in the market to regulate the interest rate, but it cannot define how high the interest rate should be. However, the State has tools to control interest rates.

 

For example, current deposit and lending interest rates are real positive interest rates and they are not overly high if the inflation rate is less than 10 percent. As such, the interest rates now are unreasonably high. This demonstrates the problems in policies like ceiling interest rate regulation. The State Bank of Vietnam recognizes the problem, but we still must do something with the laws.



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