Vietnam’s surprise lowering of interest rates for the first time in three years may help to support economic growth, but raises credit risks in a nation still grappling with a hangover of bad debt.
The central bank reduced the refinance rate by 25 basis points to 6.25 percent late on Friday and also lowered the discount rate to 4.25 percent from 4.5 percent. The changes come into effect on Monday, the State Bank of Vietnam said on its website.
“These rate cuts will make it cheaper for businesses and individuals to borrow, so it will help spur loan demand and bolster consumption,” said Do Ngoc Quynh, head of treasury at Bank for Investment & Development of Vietnam in Hanoi. “Vietnamese companies still highly rely on bank lending. We just need to be mindful about how the loans will be used to avoid increasing bad debt.”
The policy easing came a day after the International Monetary Fund said the central bank should remain on hold, stressing the need to contain rapid credit growth. Vietnam remains vulnerable because of the slow pace of its banking sector reforms, the IMF said.
The central bank said in its statement that the move was to help boost economic growth and keep inflation under control. Vietnam is among the fastest-expanding economies in the world, but growth is still below the government’s ambitious target of 6.7 percent. Annual inflation eased to 2.54 percent in June, the slowest pace in almost a year.
Vietnam has done much to overhaul its banking system since 2012 after a lending spree and weak controls led to a surge in bad debt. The central bank in 2013 set up the Vietnam Asset Management Company to buy banks’ bad debt. Non-performing loans, at 17 percent at the time, dropped to 2.6 percent as of March and the government aims to keep it under 3 percent.
While the asset quality of Vietnamese banks has improved, there is a risk some new loans could sour, according to a Moody’s Investors Service research note. Bad loans at Vietnam banks were 6.8 percent of total loans as of the end of 2016, Moody’s said.
