With credit growth at its lowest level in the past 10 years, experts say reducing interest rates further will be key to increasing businesses’ access to capital.
Businesses struggling to get loans
Nguyen Van Than, chairman of the Vietnam Association of Small and Medium-sized Enterprises, said businesses were confronted by a plunge in domestic consumption and export orders. Their situation was exacerbated by strict lending criteria and unhelpful actions by bank staff, he added.
The credit growth rate in the first six months of 2023 reached just one third of the year target and was at the lowest level in 10 years, Than said.
Although the State Bank of Vietnam (SBV) has lowered the policy interest rate four times in a row so far this year to create conditions for commercial banks to further reduce lending rates, the outstanding credit balance as of late June was just 4.73% higher than at the end of 2022.
Credit growth remained low even after deposit interest rates fell by 1-2 percentage points from the end of 2022. Bank deposits, meanwhile, hit a record high.
Commenting on the paradox of businesses lacking capital and credit growth remaining low, Bui Quang Tuan, director of the Vietnam Institute of Economics, echoed Than, saying businesses were finding it hard to access credit because they failed to meet bank criteria.
"Capital shortage is currently the biggest difficulty for businesses, followed by shrinking consumption markets due to reduced world demand," he said.
Another reason why businesses were not interested in applying for bank loans was that Vietnam's lending interest rates were higher than regional and world levels, affecting their business and profit plans, he added.
“Interest rate support, especially in difficult times like now, requires specific policies for a number of priority industries and fields,” he stressed.
Huge room remains for interest rate cuts
According to Le Xuan Nghia, a member of the National Financial and Monetary Policy Advisory Council, government monetary policy has shifted to support the recovery of the economy, with rapidly falling deposit interest rates. However, lending rates are still very high.
He pointed out three reasons for the State Bank of Vietnam (SBV) to continue cutting interest rates from now until the end of the year.
Firstly, the exchange rate is stable, placing almost no pressure on monetary policy. The U.S. Dollar Index (DXY) has fallen sharply from its peak of 115 points to 102 points, and is expected to settle at around 100 points. "This shows that pressure on the VND/USD exchange rate is almost zero or very low," Nghia said.
Secondly, Vietnam's Purchasing Managers’ Index (PMI) from November last year to June this year moved sideways at around 46-47 points (except for February when it was 51.2 points due to seasonal factors) and started to recover slightly in July 2023 to 48.7 points, an increase of 2.5 points from June.
“The economy may have bottomed out and is recovering slightly, which will be more evident from the fourth quarter. Therefore, this is an important time to support the recovery of the economy,” he said.
Thirdly, Vietnam's interest rates depend on the trends of world central banks. It is forecast that the U.S. Federal Reserve (Fed) will stop raising interest rates at the year end and start lowering them in early 2024. European central banks will also sharply reduce interest rate hikes by the end of this year.
"The opportunity for the SBV to sharply cut interest rates is quite clear now and the room for further rate cuts in Vietnam is very large,” he commented.
Nghia attributed the low credit growth to the strict requirements set by banks to access loans. "There are two conditions for granting credit, namely collateral and ability to repay debts in the future. In times of crisis, most countries only apply the second condition, but Vietnam resolutely applies both.