The State Bank of Vietnam (SBV) has issued Circular 06/2023/TT-NHNN allowing clients to borrow from one bank to pay debt owed to another bank. This circular is believed to have significant impact on lending rates, competition among banks and their market share.

Banks launch low-interest loans packages Circular 06/2023/TT-NHNN on lending operations of local banks and foreign bank branches came into force on September 1, enabling clients to borrow money at one institution to pay off debt at another institution. This means clients can look for other banks offering a lower interest rate to borrow to finance their debt payments to their current lenders. State-run banks have embarked on a race to offer such loans. Specifically, the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) has launched a preferential loan package with the annual interest rate set at 6.9% for the first six months, 7.5% for the first 12 months or 8% for the first two years. After the chosen period, Vietcombank will switch to a floating interest rate, currently around 10.5%. The Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) has introduced a similar credit package with a yearly interest rate of 6% for short-term loans, and 6.8% for medium- and long-term loans. The Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) applies its annual lending rate of 5.6% or higher for those in need of money to pay off their debt at other banks before they fall due, as a result of borrowing for production and business or for consumption with collateral assets. Private banks have jumped on the bandwagon. For instance, the Military Commercial Joint Stock Bank (MBBank) has launched a program in which the bank takes care of real estate loans which customers owe to other banks, with an interest rate of only 8% per year fixed for the first 12 months. The Vietnam Technological and Commercial Joint Stock Bank (Techcombank) has a similar program offering a minimum interest rate of 7.3% per year. Likewise, the Asia Commercial Joint Stock Bank (ACB) has announced it will finance those individual customers who want to settle their debt owed to other banks, with an annual rate of 8% for the first 12 months. Tough to borrow from one bank to pay another There are certain factors that prevent such preferential loan packages from reaching all those in need. First, customers would be subject to certain fees when they pay off debt prior to maturity. Normally, lender banks charge a penalty fee on premature debt payment and a fee for release of assets used as collateral. When it comes to getting a new loan, the new lender would collect fees on review of collateral assets, notarization and re-registration of mortgages. These fees make it less financially viable to take out new loans to pay off old loans. Second, assets used as collateral for current loans would be reassessed, making it less likely for customers to borrow. Different banks have different approaches to risk appetite. Therefore, to get a new loan, customers would need additional collateral to meet the more demanding requirements of the new lender. Third, major banks prefer financially healthy customers who need big loans. They refrain from granting tiny loans with complicated procedures. Despite such obstacles, it is an inevitable trend that the majority of customers will consider switching to bigger banks to enjoy the lower interest rates they are offering. Impact on credit growth, bad debt and competition Circular 06 is expected to lead to lending rates falling due to competition among banks but it does not address the issue of credit growth. The movement of loans from one bank to another would not result in further credit growth system-wide. Credit growth at large banks will be partly stimulated by the number of borrowers switching from small banks with exorbitant costs, whereas small banks will have to step up the granting of new loans for the sake of credit growth. Banks with cost advantages will become increasingly dominant, with a better clientele gained from others. This is clearly evinced in the gap of 2-5% per year in lending rates between top-tier banks and those at the bottom. On the contrary, this will exert immense pressure on small lenders with high capital costs, who will gradually lose better customers and their market share, and eventually fall into a vicious circle of bad debt and growth. To cope with such a situation, banks would need to minimize their costs of capital (COF) and cost-to-income ratios (CIR). A reduction of COF can only be done by enhancing service quality, thereby improving the ratio of current and savings accounts (CASA). As for the reduction of CIR in general, including cutbacks in COF and other operating costs, it is essential that banks simplify their processes and procedures, and advance the application of technology in banking activities. In the long term, Circular 06 will make the banking system increasingly divided, with small institutions who fail to keep it up to be gradually eliminated from the game and find it difficult to escape the vicious cycle of growth and bad debt.