The Covid-19 epidemic has forced banks to make difficult choice: accept the temporary profit shock but in exchange for less bad debts, or keep the profit margins at their current high but arising bad debts in later years, which similar to the previous bad debt cycle.
Recently, the State Bank of Vietnam (SBV) has issued a series of decisions to reduce operating rates, effective from March 17. Some of the main regulating rates to be adjusted down include: refinancing interest rate from 6.0 percent to 5.0 percent per year; rediscount interest rate from 4.0 percent to 3.5 percent per year; offering interest rate of valuable papers via open market operations (OMO) from 4.0 percent to 3.5 percent per year; The deposit ceiling for demand deposits and term deposits with less than one-month term from 0.8 percent to 0.5 percent per year.
Along with that, the ceiling deposit interest rate was reduced by 0.25 percent to 4.75 percent per year for one month to less than six months while maximum cap on short-term lending in dong for priority fields decreased from 6.0 percent to 5.5 percent per year.
The rate but by SBV was timely, but the reduction was not really strong. Explaining this, the experts of Bao Viet Securities Company (BVSC) said that the inflation at a higher level than usual (five percent in February, higher than the government’s target of no more than four percent) was one of the reasons that SBV had been cautious in reducing regulating rates.
They forecast that with the supply-demand movement of goods due to the current epidemic, it is likely that Vietnam’s inflation will tend to decrease in the coming months, thereby creating favourable conditions for SBV to cut short-term deposit interest rate cap when necessary.
With similar view, Lawyer Bui Quang Tin, CEO of Bizlight Business School and lecturer at Banking University Ho Chi Minh said SBV had reduced regulating rates in line with inflation, exchange rates as well as other macro balance indicators. He also emphasized the inflation factor, when this index in February was significantly higher than initially expected (four percent).
This expert expected lending rates to decrease in the near future.
In a thematic report on SBV’s interest rate reduction action, the experts of KB Vietnam Securities Company (KBSV) also forecast that the lending interest rate level in the economy will tend to fall in the near future. There are two main bases for this prediction by KBSV. Firstly, due to the impact of the Covid-19 epidemic, businesses’ credit demand has witnessed a sharp decline (as shown by credit growth in the first two months of the year at only 0.06%, the lowest in six years), meanwhile the system liquidity is in abundant state. Secondly, the cost of raising capital in the interbank market has decreased, combined with the government’s business support policies.
KBSV expects a specific reduction of about 0.5 percent per year.
In general, the interest rates in general and the lending interest rates in particular will decrease, which will affect banks’ profit. However, in this “once-in-a-lifetime” crisis, this was not the most important factor affecting bank profits.
Basically, experts agree that the immediate action of lowering interest rates of SBV is to increase liquidity for banks, and at the same time lower capital costs, creating favourable conditions for banks to proactively take measures to support customers more easily.
Lending interest rates may drop in the future, but according to Bui Quang Tin, this mainly affects new loans, because old loans are still bound by contractual agreements between the two parties.
Regarding the old loan contracts, Tin assessed that it was difficult for the bank to support lending interest rate reduction, unless the customer must have evidence to prove the damage caused by Covid-19 epidemic. “Enterprises themselves are also waiting for stronger actions from commercial banks”, Bui Quang Tin emphasized.
This stronger move will force the banks to sacrifice profits.
Assoc. Dr Pham The Anh, Head of the Department of Macroeconomics National Economics University, said that in the past few years, the banking industry had reported a huge profit, so when there were difficulties banks should support businesses by rescheduling and restructuring debts, reducing interest rates, helping them survive the disease.
“Banks have to share difficulties with businesses in this context, because if enterprises can survive, so can the banks, if the businesses die, they will die too,” the expert stated. “Even if this year is not profitable, the banks have no choice but share with businesses,” he said.
On his personal Facebook page, Le Hong Giang, an economic and financial expert working in Australia, quoted the speech of former US Treasury Secretary, Larry Summers, about the nature of this crisis: “Economic time has been stopped, but financial time has not been stopped”.
Giang commented, this was the problem that the whole world was facing. While restaurants, hotels, and airlines were no longer able to generate revenue, bank interest, rent, labour costs still have to be paid, meaning “economic time” of that business had stopped but “financial time” did not stop.
“This has pushed businesses to the possibility of bankruptcy and closure to incur more bad debts, and in the long run they will go bankrupt,” Le Hong Giang acknowledged.
According to Giang, the solution to this crisis is to somehow stop the “financial time”, or at least slow down to wait for the “economic time” to recover, which will help reduce the negative impact of Covid-19 into the economy and society in general.
Debt freezing, rescheduling, debt restructuring, interest rate reduction and exemption are some of the ways to carry out this solution. And this certainly affects bank profits.
In fact, facing the crisis, sacrificing profits is inevitable. The problem is how the bank chooses: sacrificing immediate profits to support customers, in exchange for more customers to overcome the crisis, fewer bad debts, leading to healthier banking assets and brighter future prospects for profits; or just moderately support customers so that the impact is not too great for bank profits, but in return for the following years facing the arising bad debts.
Obviously, in terms of bank profits, in general, the maximum support plan for customers will be more effective because bad debt will be less, while principal and interest debt will not be paid when the customer makes it through the pandemic.
However, does any bank dare to accept the shock of profits, even if it is only temporary?
This difficult choice will greatly affect the picture of the bank in the near future. Without accepting the shock of profits, it is likely that the banking industry will repeat the old process of handling bad debts with the characteristic that lasts many years.
