Debt extensions for businesses will only prolong the existence of incompetent businesses, an economist said.
Dr. Le Xuan Nghia
Dr. Le Xuan Nghia, a member of the Advisory Council for National Monetary Policy, told DTiNews in a recent interview that it's vital to take measures to deal with enterprises’ bad debts in order to improve bank liquidity and help credit growth.
Why is the country’s credit growth still lower than expected, despite decreased interest rates?
Vietnam has experienced a decline in economic growth as a result of both the global economic downturn and risky domestic policy. The country’s fiscal policies have sometimes been too loose, and at others too tight.
The country’s money supply grew by over 10% in 2011, while credit growth rate was only 12%. The situation has put the nation in capital deficiency, resulting in stagnation in the real estate, commodities and securities markets.
Commercial banks have been compelled to tighten their lending policies, especially for small-and-medium-sized enterprises (SMEs) via devaluing collateral, reducing lending limits and increasing interest rates. This has pushed a lot of SMEs into a place where they are badly in need of capital and unable to access it. Many have had to file for bankruptcy.
Even though lending interest rates decreased recently, bank liquidity has yet to improve ,as the majority of SMEs continue to find it difficult to meet requirements for lending. The credit growth rate is much lower than the 17% expected for the year.
Many banks currently report that they have sufficient capital, but remain hesitant about providing loans, what do you think about this?
Due to economic difficulties, banks' confidence in enterprises has declined. There are many cases in which inter-bank lines of credit have been frozen. Large banks are not lending to smaller ones without large collateral requirements.
The same situation can be seen in relation to banks and businesses. Many businesses find it difficult to get loans. In general, we can see increasing inventories with decreasing demand. This leads to stricter loan requirements, which most SMEs cannot meet.
There are also signs of low liquidity rates among some banks. Although the inter-bank interest rate has gone down by 2.5% for overnight transactions, and 8% for term loans of 1 to 6 months, many banks are still unable to borrow. However they continue to gain liquidity by offering annual deposit interest rates of 16% or 17% for deposits over VND1 billion (USD47,915).
Debt extensions for businesses will only prolong the existence of incompetent businesses
So is there any solution to the problem?
A sever tightening of credit would be dangerous. It could result in a long-term recession, like the one we saw in Japan. There are a number of central banks around the world grappling with the same problem.
To avoid a credit freeze, banks must avoid taking on toxic debt, especially in the real estate industry. The banks really have no other choice than to restrict lending criteria. It will be up to the private sector to work out solutions for bad debts while decreasing lending interest rates.
The central banks of the US and some European countries have had to issue more money to take over bad debts taken on by commercial banks. This was done to free up the credit market and make it possible for viable businesses to stay afloat.
This shows that if the problem of bad debts is not resolved, there may be no other policy solutions available to improve the situation.
In short, a lot of the restructuring plans we have seen recently, especially the debt deferment programme requested by the State Bank of Vietnam, and even debt forgiveness, is just a stop-gap measure. It may help unprofitable businesses maintain operations for some time. But it is not a long-term solution, and may lead to liquidity problems for commercial banks.
The Government would do much better by directly taking over the debts of viable businesses to help them make it through these tough economic times.
