Ceiling interest rate of 20 per cent remains an open question

Delegates at the recent 10^th session of the 13^th National Assembly (NA) voiced their support for a fixed interest rate of 20 per cent a year at most, as stipulated by the Civil Code.

Accordingly, negotiated interest rate should not exceed 20 per cent a year, excluding those loans stipulated in other laws or regulations.

Cao Sy Kiem, former Governor of the State Bank of Vietnam (SBV) said that many NA deputies voted for a fix interest rate of 20 per cent as it would help reduce fraud on the black credit market that often involved high interest rates and negative consequences for the society, Kiem noted.

The former governor emphasised that the 20 per cent rate were applicable to all loans, excluding those stipulated by relevant laws with different regulations. This means credit institutions operating in accordance with the Law on Credit Institutions and the Law on the State Bank of Vietnam will not be affected by the latest adjustment on the 20 per cent rate as regulated in the Civil Code, but affected by the Law on Credit Institutions.

Therefore, he said credit institutions could set interest rates through negotiations with partners and customers. However, in some special cases or in emergency, the central bank can made immediate requests to control the market promptly in line with the Law on the State Bank of Vietnam.

According to Kiem, it is essential to put forth the ceiling interest rate of 20 per cent, when banks operate well and businesses gain high confidence. Otherwise, when the negotiated rate surpasses 20 per cent a year, due to certain factors like inflation, natural disaster, epidemics, and war, it may lead to unexpected high demand for loans.

Earlier on in October, the NA deputies proposed a plan on ceiling interest rate but did not mention any exceptional cases as stipulated in other relevant laws. After that, they reached an agreement on adjustments to Article 468 of the Civil Law, in line with practical conditions.

Economist Nguyen Tri Hieu, meanwhile, suggested that the ceiling interest rate should be controlled. The rate should be adjusted in line with market changes rather than being fixed at 20 per cent a year. The rate should be adjusted in accordance with real operations of credit institutions and deposit rates, as well as interests on loan.

In addition, the rate margin should be carefully calculated due to risks in credit institutions’ operations. For example, when the deposit rate is around 11 per cent, lending interests are about 9, and risk management rate is at 2 per cent, while bank profit is at least 3 per cent, the real ceiling rate must rise to over 20 per cent.

“When the risk of credit institutions’ operations is high, the margin of interest rate should be widened. In some cases, the margin of interest rate may reach 10 per cent or even higher,” said Hieu.

According to Hieu, it is necessary to encourage the participation of all economic sectors and banks to identifying the risks and thus set interest rates based on lending interests. The fixed ceiling rate of 20 per cent a year may prevent banks from launching credit packages with even more risks.

However, Hieu also noted that all participants must follow the regulations. Relevant agencies, such as the Ministry of Justice, the NA Office, the SBV, and the court, should issue more specific documents and guidelines on the implementation of the Civil Code in a transparent manner and in accordance with market mechanism of credit institutions, thus stabilising the overall interest rates and promoting the development of financial and banking system.

Hieu’s view was shared by Truong Thanh Duc, chairman of the Vietnam Banking Association, who stressed that the new adjustment to the fixed ceiling rate of 20 per cent a year shows positive sign in ensuring transparency in the local credit market.

Duc also expressed his support for further raising the ceiling rate to above 20 per cent a year, to 30-50 per cent in some special cases.