The interest rate trade-off problem

Low interest rates are difficult to access.

At the conference “Connecting Banks – Enterprises in Hanoi ”, Governor of the State Bank Nguyen Thi Hong had a direct dialogue with small and medium enterprises (SMEs) to remove difficulties and increase the capital absorption capacity of enterprises.

Sharing at the conference, Mr. Le Vinh Son - Chairman of the Hanoi Association of Key Industrial Products Manufacturers (HAMI) expressed the problem of loan procedures for small and medium enterprises being cumbersome, difficult to access, long loan review time, and even some loans have a waiting period of up to 6 months.

Besides the loan requirements, it is very difficult for businesses to meet the bank's loan criteria when the current economy is still difficult, causing business results to decline.

“If there is a medium/long-term project funding source, the enterprise that repays the debt before the due date will have to pay a penalty of 1%-5% of the prepayment interest, depending on the remaining loan period. If the enterprise uses the project's own revenue to repay the debt before the due date, it will still be subject to a penalty of prepayment interest,” Mr. Son added.

Finance - Banking - The problem of interest rate - exchange rate trade-off of the State Bank — If the State Bank does not reduce interest rates, businesses' financial costs (including interest costs) will remain high, affecting their revenue and profits.

Regarding interest rates, Mr. Nguyen Trong Hoa - Director of Steel Materials and Structure Company Limited also said that it is very difficult to access low interest rates.

In addition to the problems with interest rates, Ms. Nguyen Thi Huyen Thuong - General Director of Nagakawa Group Corporation, a machinery and equipment trading enterprise, is facing problems with exchange rates. Because when the State Bank reduces interest rates, it will affect the exchange rate, especially for enterprises with import activities.

However, the contradiction is that if the State Bank does not reduce interest rates, businesses' financial costs (including interest costs) will remain high, affecting businesses' revenue and profits.

Mr. Nguyen Viet Hung - Head of Finance - Accounting of Dong Anh Mechanical Joint Stock Company said that the loan interest rate that his company is currently borrowing is about 5.2 - 5.6%/year.

“I really hope the State Bank will maintain this low interest rate for a long time,” Mr. Hung emphasized.

The business representative also said that he noticed that every time the interest rate decreased, the exchange rate increased, directly affecting businesses, especially import businesses. He suggested that the authorities take appropriate measures to stabilize the exchange rate.

Harmonious interest rate and exchange rate management

Responding to businesses’ concerns, State Bank Governor Nguyen Thi Hong said that managing exchange rates and interest rates is a comprehensive problem, which is very difficult and requires accepting trade-offs. Even if we want to reduce the operating interest rate, the exchange rate will increase.

For the State Bank, when operating exchange rate policy on the national level, there are exporting and importing enterprises. It is beneficial for exporting enterprises but difficult for importing enterprises.

"The State Bank must consider the whole economy from the perspective of the whole economy," said the Governor.

Regarding the proposal to reduce interest rates, Governor Nguyen Thi Hong shared that the total amount of interest rate and fee reduction from the resources of credit institutions from 2020 to now is 60,000 billion VND. This is a significant support from banks for customers.

Assessing the health of businesses still facing many difficulties, the Governor requested credit institutions to continue to reduce costs, based on their financial situation assessment to reduce interest rates on new loan contracts and old loans. At the same time, it is also necessary to ensure the financial situation of the bank itself, and above all, be ready to ensure payment to depositors.

Finance - Banking - The problem of interest rate - exchange rate trade-off of the State Bank (Figure 2). — Governor of the State Bank Nguyen Thi Hong.

Regarding exchange rates, Ms. Hong said that exchange rates are also part of the financial costs of businesses, while when interest rates decrease, exchange rates will increase, that is from an economic perspective.

"Therefore, managing exchange rates and interest rates in a harmonious and stable manner is the task of the State Bank," said Ms. Hong.

The Governor of the State Bank emphasized that exchange rate management must be based on the overall economic perspective. An increase in exchange rate is beneficial for export enterprises, but domestic production industries are heavily dependent on imports, while the import/GDP ratio is nearly 100%. Thus, it can be seen that an increase in exchange rate will cause difficulties for import enterprises.

In conclusion, Governor Nguyen Thi Hong affirmed that the State Bank is currently closely monitoring exchange rates, daily and hourly, to be able to manage appropriately .

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