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Capital in excess, but businesses not ’interest’-ed   2008-10-31 - Lao dong

The basic interest rate has been cut to 13% but banks and businesses are still estranged.


Products unsalable


According to the General Statistics Office, the consumer price index (CPI) decreased by 0.19% in October, which reflected the decreased purchasing power, and thus lower consumption.


Duong Kim Thoa from Dong Hai Automobile Company said that the demand for cars in the first 10 months of the year decreased by 50% over the same period of last year, and that automobile companies are now having to struggle to survive.


Nguyen Manh Hung from Viettel telecommunications company said that customers nowadays have to cut spending and limit the numbers of calls they make, which means that the plan to develop subscribers will be affected and turnover will decrease.


Meanwhile, analysts say that the purchasing power of materials has decreased by 30-60%, and forecast that material prices will further decrease amid the big difficulties in the world.


The slow sale of products explains why many businesses are not interested in borrowing money at this moment. Other businesses do not want loans now because they hope interest rates will drop further.


Clients paying debts ahead of schedule


Some joint-stock banks have reported that clients have asked to pay debts ahead of schedule. Banks would have been very happy about this several months ago, when they faced liquidity problems. However, undue debt payment now is not terribly pleasing to them, as their capital is in excess.


A report by the central bank said that banks now have VND50bil of usable capital for disbursement.


Some of those borrowers want to pay back the money they borrowed before at high interest rates and take out new loans at new interest rates, which have become lower since the central bank slashed the basic interest rate to 13% and banks slashed lending interest rates to 16%.


However, bankers think that businesses want to pay money back now mostly because they have cancelled their business plans in the context of deflation. Decreasing commodity prices have likely made businesses believe that they will not profit from their plans.


Banks inject more money in government bonds


In the last few months, especially in October 2008, commercial banks pushed up purchases of government bonds. With the bonds, banks still can obtain the interest rate of 16-17%, while they have valuable papers to use as mortgaged assets when they borrow capital on the open market or in the interbank market.


In 2007 and the first three months of 2008, when credit development was overly hot, the State Bank encouraged banks to use part of their capital to purchase government bonds for liquidity provisions.


However, analysts have pointed out problems with the fact that banks have spent big money on government bonds and have VND50tril for liquidity provisions, while the urgent matter now is to provide capital for the national economy.


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