Banks are facing... "excess cash."
After a long period of businesses facing inventory problems, now, as predicted, banks are also facing... excess cash. This might sound strange, as the market usually only hears about businesses struggling to access capital, not about excess cash. However, this is the reality.
(Baonghean)After a long period of businesses facing inventory problems, now, as predicted, banks are also facing... excess cash. This might sound strange, as the market usually only hears about businesses struggling to access capital, not about excess cash. However, this is the reality.
Currently, in the credit market, many banks have excess capital and are willing to lend, but generally, businesses have very poor capital absorption capacity. Healthy businesses are hesitant to borrow despite banks lowering interest rates and increasing promotions; while banks are reluctant to lend to businesses with poor financial situations, fearing they might be abandoned. Therefore, banks find it very difficult to disburse credit. Many banks are currently experiencing a capital surplus that needs to be released, but where can they release it when the Provincial Small and Medium-Sized Enterprise Association comprises 5,000 businesses, most of which are small businesses with an average workforce of 5-8 people per enterprise, primarily in the service sector, and over 50% are in the weak group? Statistical reports from the State Bank of Vietnam's provincial branch show that, since the beginning of the year, the situation of capital mobilization exceeding outstanding loans is quite worrying. In the first quarter of 2013, deposits continued to increase significantly, reaching VND 48,400 billion, a 9.7% increase compared to the beginning of the year, while lending only increased slightly by 1.3% (reaching VND 78,340 billion).
Lending interest rates have decreased, but businesses are still finding it difficult to absorb capital.
Pictured: Manufactured at Hai Chau Shipbuilding Company Limited.
Mr. Vo Minh Quan, Director of Naconex Nghe An Joint Stock Company and Chairman of the Vinh City Small and Medium-Sized Enterprise Association, said: “Unlike before, nowadays, businesses with strong financial resources and who repay loans promptly receive very attentive care from banks. Our company has received loan offers from many banks, but given the current difficult production and business situation, we are very cautious about borrowing. Besides bank interest, there are many other costs such as labor costs, taxes, rent, etc. Borrowing (even at low interest rates) could add to our burden. Currently, our company has borrowed about 60 billion VND from banks and mobilized other sources. With this loan, we have to pay about 7 billion VND in interest annually, in addition to other expenses to maintain employment for 200 workers. In difficult production conditions, with sales in the first three months of the year continuing to decline by about 30% compared to the same period last year, determining how much to borrow and what production plan to implement to maintain operations is a constant concern for us.” "We need to think carefully."
Similarly, at Hung Phat Production and Trading Joint Stock Company (Nghi Phu Industrial Park), Mr. Nguyen Van Sinh - Director of the company said: “Borrowing capital is not difficult now. We just borrowed several billion VND from Vietcombank Trung Do branch with an interest rate of 11.5%/year. Recently, there have been very few large projects, and we haven't been able to implement any. The company only has a few small projects; sales in the first quarter reached 11 billion VND, equivalent to 90% of the plan. With difficult sales and inventory buildup, borrowing capital is necessary but must be done cautiously.”
At Sacombank's Nghe An branch, by the end of March, deposits reached 630 billion VND, an increase of 80 billion VND compared to the beginning of the year, but loans decreased by 30 billion VND. At SHB Bank's branch, deposits increased steadily, reaching 1,465 billion VND by March 31st, an increase of 300 billion VND, but outstanding loans only reached 760 billion VND, an increase of 30 billion VND, equivalent to 3%, compared to the beginning of the year. An official from SHB Bank's branch said that since the beginning of the year, there have been almost no new outstanding loans, the reason being that SHB's lending interest rates are high, averaging 14-14.5% per year. There are no customers with good financial standing, but customers with poor financial situations who come to borrow to refinance or transfer bad debts from one bank to another are being refused by the bank.
The imbalance between deposits and loans in the first three months of 2013 was not only seen in joint-stock banks but also in many commercial banks. At Vietcombank's Vinh branch, as of March 21, 2013, total deposits amounted to VND 5,413 billion, but outstanding loans totaled VND 2,234 billion. A leader of a joint-stock bank shared: Previously, after mobilizing funds, banks would channel them through lending. Besides deducting a percentage for provisions and mandatory reserves, along with other capital safety obligations as stipulated before lending, the remaining amount would be sold on the interbank market. However, with the stringent regulations in Circular 21, this option is almost closed. Banks with surplus capital are not buying, while weaker banks that could buy capital are required by the circular to set aside excessively large provisions.
Thus, credit growth is slow, with some banks even experiencing negative growth, interbank market capital transactions are difficult, and government bond purchases yield negligible profits. Faced with the current surplus of available capital, banks are opting to "release funds" by reducing deposit interest rates and offloading excess capital to avoid pressure on capital costs. Although the State Bank of Vietnam only announced on March 25, 2013, a ceiling on VND deposit interest rates for terms under 12 months, from 8%, Vietcombank and several other institutions had already lowered their rates to 7.5% per year two days prior.
Lowering deposit interest rates to release liquidity and thereby balance it with a reduction in lending interest rates is a strategy banks employ. However, feedback suggests that lending interest rates need further reductions for businesses to operate effectively. While reducing lending rates to facilitate cash flow is crucial, the government also needs to focus on tax policies and solutions to reduce inventory, among other measures, to further support businesses and revive the economy.
Text and photos: Thu Huyen
