Banks are optimistic and willing to offer low-interest loans as the State Bank of Vietnam (SBV) lowered its caps for the first time this year.

Interest rates lowered by 1%

Nguyen Duc Huong, Vice Chairman of Lien Viet Post Bank, said they might have fewer short-term deposits due to the lower rates but they can expect an increase in long-term deposits. Moreover, they can encourage enterprises to make more loans since the lending interest rate will go down with deposit rate.

There are worries that low rates will drive depositors to withdraw their funds from banks to invest in other channels such as gold or real estate. However, according to Huong, the impact of this would be minimal because the low rates are only applied on deposits with terms of under six-months.

The director of Sacombank, Phan Huy Khang, said, "We have cut down our lending interest rates, but we are still considering a further cuts."

The central bank's monetary policy head, Nguyen Thi Hong, said their aim is to support enterprises and improve the economy. As of March 13, Vietnam's credit growth was still negative. "Vietnam's banking system will not recover until the problem of bad debt is dealt with. There is a lot of money sitting idle in the banks, showing low demand for loans. Lowering interest rates is SBV's attempt to aid the economy," HSBC reported.

HSBC's report also pointed out that the overnight lending and interest rate on open market is cheap at 1.3% and 5.5% respectively. This shows interest rates are not the cause for stagnant credit growth.

Bad debts might prevent Vietnam's economic growth from being higher than 5.6% this year. The report said, "Vietnam's growth will be uneven this year because import-export companies will have advantages over other domestic companies."

The report was released after the central bank announced that the caps on interest rates for short-term loans and deposits would be lowered from 7% to 6% today, March 18. The lending rate for refinancing and on interbank market was lowered by 0.5%. The central bank also lowered the lending rate for exporting, agriculture, small and medium-sized businesses by 1%. Deposit rates for the USD have also been lowered from 1.25% to 1%.