In an effort to stop unhealthy competition among banks, the State Bank of Vietnam (SBV) has issued a regulation that would prevent banks from offering loans at rates lower than deposit ones to extend more loans to businesses as capital has piled up.

The SBV, in Document N°9312/NHNN-TTGSNH issued on December 10, stated that the lending at rates lower than the deposit ones is the “manifestation of the unhealthy competition among banks which may generate high risks to credit institutions”.

Nguyen Phuoc Thanh, deputy governor of the SBV, said if the lending rate was too low, many businesses could take deposits from one bank and re-deposit them in another to get benefits. The central bank said this practice was increasing the volume of bad debts, leading to low liquidity and even losses.

To readdress this situation, the SBV requires the directors of its municipal and provincial branches to instruct commercial banks in their locations to lower both credit and lending rates in accordance with the money market condition, and their financial capacity, while terminating the loan extension with the lending interest rates lower than the mobilising rates in order to avoid unfair competition and hidden risks.

At the same time, the SBV requires its municipal and provincial branches to closely monitor developments in the money market and lending rate competition among commercial banks in their locations, to enhance supervision of the implementation of the regulations on both interest rates of credit institutions, and strictly deal with all violations and negative impacts on the stability of the money market.

Besides, it also asks its branches to closely monitor the liquidity of commercial banks in their locations to ensure safe and sound banking operations at the end of 2013.

During this process, the SBV municipal and provincial branches are required to promptly make recommendations and report all the arising problems beyond their authority to the central bank (via the Financial Supervision Agency) for guidance.

Le Tham Duong, head of the HCM City Banking University's Business Management Department, said banks were seeking ways to attract customers, regardless of price. He said that a regulation was needed to ensure fair competition among banks.

However, several other commercial banks said the regulation was inflexible, citing the need to lower rates to attract customers. They said banks would not necessarily suffer losses because they can offer other loans at a higher interest rate to compensate for the loans with low interest rates.

In addition, not all customers are allowed to get the preferential lending rate. Only customers in good standing who meet bank requirements can qualify.

When asked about the loans with low interest rates, the general director of a bank was quoted by Thoi bao Kinh te Viet Nam as saying that the preferential loans will be addressed to VIP clients only. “VIP clients” are understood as the businesses which have a healthy financial situation and stable cash flow, not the big businesses or the businesses which “have relations” with banks.

The general director said when offering low interest rates, commercial banks strive to “set a sprat to catch a mackerel”. This means that in return for the low-interest rate loans, banks can get many other things: more good clients, more opportunities to provide services, which means higher turnover.

“I know some banks offer the surprisingly low interest rate at 5 percent, while the ceiling deposit interest rate is 7 percent. However, only a small percentage of clients can access bank loans at the interest rate,” he said.

Dang Bao Khanh, CEO of SeABank, affirmed that banks do not “dump” capital in the market, but they “compete healthily”.

“A bank would still feel happy if it lends at 5 percent, because it can obtain a new client who would not only borrow money from the bank, but also use other services, thus bringing higher turnover to the bank,” Khanh explained, as quoted by Vietnam Net online newspaper.

Banks said that SBV should create a more flexible policy and ask banks to closely monitor the purpose and use of loans. If banks did this, then businesses would not be able to make re-deposits in other banks to receive benefits, they said.-VNA