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Pressed to increase capital, banks plead for delay   2010-08-11 - Tuoi tre

Bankers, backed by economists, say State Bank requirements that they raise their capital adequacy ratio by 1 October 2010 will handicap banks and businesses and hinder economic growth.


Fourteen commercial banks have formally requested the State Bank to reconsider its May 1 instruction.  Tuoi Tre reports the comments of several experts:


Dr. Tran Hoang Ngan, Vice President of the HCM City Economics University and a member of the National Advisory Council for Monetary Policies: the decision will slow economic growth:


Our interest rates are high. Banks have capital, but they cannot lend.  These factors are stifling the stock market and the real estate market.  Businesses do not have capital to expand their business.  We’re impacted [negatively] by external factors.  If we don’t soon adjust our policies, our economic growth will be influenced.


Our difficulties in capital and high interest rates are caused by Circular 13, [the State Bank instruction that requires commercial banks to increase their capital adequacy ratios – ed.] The circular aims to standardize banking operations and help the banking system operate in a safe mode. However, these standards are more appropriate to the conditions of a developed national economy and banking system.  Vietnam’s economy and its banking system still cannot meet the conditions.


Especially, the circular stipulates that banks can use no more than 80 percent of its mobilized capital for lending. The noteworthy thing is that “mobilized capital” here is understood as the capital that banks raise from the public.  It does not include a form of demand deposit that’s very important – funds deposited by the various  economic institutions.


Demand deposits always have low interest rates, therefore, they can be a big source of low cost capital for banks. If banks can only lend the capital they mobilize from the public at high interest rates, they will not be able to ease lending interest rates.


Therefore, I think, it would be better to delay the implementation of some provisions of Circular 13, especially now, when commercial banks are trying to increase their chartered capital to three trillion dong.  That capital increase can also be seen as a way to increase the safety ratio in bank operations.


As far as I know, the State Bank has realized the problems of the circular and plans to adjust the document.  That needs to be done soon.  If the central bank is slow in adjustment, banks will find it difficult to expand credit in the near future.


Duong Thu Huong, Secretary General of Vietnam Banking Association: the actual ratio is 60 percent, not 80 percent


Though Circular 13 stipulates that banks can use up to 80 percent of their mobilized capital to support lending, the real figure is 60 percent, not 80 percent.

The problem is that the central bank stipulates that the mobilized capital of banks may not include other sources of capital; it can only be capital mobilized from the public.  However, demand deposits by economic institutions, state treasuries and social insurance now provide fifteen to twenty percent of the total capital mobilized by banks.

As such, in fact, banks can use only 60 percent of the total mobilized capital for lending. This will hinder credit expansion, especially when the demand for loans increases towards the end of the year.


A banker: borrowers will suffer


The Government wants to ease deposit and lending interest rates, but interest rates are still high because banks have to step up their capital mobilization in order to meet the new capital adequacy requirements.  At the same time, borrowers must borrow money at high interest rates, because State Bank regulations require banks have to bear many other kinds of expenses.


For example, when a bank lends 100 dong, it has to set aside 0.75 percent of this sum as a provision against bad loans. This is the sort of thing that pushes up banks’ expenses and makes it hard to ease interest rates.

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