Duality of interest rate ceiling removal

	Banks expect stable interest rates
	Credit growth reached 18.71% in 2016
	2016: Central rate rises by 1%, interest rate not reduced as expected.

Lending activities under the new regulations will bring more benefits. Photo: Huu Linh

The benefits

Circular 39/2016/TT-NHNN stipulates the lending activities of credit institutions and foreign banks to customers issued by the SBV in late 2016 and takes effect from 15 March 2017. The Circular replaces previous circulars and decisions of the SBV. The newest point of concern in this Circular is regulations on lending interest rates. Accordingly, credit institutions and customers negotiate lending interest according to the market demand and supply of capital, demand for loans and creditworthiness of the customer, except for cases applying the maximum interest rate for short-term loans in VND for 5 priority fields decided by the Governor of SBV in each period.

That is demand on capital for agricultural and rural development under regulations of the Government on credit policies for agricultural and rural development; implementation of business plans for export goods in line with regulations in the Trade Law and Guidelines in the Trade Law; business operations of small and medium sized enterprises under the Government regulations on small and medium sized enterprises assistance; development of the supporting industry sector under Government regulations on supporting industry development; and business of enterprises applying high technology in accordance with regulations in the High-technology Law and guidelines in the High-technology Law. Therefore, regulations on the interest rate ceilings only apply for short-term loans in priority fields in Circular No. 39/2016/TT-NHNN

At the same time with these regulations, the SBV issued Circular No. 43/2016/TT-NHNN on consumer loans of financial companies. Accordingly, consumer loan rates of financial companies are implemented in compliance with the regulations of the SBV on the lending activities of financial institutions and foreign bank branches to customers. Financial companies issued regulations on the frame of consumer loan rates which are applied uniformly throughout the system in each period, which includes the highest lending interest rate and the lowest lending interest rate for each consumer loan product.

It can be seen that the above regulations broke the previous controversies on the interest rate ceilings which do not exceed 20%/year of the loan amount under the provisions of Civil Procedure Code 2015 which took effect from early this year.

According to financial expert Dr. Nguyen Tri Hieu, with this new circular of the SBV, most of the lending rates in the market are completely floated. This helps Vietnam better fit the needs of the market economy. The interest rates are evaluated according to the market demand and supply, reflecting the market operation and being seen as "the price" of money being used. Theoretically, any "prices" which are controlled have made the market distorted and off the track of market demand and supply

The concerns

Commenting on interest rate movements in 2017, the economic experts of MarketIntello Vietnam said that the interest rates may fall in the first months of the year due to the SBV retaining the expansionary monetary policy that makes the system liquidation abundant again. However, for the whole year, the interest rates will be maintained at the level equal to the level in 2016 through the impacts from the SBV and the Government. Credit growth will remain at 17-18% in 2017 as the economy is still weak.

In recent years, keeping interest rates stable, encouraging credit institutions to reduce the lending interest rates by the SBV has been always been set as a key goal. Thereby, many policies and measures were implemented. But according to the regulations of the SBV, deposit interest rates in VND were still maintained at the ceiling rate for the lower 6-month term and the deposit interest rates in USD were limited at 0%/year for all terms. This made many experts desire complete removal of the interest rate cap.

However, if this removal is implemented, it will create positive effects on the market economy but also create losses unless reasonable and effective regulatory measures are issued.

Regarding this matter, Master Nguyen Tri Hieu stated that the interest rates are not only a balance between supply and demand but also a tool to adjust behaviors of all economic sectors in the market. If the interest rates are low, people and businesses tend to borrow more, if the interest rates are high, the people and businesses tend to borrow less. Therefore, many Central Banks issued the interest rate ceiling in expectation of bringing the market to the desired level.

"The more the enterprises’ operations are, the more is the demand on capital, so enterprises will contact to bank credits. Therefore, the interest rate floating could push up interest rates to a high rate, which makes many economic sectors impossible to borrow because the borrowing cost is too high. But when the interest rates go down, people and businesses rush to borrow, causing an increase in inflation. Thus, a measure to maintain interest rates at balance is extremely necessary” Dr. Hieu noted.

However, a good point is that the Circular 39/2016/TT-NHNN not only clarifies the matters on interest rates but issues regulations on lending procedures, the rights and obligations of borrower and lenders to ensure transparency in lending activities and protect the benefits of borrowers.

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In general, any matters can also have duality. Therefore, it is important that there is high operating ability of the leading agencies and market faith. In the current context, with the results achieved on monetary and inflation policy operations of the SBV, the tendency of interest rate cap removal should be considered and will be carried out successfully.