Bankers press for phase out of interest rate subsidies

LookAtVietnam – Bankers and economists believe that it is time to scale down the subsidy and limit eligibility for the preferential loans.

Many businesses feel worried now, says Dr. Dinh Trong Thinh.  The Government’s interest rate subsidy program is scheduled to end at the end of the year, but they still cannot find other capital sources.

 

According to Thinh, who teaches at the Government’s prestigious Finance Academy, though there are yet no precise data on the impact of the economic recession, Vietnam will still need another interest rate subsidy package. However, the second package ought to have smaller scope and lower loan interest rate subsidy — two percent, for example, instead of the current four percent.

 

He said that if the Government decides to give businesses ‘another present,’ it should narrow the criteria so that only businesses that really need and deserve capital will be able to access the preferential loans.

 

Agreeing with Thinh on the need of a second interest rate subsidy package, Chairman of the Vietnam Small and Medium Enterprises’ Association Cao Sy Kiem said that businesses would receive a shock if the Government suddenly stopped providing preferential loans.

 

Some other economists and businessmen believe that the Government should discontinue the interest rate subsidy programme.

 

Tran Cong Hoang Quoc Trang, Chairman of Hoa Viet Group, wants the loan interest subsidy removed soon.  He says it has created an unfair competition among businesses.

 

According to another big businessman, Chairman Thai Tuan Chi of Thai Tuan Group, a child will eat rice gruel after he is weaned, and then he will eat rice. Businesses should move on too.  Alluding to a need for Government instruction, Chi added “the mother should tell her child when he can drink milk, when he should eat gruel, and when to progress to rice.”

 

Vietcombank Chairman Nguyen Hoa Binh thinks that the State Bank of Vietnam should propose to the Government that it gradually reduce and then stop the interest rate subsidy package.  Failing to do that, he argues, will increase inflationary pressures and distort capital allocation, with consequent bad impacts to the national economy, for example more bad debts on the books of commercial banks. Conversely, stopping interest rate subsidy will help ease state budget overspending and inflation.

 

A State Bank report shows that the four percent interest rate subsidy enables businesses to reduce their borrowing cost by 30 percent.  However, admits a SBV official who spoke to the online journal Dau tu Chung khoan (Securities Investment), the loan interest rate subsidy package, besides its positive impacts, has distorted credit control, the money market and exchange rates.

 

With the four percent interest rate subsidy, businesses need only pay six percent per annum to borrow funds. As the result, borrowing dong has become much more attractive than borrowing dollars. This has prompted businesses to borrow dong and use the dong to purchase foreign currency.  This has put pressure on the dong/dollar exchange rate, creating problems in foreign currency liquidity.

 

The interest rate subsidy scheme has also prompted some businesses to borrow dong from banks at low interest rates and then deposit the borrowed money at other banks to earn a free market interest rate – an outcome flatly contrary to the program’s intent.

 

VietNamNet/TBKTVN, DTCK