Dr Le Xuan Nghia: Debt charge-off is not easy

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Dr Le Xuan Nghia

Many firms have simultaneously applied for debt charge-off, in your opinion, how will this cause difficulties for the market?

Bad debt is in danger of increasing rapidly. The complex developments of the Covid-19 pandemic make debt restructuring an ineffective solution, so both firms and banks want to charge off debts. However, this is not easy, even very difficult because of the budget. Because to implement the debt charge-off policy, the Government must have a budget source to pay debts on behalf of firms in the event that the debt charge-off period expires but firms still cannot repay.

To support firms in the current context, what is an effective solution?

An effective solution to support firms in recovering and reducing bad debts is that the Government must accelerate current support policies, besides; banks must increase their provisioning for risks.

We hope Vietnamese firms will have strong and effective support from the Government like other countries in Europe, America and Northeast Asia have done. Accordingly, these supports amount to more than US$10 trillion, accounting for 30% of the GDP of these countries. But of course, not every government can provide such a large amount of money, so they all must borrow to finance firms, borrow from people, borrow from the central bank through Government bonds, that means Governments use fiscal policy to support firms, not using resources from the commercial banking system.

In Vietnam, if strictly following the instructions of the management agency, commercial banks will exceed international practices, creating many risks for banks. Commercial banks are actually a business, doing business with money and trust of depositors. The safety of commercial banks is to stabilise the macro-economy and national reputation.

How do you think about the fact that many firms affected by the pandemic simultaneously applied for a reduction in lending rates?

Recently, some firms have suggested that banks reduce lending interest rates by 3-5% per year on the basis of comparing interest rates of many nations around the world approaching 0%, the US interest rate is 0.25% annually. But in my opinion, this is a mistake. Because the interest rate of 0.25% per year applied by the US Federal Reserve (FED) is the lending interest rate between the US central bank and small banks to cover the required reserve shortage, not lending interest rates between commercial banks and people and firms. This interest rate of the Fed only indirectly affects the deposit rate and lending rate through the interbank market.

The lending interest rate of commercial banks depends on many factors; the main one is the cost of capital mobilisation and operating costs. In addition, banks also have to bear large operating costs, ranging from 2-4%. Therefore, commercial banks have to lend at the average deposit rate (including savings deposit interest rate, payment deposit interest rate) and operating expenses of the bank.

With deposit interest rates, the average inflation is about 3.5%, while the expected inflation is 4% in 2021. If the deposit interest rate is equal to inflation or to inflation expectations, the real interest rate is zero because the currency depreciates 4% per year. In case the deposit interest rate is zero or negative, depositors tend to withdraw money to do business in fields such as securities, buying gold, buying foreign currency and real estate. At that time, the banking system as well as the economy falls into a “liquidity trap”, allowing money to be massively withdrawn.

Vietnam's current deposit interest rates are already very low. Some small banks have seen big liquidity pressure, so they often set high deposit rates from 6-7% for deposits with a term of more than 12 months. One of the reasons for this situation is the extension and postponement of debts, so many banks need additional deposits to ensure they have credit growth of 12-13% as planned.

Although the announced profit is very large, the profit actually includes the extension and postponement of debt, which is the expected profit. Therefore, it is possible that when the Covid-19 pandemic stops, the loan extension or postponement expires according to regulations; bad debts at banks will become obvious and increase, causing the provisioning for risks increasing, affecting real profits of banks.

With the above analysis, I find the opportunity to further reduce the deposit interest rate is very low, so the chance of reducing the lending interest rate is also quite low, about 0.5-1% depending on the conditions of each bank. Therefore, it is not possible to have a reduction of 3-5% as many firms and associations want.