Reducing interest rates for loans is one of the criteria that the SBV considers when allocating additional credit room to banks in the final quarter of the year. Photo: LÊ VŨ |
Competing with interest rates
23.4% is the average lending interest rate for February 2024 by FE Credit, one of the first credit institutions to publish this figure at the request of regulators.
Since the beginning of the year, the State Bank of Vietnam (SBV) has continuously required credit institutions to publicly disclose the average lending interest rate on their websites, such as at the banking sector conference, Directive 01/CT-NHNN, or at the recent online conference on boosting bank credit in 2024. Most recently, in Official Dispatch No. 18/CD-TTg dated March 5, 2024, on credit growth management for 2024, the Prime Minister requested the SBV to direct credit institutions to publicly disclose the average lending interest rate to facilitate individuals and businesses in accessing credit and choosing banks for borrowing. The SBV also believes that the publication of lending interest rates by banks will ensure fairness and objectivity in competition.
In the context of the economy still growing slowly and the demand for loans not strong, even as of February 16, 2024, credit growth recorded a 1% decrease compared to the end of 2023. Finding good customers with borrowing needs is not easy. Therefore, the publication of average lending interest rates may become an important tool for banks to compete and attract credit customers in the coming period, especially when the policy of providing loan repayments to other banks has been strongly implemented recently.
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The structure of lending for retail or wholesale will lead to large differences in the average lending interest rates among banks. |
However, the way average lending interest rates are published or calculated still lacks clear regulations.
The SBV defines the information to be published as the average lending interest rate, not the lending interest rate for each target, each company, or each type. To avoid misunderstandings when publishing the average lending interest rate, the SBV does not limit credit institutions from disclosing detailed information about customer groups or classification of customers.
But does this average lending interest rate calculation cover new outstanding balances in a period or the total outstanding balance of credit institutions? Depending on the calculation method, there may be significant differences in the results.
If the average lending interest rate is calculated on new outstanding balances, some large banks have occasionally published this rate, and it usually fluctuates following the latest interest rates. The SBV also tracks this criterion through regular reports from banks and regularly publishes information in 2023.
On the contrary, if it is calculated based on the total outstanding balance, this average lending interest rate will be affected by (i) old debts with high interest rates in the past; (ii) interest rates of bad debts that may still be calculated with overdue interest rates. Clearly, banks do not want to publish a lending interest rate that is calculated with significantly higher results than the general level, as it would affect competitive advantage, when customers will choose banks based on the initial criterion, the average lending interest rate.
And the challenges
With different capital structures and business strategies, the requirement to disclose average lending interest rates will create significant competitive challenges. Especially for small-scale banks with high input costs, low self-capital, limited access to other financial sources, low diversification in raised capital.
On the contrary, the advantage will belong to banks with low input interest rates, including banks with wide networks, reputable brands advertising low savings interest rates, such as state-owned banks, banks with large payment deposits of businesses contributing to higher CASA ratios, banks with large foreign currency deposits, banks with access to cheap international commercial financing sources. A large difference in input costs between banks will result in significant differentiation in lending interest rates.
Therefore, banks with lower average lending interest rates will have an advantage in attracting credit customers from the start. Therefore, while publishing the average lending interest rate, but with more detailed information on each customer segment, lending product, may be more appropriate for some banks, for easy and similar criteria when comparing with other organizations.
Some bank leaders have proposed that the SBV provide detailed guidelines for the implementation of uniform, publicly disclosed average lending interest rates should be divided by term, customer segment, appropriately for practical implementation. The published interest rates should be within the ranges of widely-held outstanding balances, to avoid misunderstanding, believing that interest rates are too high or too low for certain specialty loan amounts.
For borrowing customers, in addition to considering the publicly disclosed average lending interest rate, the cost of property appraisal, prepayment fees, accompanying insurance purchase requirements, or the mechanism of calculating the interest rate and principal to be paid periodically (which formula is being applied) … are factors that customers need to consider when deciding to choose a bank for borrowing.
If small-scale banks do not have a competitive advantage when they have to publish the average lending interest rate, then large banks with low input costs and lower publicly disclosed average lending interest rates may face more scrutiny. According to Directive 01 mentioned above, in addition to having to publish the average lending interest rate, credit institutions must also disclose the difference between deposit interest rates and the publicly disclosed average lending interest rate on their websites.
Therefore, although the publicly disclosed average lending interest rates of these large banks are much lower than the general level, if the difference with the bank’s input interest rate is too large, it may also cause undesirable reactions from customers.
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