Businesses and experts said borrowing costs would come down to more affordable levels after recent moves by the government to subsidize interest rates and cut the benchmark rate, both effective today.

Huynh Van Minh, chairman of the Ho Chi Minh City Business Association, said the 4% interest rate subsidies offered to businesses would help them overcome the credit crunch and also encourage them to invest at this juncture.

The loan subsidies, part of the stimulus package put together to bolster the economy, apply for loans taken by both state-run and private enterprises, excluding those operating in 13 specified sectors like the entertainment industry, real estate and stock market.

Tran Hoang Oanh of HCMC-based Phu Oanh Garment and Textile Company said the 4% subsidy means her company would only have to pay interest rates of 6%.

The company, which borrows nearly VND10 billion (US$573,000) a year, can save about VND400 million ($23,000) thanks to the subsidy, she said.

Economist Le Tham Duong of the Banking University of HCMC said companies eligible for loan subsidies would enjoy an overall rate cut of 5.5% as the key rate has been lowered by 1.5% to 7%, the sixth rate cut since October.

“The (5.5%) decline in interest rates is considerable,” Duong said. “Companies borrowing VND1 billion will have to pay less than half the interest they paid in January.”

The State Bank of Viet Nam, the central bank, has also lowered the refinancing rate to 8 percent from 9.5%, and trimmed the discount rate to 6% from 7.5%.

Economist Tran Hoang Ngan from the HCMC University of Economics said the moves to assist local companies send out a clear message that the government would create the best conditions for doing business in its bid to prevent economic recession.

But Ngan also said that although the government has started subsidizing interest rates for some companies, the benchmark rate should be cut further so that all firms can have access to the lowest possible borrowing costs.

Ngan said slowing inflation in recent months has provided the opportunity for the central bank to slash the key rate further.

“If the key rate is lowered to only 4-6%, borrowers will have to pay annual interest rates of 6-9%, instead of the current 10.5%. Lower lending costs will encourage the whole society to do business.”

Inflation last month slowed to 17.5%, the lowest level in almost a year, while industrial production slumped.

Many businesses, however, said they would not benefit from lower interest rates. As orders have declined sharply, they have cut back on production and thus do not need to apply for new loans.

Viet Nam has forecast that export growth this year will slow to 13%, after a rise of 29.5% in 2008, due to the economic downturn in the three most important markets of the US, Europe and Japan.

Vu Hoang Minh, director of Minh Hoang Construction Company, noted that as businesses receive interest rate subsidies for eight months only, it may be hard for them to make long-term plans.

Minh said an eight-month period is relatively short, considering it usually takes his company at least two years to complete a construction project.

Consumer loans

After the central bank removed its cap on interest charges for consumer loans, many commercial lenders said they planned to launch various consumer credit products this month.

A new rule by the central bank, also effective today, allows banks to negotiate borrowing costs with clients. Banks can now set interest rates on consumer loans outside the ceiling rate, which is equivalent to 150% of the base rate regulated by the central bank.

DongA Bank CEO Tran Phuong Binh said the move was what commercial lenders had been waiting for.

As consumer loans and credit card loans are riskier than other kinds, interest rates need to be higher, and customers understand that, he said.

Duong Thu Huong, general secretary of the Viet Nam Banking Association, said the reintroduction of negotiable interest rates for consumer loans would help banks boost consumer lending, which had been tightened for a long time.

However, economist Doan Ngoc Long warned that encouraging consumer credit too much may bring back inflation and increase nonperforming loans.

The State Bank of Vietnam is aiming to keep credit growth in the banking system at around 20 percent in 2009 after a rise of 21-22% last year.

Analysts have said it is necessary to allow banks to set interest rates on a negotiable basis on all loans, not only consumer loans.

Right now the central bank still controls the ceiling rate. Once the economy is stable again, negotiable interest rates should apply to all kinds of loans, they said. (TN)