Commercial banks concerned about impact of lower interest rates
Commercial banks concerned about impact of lower interest rates
Private commercial banks have expressed concern that the decision made by the Bank of the Lao PDR to lower interest rates will impact on their business operations.
CEO and Managing Director of ACLEDA Bank Lao Ltd Mr Narin Phon told Vientiane Times yesterday that his bank has borrowed money from international financial institutions at a high interest rate which will make it difficult for his bank to give loans at a lower rate.
“We have borrowed money from international financial institutions with interest rates of 7-8 percent per year for US dollars and 10 percent for Lao kip but under the new regulations we are allowed to give loans at the rate of 12-14 percent (for Lao kip) per annum in the five-year period,” he said.
With only a 2 percent profit, Mr Narin said, his bank could not survive, saying that if his bank loses profits, it could impact the bank's tax obligations to pay the government.
He said at the moment, the bank is not feeling such an impact but the effect could take place in the next six months or one year.
Mr Narin speculated that people who used to get high interest rates could withdraw their money from the bank and shift it to deposit with micro-finance institutions or make other investments that offer high returns.
Another private commercial bank, which asked not to be named, commented that the decision made by the Bank of the Lao PDR to lower interest rates was made quite hastily so it will be difficult for commercial banks to adjust to the situation.
But in the long run, he believed, the commercial banks could adjust to the situation an d more money could be generated into productivity and the economy due to the lower interest rates for loans.
Prior to this, some commercial banks faced challenges of giving loans to the business sector due to the high interest rate for loans.
The decision made by the Bank of the Lao PDR to lower interest rates came into force earlier this month, which is a major change in the banking sector.
Deputy Governor of the Bank of the Lao PDR Mr Sonexay Sitpasay attributed the main reason for lowering the interest rate to reducing the loan rates and production costs and thereby stimulating economic activity.
The lower production costs will contribute to boost domestic productivity for commercial purposes and enable Lao products to be competitive on international markets.
The interest rate will change every year based on the inflation rate. This year, average inflation stood at 4.13 percent so the interest rate levied on a one year loan will be 2 percent more which will be a minimum of 6.13 percent.
Meanwhile the loan repayment rates levied by the banks cannot exceed the deposit interest paid for a comparable period by more than 4 percent.
For instance, if a particular bank pays 6.13 percent for a one year deposit, a comparable one year loan cannot attract interest of more than 10.13 percent.
