"Banks who want to keep their clients should quickly cut their lending rates," the Vietnam Economic Times quoted State Bank of Vietnam Governor Nguyen Van Binh as telling business people in Danang on Thursday.

The Vietnam Economic Times, in a report on its web site (vneconomy.vn), said the governor told his audience that deposit rates - which are regulated by the state - could be cut by at most 1 percentage point this year. Binh said it was therefore in their interest to reduce lending rates.

"Otherwise, if they wait until the markets recover before bringing rates down, their market share will definitely shrink," the governor said.

In Vietnam, short-term deposit rates at 8 percent. Loan rates range from 9 percent to around 16 percent, and state media have quoted company executives as saying they can pay as much as 18 percent interest.

High loan rates have squeezed many of the country's small and medium-sized businesses, nearly 100,000 of which have had to cease operations in the past two years.

Many investors and economists see high loan rates and major problems of bad debts at banks as root cause of an economic slowdown. The economy last year grew 5.03 percent, the lowest since 1999, and the government has projected 5.5 percent growth this year.

The government has said it had ordered the central bank to bring down interest rates in an attempt to aid the economy and help businesses struggling to get loans and cope with high unsold inventory.

The central bank cut the key policy rates six times last year, but banking remains a key problem. Bank lending fell 1.23 percent in January from December and in February rose just 0.26 percent, official data showed on Tuesday.

Awaiting reforms

Economists and investors are waiting to see implementation, or at least a detailed plan, of measures to deal with banking problems in order to gauge Vietnam's commitment to its reform promises.

They see improvements in the macro economy, such as increased exports and a sizable cut in the annual inflation rate - from 23 percent in August 2011 to less than 8 percent at present - as signs Vietnam is on the right track, but say real reforms are yet to show.

The country saw its first trade surplus since 1993 last year, and the Ho Chi Minh Stock Exchange has been Southeast Asia's best performer this year, up nearly 18 percent.

The government may approve the central bank's plan on bad debt settlement and issue a decree on the establishment of an its asset management company by March 23, the Vietnam Economic Times said.

The long-awaited firm, sometimes referred to as a "bad bank", would not determine the non-performing loan (NPL) settlement, but banks would have to deal with their own bad debt first, Binh was quoted as saying on Thursday.

The central bank has yet to provide details on how the asset management firm would work. The government in February put banks' NPLs at 6 percent, down from nearly 9 percent, but many economists say the real level of bad debt could be much higher.

Vietnam has 38 commercial banks, four of which the state has controlling stakes in. It has small holdings in most of the others.

Reuters - March 21, 2013