Banks announce big profit, while businesses facing difficulties

A slew of commercial banks have reported major profits in the first six months of this year, despite businesses facing difficulties, including high interest rates.

Banks have exploited the disparity between deposit and lending interest rates to make major profits

According to the State Bank of Vietnam (SBV), total outstanding loans among Vietnamese banks are equal to 1.2 times national GDP, compared to just 0.6-0.7% in other countries. Commercial banks are a major funding channel for the local economy, meeting 97% of credit activities. Therefore, it is easy to explain why commercial banks have raked in such fat profit.
Ways to make profit
Economists however have said the banks had found ways to continue raking in profits despite a 20% credit growth cap.
In a recent article, economist Huynh The Du provided four basic reasons why banks had released such positive profits.
Firstly, banks had profited from the disparity between deposit and lending rates. Since March 3 this year, the banking sector had been requested to offer annual deposit rates of 14%; but with lending interest rates at over 20%, or even in some cases between 25-27% per year for consumer loans, banks have exploited the disparity to make huge profits.
Secondly, banks have taken advantage of the disparity between official and unofficial exchange rates. Customers have to pay intermediate fees for foreign currency transactions charged by banks.
Thirdly, the policy to restrict gold imports has benefited banks because it pushed domestic gold prices higher than world levels. Fourthly, inflation is also a factor which makes banks raise their nominal profits.
Banks have also applied various fees on credit transactions. In 2010, individual transactions increased three fold and the corporate transactions increased 10 fold, but banks still increased fees despite a gigantic leap in business.
Tough action needed
Dr. Le Xuan Nghia, Vice Chairman of the National Financial Supervisory Commission, said, “Never before has the morality of the financial system been so open to question,” adding that banks continue to only offer much higher deposit interest rates compared to the permitted levels.
In response the SBV has issued stern warnings, but taken no action so far to redress the issue.
Economist Bui Kien Thanh said if bank profiteering affected the national economy, the Government and the State Bank of Vietnam should intervene to stabilise the monetary markets. "No economy can afford stable and sustainable growth with lending interest rates of over 20%," he added.
The SBV has the right to control bank operations. “It is important to work out whether the banks have implemented the government’s policies to increase loans for the production sector, or whether they are just trying to obtain profits by any means available,” Thanh said.