Even though several measures and programs have been introduced to help businesses with substantial support to survive this worsening phase, such as by debt restructuring, reduced or exemption of interest on loans, it is becoming increasingly clear that just the support of banks will be insufficient to revive the economy.
Banks under burden
The Vietnamese economy is based on loans and debts, and though the private sector businesses are not all dependent on bank loans, their efforts have not been as fruitful as expected. Credit growth over the past few years has been 12% to 14% per annum, and credit debts in the entire banking system by the end of 2019 were at approximately VND 8.2 mn-bn. Also, credit-debt-to-GDP ratio has increased continuously year after year, with 101% in 2014, 111% in 2015, 122% in 2016, 130% in 2017 and 2018, and 136% in 2019. This indicates that the economy depends more and more on loans than the value of products made.
Companies usually operate their business activities based on debts, hence slow sales have recently pushed businesses into deeper trouble, leading to a shortfall in capital and less production and business activities, which then have led to a shortfall in capital to pay back their loans. This is the main reason why banks have stepped forward to offer support to companies in the current case scenario where the outbreak of the Covid-19 pandemic has created many problems and a shortage of spending capital.
Over the past three months, the State Bank of Vietnam (SBV) has urged commercial banks to restructure the debts of businesses and lower interest rates on loans to businesses and individuals that have been badly hit by the pandemic. Figures from SBV for the economic sector show that by 20 April 2020, credit institutions (CIs) had maintained debt groups for 166,544 clients with a total debt amount of VND 62,835 bn and reduced interest rates for 14,368 clients for a total debt amount of VND 12,319 bn. Lower interest rates were also given on VND 948,407 bn, with a total interest of around VND 3,530 bn.
Banks have also promised to provide fresh loans of a total VND 511,230 bn at lower interest rates, so that companies can carry out plans for production and business activities. Mr. Dao Minh Tu, Deputy Governor of the State Bank of Vietnam, said that state-owned commercial banks must expect to see profits decline by about 40%. For instance, Vietcombank, which made a profit of around VND 22,000 bn last year, is expected to see its total profit drop by 30% to 40% this year, which means it will lose at least VND 8,000 bn on the lower interest rate plan. Mr. Nguyen Duc Vinh, General Director of VPBank, said that CIs have had to minimize on expenses, reduce salary budgets and launch various campaigns in a move to bring in sufficient funds. VPBank may have to cut about VND 1,000 bn in expenses this year, and it has already cut expenses by more than VND 200 bn in the first quarter of the year.
Support packages insufficient
Support from banks is of great significance for businesses at this time, however, such assistance will be provided for a certain period of time only. According to a finance expert, banks have decided that support for companies also means assistance for the banks themselves, but the current support packages last for a short time only, and more decisions will be made later, depending on the actual impact of the pandemic.
Many finance experts believe that support packages from commercial banks are aimed to only help those customers who can fulfill the necessary requirements set forth by banks to ensure credit safety, and sustain the development of the bank giving the credit loan. That is to say that the bank will prioritize loan to a customer who has the capacity to pay back the loan.
A recent report by a market analysis company says that the economy now has two groups of companies, one with income and the other without. Although short-term and long-term debts have been restructured to extend debts in 2020 for both these two groups, they will still have to incur operational costs, loan interest costs, and payment to short-term sellers in 2020. Therefore, it will be hard to maintain operations during and in the aftermath of the pandemic.
The future of corporate companies does not look bright right now, but in any situation, banks will still have to ensure safety of their system. Therefore, it will be extremely hard to rely on the monetary policies of the banking system to enable companies to maintain their operations during the pandemic and make a significant recovery after that. The recovery of the companies will obviously need assistance from fiscal measures. Decree No.41/2020/NĐ-CP has been effective since 8 April, which provides for delays in the payment of taxes and land rentals. The initial planned VND 30,000 bn package for delayed payment of taxes has been increased to almost VND 180,000 bn now.
According to a study by a group of researchers at the National Economic University in Hanoi, companies have given the lowest points to the support policy on delayed payment of corporate income tax, value added tax and land rentals. Researchers believe it would be better to offer reduction or exemption of tax, instead of extended or delayed payment periods. Also, some companies have asked for a delay of payment of tax and land rentals for a longer time period of five months from that stated in Decree No.41/2020, because they say this delay period is too short, and companies will suffer severely if their business activities do not have sufficient recovery time.
Dr. Nguyen Tri Hieu, a finance and banking expert, has suggested that the Government should provide capital from the State budget and a support package of about VND 150,000 bn, equivalent to 2% of the GPD of Vietnam, to directly assist small and medium-sized enterprises (SMEs) by authorizing banks to disburse the said amount. In this way only will we be able to make it possible for SMEs to overcome financial distress and make a decent recovery. While on the other hand, the bank-capital-based support package with stricter requirements under bank regulations will continue to keep many vital companies in a state of uncertainty with fewer chances of recovery or continued survival.