Focus: Asia Finance – Vietnamese interest rate developments
1 April 2009
In brief: Consumer finance companies and banks in
Vietnam have recently had some reason to rejoice, thanks to a joint effort by
the State Bank of Vietnam and the Vietnamese Government to stimulate
consumption, lending and investment activity. Partner Thomas Miller (view CV) and Senior
Associate David Hinchey report.
How does it affect you?
There will be scope for bigger margins on consumer
lending in Vietnam with the removal of the interest rate cap on 'loans for
everyday living' and on credit cards.
Local credit institutions will get a boost, with
short-term business lending now subject to a 4 per cent subsidy. Offshore
lenders will need to look at rates if they are to stay competitive.
Many foreign financial institutions had commenced their licensing procedures
to establish locally based finance companies or banks in 2007 or early 2008.
Along with local credit institutions, they were in the process of ramping up
their business plans, only to be greeted by an overly heated market in desperate
need of cooling when inflation peaked at around 28 per cent pa in mid 2008.
One of the State Bank of Vietnam's (SBV) responses
to the high inflation, unsustainable asset price increases and the deposit race
between local banks that were clamouring to get access to funding, was to
introduce, under Decision 16-2008-QD-NHNN On the Mechanism of Basic Interest
Rate Denominated in Vietnamese Dong (Decision
16), dated 16 May 2008, a cap on deposit and loan
interest rates at 150 per cent of the basic interest rate in Vietnamese dong
(the benchmark rate promulgated on a monthly basis by the SBV).
The basic interest rate peaked at 14 per cent pa in June 2008, where it
stayed until October and has since been substantially reduced to only 7 per cent
pa, consistent with the significant drops in interest rates around the globe. A
basic interest rate of 14 per cent meant that credit institutions were
restricted from lending at any more than 21 per cent pa in Vietnamese dong;
still high by the standards of many other jurisdictions, but a problem for
locally based credit institutions, many of whom could not get their own funding
much below the 21 per cent cap, putting a severe squeeze on margins.
To get around this squeeze and nominally stay within the interest rate cap,
many credit institutions began introducing a raft of new fees and other means to
increase their returns on loans. The range of fees that started to appear
included establishment fees, advisory fees, fees for reviewing credit profiles,
fees for appraising lending projects and many others. In addition, many credit
institutions started to require their borrowers to deposit money (usually from
the loan proceeds) with the credit institution as security or a 'margin deposit'
for the loan.
The SBV was reasonably quick to take action in response to these new fee
structures. In June 2008 it put an end to the practice by issuing a number of
official dispatches and notices that prohibited activities that indirectly
increased the cost of borrowing over the interest rate cap. The first of these
official dispatches, issued on 10 June 2008, appeared to permit fees provided
that the (effective) interest rate did not exceed the interest rate cap. The SBV
then followed up its own decision nine days later with a further official
dispatch, which appeared (although its language is quite vague) to prohibit all
forms of lending-related fees. Under this dispatch, it was only the interest
component that would be a permitted cost on a Vietnamese dong loan.
To demonstrate its commitment to the interest rate cap and these prohibitions
on lending-related fees, the SBV pursued some branch heads of local commercial
banks, ordering that they be sacked for breaching the new rules. A Techcombank
branch head was sacked for requiring a borrower to provide a 'margin deposit'
that brought the borrower's effective interest rate over 24 per cent pa, while a
Sacombank branch head was sacked after requiring an interest rate on a
borrower's loan to be in excess of the 21 per cent pa cap. We are not aware of
any officers from foreign banks or foreign finance companies facing a similar
fate, so the reasonably high-profile nature of these SBV orders may have been a
sufficient deterrent for the rest of the market.
Times have certainly changed in recent months. As the economy deteriorated,
the interest rate cap proved more and more unnecessary, as it presented a major
constraint on credit availability and growth. As a result, the SBV overturned
the interest cap under Circular 01-2009-TT-NHNN Permitting Credit
Institutions to Negotiate Interest Rates on Loans for Everyday Living and on
Lending Via Issuance and Use of Credit Cards (Circular
01), dated 23 January 2009, but only to a limited extent. Under
Circular 01, the SBV permitted local credit institutions to negotiate interest
rates on 'loans for everyday living' and the lending via the issuance and use of
credit cards 'based on the supply and demand on capital markets and the credit
ratings of borrowers'.
The meaning of lending via the issuance of credit cards is reasonably easy to
determine, but 'loans for everyday living' is somewhat open to interpretation.
We have taken it to refer to traditional consumer lending; that is, lending for
personal, domestic and household purposes. The market in Vietnam seems to have
formed the same view, given the changes to product offerings and relevant
interest rates in the consumer segment of the market.
We spoke with SBV representatives to clarify what this phrase meant, and they
referred us to Decision 1627-2001-QD-NHNN of the SBV Issuing Regulations on
Lending by Credit Institutions to Clients (Decision
1627), dated 31 December 2001. Decision 1627 includes a reference
to a permitted loan type being a 'loan for servicing living conditions'. This
phrase is also open to interpretation, so, when pressed as to how they
interpreted this phrase, the SBV representatives said that it referred to
anything other than the other types of loans permitted under Decisions 1627,
being loans for 'the implementation of investment projects, plans for
production, business and services'. As such, if a loan is not for these
investment, business or production-type purposes, it is likely to be a 'loan for
everyday living' or a 'loan for servicing living conditions' – in other words,
we understand, consumer lending.
The market has been swift to respond to the removal of the interest rate
ceiling on consumer products. Consumer lending rates are now hovering between 12
to 14 per cent pa, which is 1.5 to 3.5 per cent higher than they would be under
an interest rate ceiling with the basic rate at 7 per cent pa. Rates are even
higher at some credit institutions (in the area of 18 per cent pa) particularly
where no security is provided by the borrower. Local commercial banks have also
introduced a range of new consumer lending products, including a variety of new
home loans, car loans, and construction and renovation loans, with promises of
quick approvals for new customers. As well, some local commercial banks, in a
bid to outpace the competition, have started offering their customers gifts (eg
gold and free life insurance products).
Unfortunately, despite the new product offerings and other incentives, the
take-up rate with consumers has been poor, with many prospective borrowers
seeing the increased rates as prohibitive. As such, it may be some time before
the intended effects of the removal of the interest rate cap on consumption and
lending activity are seen, as banks start reducing their rates to more palatable
levels and consumers adjust their mindset to an interest rate regime without any
What we are also yet to see is the abolition of the interest rate cap on
deposits, which remains at 150 per cent of the basic interest rate under
Decision 16. Although many banks are unlikely to want to offer deposit products
with rates in excess of the interest rate cap, some may wish to offer more
sophisticated structured deposit products with deposit rates linked to other
market events, derivative products, commodities or foreign exchange rates where
the return may be higher than a standard deposit rate. The rates possible
on these products will, however, still be limited by the cap. The SBV is also
yet to formally repeal or replace its dispatches on lending fees, although
lending fees on consumer lending products may again be possible given the
removal of the interest rate cap.
On the same day that the SBV introduced Circular 01 removing the interest
rate ceiling for consumer lending, the Prime Minister issued Decision
131-2009-QD-TTg on Interest Rate Support for Organisations and Individuals for
Borrowing from Banks for Production and Business (Decision
131). Decision 131 may have a significant short-term impact for
foreign banks looking to lend in foreign currency into Vietnam.
Under Decision 131, the Government established an interest rate support
regime that is stated to assist in reducing manufacturing costs for products and
goods, maintain production and business and create jobs. The interest rate
support is available for loans from state commercial banks, shareholding
commercial banks, joint venture banks, foreign bank branches, 100 per cent
foreign-owned banks and on 10 March 2009, was extended to include a limited
number of finance companies (those which comply with the required prudential
ratios and which have a ratio of bad debts to outstanding total loan balances of
less than 5 per cent).
The level of interest rate support is 4 per cent pa but only applies to
short-term (no more than eight months) Vietnamese dong loans and provided that
the loan contract is signed and drawn down between 1 February 2009 and 31
December 2009. Any loan where interest rate support is provided must be used to
satisfy working capital requirements for production and business activities,
although certain sectors – including education and training, cultural and
sporting activities, trading and consultancy services, investment and business
in securities and real property trading – are excluded from the interest rate
Credit institutions that provide finance under the interest rate support
regime must deduct interest equivalent to 4 per cent pa from the interest
payable by their borrowers. This interest is then refunded by the SBV, following
the submission of a quarterly report on all relevant borrowers and interest
deductions for that quarter (although some recent SBV guidelines indicate that
this can take place on a monthly basis). Given that the interest rate ceiling
still applies to business lending, this will reduce the interest payable under
short-term Vietnamese dong working capital facilities to no more than 6.5 per
cent pa, down from the current maximum under the cap of 10.5 per cent pa.
To date, the interest rate support regime has proved, as expected, very
popular. Local commercial banks have started to increase their deposit rates,
given their need for increased Vietnamese dong funds to meet demand for interest
rate supported short-term loans. The popularity of the interest rate support
program is likely to present some issues for foreign banks looking to lend in
foreign currency into Vietnam. Foreign loans have often proved popular, as the
rates on US dollar and other foreign currency loans have been significantly
lower than the rates on Vietnamese dong loans. This new interest rate support
regime is likely to create a far more level playing field, which may limit
Vietnamese borrowers' willingness to look offshore for funding.
Published 1 April
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