That credit institutions are required to publicize their average interest rates for loans may be used as a tool to compete for customers.

Interest rates as a tool to sharpen competitiveness The average lending rate in February 2024 of the finance company FE Credit was recently announced at 23.4%, marking one of the first credit institutions to disclose this data as required by the central bank. Since the beginning of the year, the State Bank of Vietnam (SBV) has repeatedly asked credit institutions to publicly announce the average lending rates on their websites, such as at banking industry conferences, in Directive 01/CT-NHNN, or at the recent online conference on boosting bank lending in 2024. Most recently, in Document No. 18/CD-TTg dated March 5, 2024, on managing credit growth in 2024, the Prime Minister requested the SBV to direct credit institutions to publicly announce average lending rates to facilitate access to credit for individuals and businesses in choosing banks for loans. The SBV also believes that greater transparency in interest rates will ensure fairness and objectivity in competition. In the context of the economy still growing slowly and the demand for loans not yet strong, with credit growth as of February 16, 2024, recording a 1% decrease compared to the end of 2023, it is tough to find good clients. Therefore, publicizing average lending rates may become an important tool to compete for customers, especially as the policies for refinancing have been widely implemented by many banks recently. However, how to publicize average lending rates or how to calculate them is still not clearly regulated. The SBV determines that the information disclosed must be the average lending rate for all customers across the board, not the lending rate for each individual, business, or type of loan. To prevent misunderstanding when disclosing average lending rates, the SBV does not limit credit institutions from detailing lending rates for customer groups. But is this average lending rate calculated on newly incurred balances in a certain period, or is it calculated on the total outstanding balances of credit institutions? Depending on the calculation method, there will be significantly different results. If the average lending rate is calculated on newly incurred balances, in practice, some large banks have occasionally announced this rate, which tends to fluctuate according to the latest interest rate movements. The SBV also monitors this criterion through regular reports from banks and has frequently announced it in 2023. If calculated on total outstanding balances, this average lending rate will be affected by (i) older debts with higher interest rates in the past; (ii) the interest rates of bad debts that may still be subject to overdue rates. Clearly, banks do not want to disclose an average lending rate far higher than the general level due to high rates applicable to old debts, as it would affect their competitive advantage when customers choose banks primarily based on the average lending rate. And challenges With different capital structures and business strategies, disclosing average lending rates will pose significant competitive challenges. This proves especially true for small-scale banks with high input capital costs, low amounts of equity, limited access to other funding sources, and low diversification in input capital sources. Greater advantage will belong to banks with low input interest rates, including banks with extensive networks, good brands that often set low savings interest rates like state-turned-shareholding banks; banks with large corporate deposit ratios helping maintain high CASA; banks with large foreign currency deposits; and banks with easier access to cheap international trade finance sources. Large differences in input capital costs among banks will lead to significant differentiation in output lending rates. The strategy on the focal credit customer segments will also affect the average lending rates of banks. Specifically, credit institutions with wholesale development strategies, focusing on large corporate customers with production and business loans, supplementing short-term working capital loans, or lending to priority sectors according to government directives with preferential interest rates, will naturally have lower average lending rates. Meanwhile, institutions with strengths in retail lending, primarily targeting individual customers, focusing on consumer loans, long-term loans for buying homes, cars, with unsecured lending products, will naturally charge much higher average lending rates. In other words, the lending structure towards retail or wholesale will lead to significant differences in average lending rates among banks. Banks with low average lending rates will have an advantage from the outset in attracting credit customers. Therefore, publicizing average lending rates but with more detailed rates for different customer segments and different loan products may be a more appropriate choice for some banks, to have criteria similar for comparison with other institutions. Some bankers have proposed that the SBV provide detailed guidance on this matter for consistent implementation, where the disclosed average lending rates should be specifically publicized for different customer segments and loan terms to be realistically applicable. The disclosed interest rates should be around the interest rates of commonly incurred balances to avoid misunderstanding, thinking that the interest rates are too high or too low for certain specialized credits. For borrowing customers, aside from referencing the disclosed average lending rates, the fees for asset appraisal, early prepayment fees, accompanying insurance purchase requirements, or loan interest and principal repayment mechanisms… are factors that customers need to consider when deciding which bank to borrow from. If small-scale banks do not have a competitive advantage when disclosing average lending rates, then large banks with low input costs and lower disclosed average lending rates may also face greater scrutiny. According to Directive 01 mentioned above, besides disclosing average lending rates, credit institutions also have to disclose the difference between deposit and average lending rates on their websites. Therefore, although the average lending rates disclosed by these large banks may be significantly lower than the general level, if the bank’s profit margin stemming from interest rates is too large, it could also lead to negative reactions from customers.