Ceilings for deposit and loan interest rates have been imposed in an attempt to manage and lower the interest rate that commercial banks charge borrowers, the central bank governor has said.
Governor of the Bank of the Lao PDR Dr Somphao Phaysith recently made the comment as he detailed bank loan policies to boost production and economic growth in response to questions raised by members of the National Assembly (NA) during the ongoing ordinary session.
The central bank has stipulated that the deposit interest rate for commercial banks must not exceed the inflation rate by more than 2 percent. The difference between the deposit and loan interest rates must not exceed 4 percent, a decrease from the 5 percent imposed previously.
Interest rates for both deposits and loans have decreased compared to previous rates, which should be acceptable, the governor said.
The central bank stepped in last year to manage interest rates after learning the rates were previously too high.
Commercial bank lending rates were driven by market mechanisms from 1995 to 2013. The demand for loans has increased so commercial banks have raised interest rates on deposits to attract more depositors. The increase in deposit rates and other administrative costs drove loan interest rates higher, causing the central bank to intervene.
I n addition, the central bank charges only about 5 percent or slightly more than 5 percent from commercial banks who borrow short-term loans from the central bank for their financial liquidity.
The explanation came amid complaints that interest rates on bank loans in Laos were too high.
For example, interest rates charged by Banque Pour Le Commerce Exterieur Lao Public (BCEL) start from 9 percent for loans in kip with a lending period of no more than 12 months. Interest rates for different borrowing currencies and different levels of risk are charged differently.
The governor said multiple banking policies have been applied to support and drive economic growth, adding that since a few years ago the central bank has permitted commercial banks to use almost all their registered capital to be released as loans.
In addition, banks have mobilised capital from overseas financial sources to be released. As a result, banks have attracted considerable deposits.
By July (the 10th month of the 2015-16 fiscal year), commercial banks had accumulated more than 59,616 billion kip in deposits representing 54.84 percent of Gross Domestic Product (GDP). This was an increase of more than 5,692 billion kip compared to the same period last fiscal year.
Commercial banks will strive to increase deposits to 57 percent of GDP by the end of 2016 and further increase this to 84 percent by 2020.
Credit [loans] is increasing every year, Dr Somphao told the session.
We will do all we can to create conditions that are conducive to business growth.
The inflation rate has been maintained at about 1.2 to 1.3 percent.
The governor told the parliament the central bank had undertaken a study and was prepared to issue a new regulation that would allow businesses including importers to borrow bank loans in foreign currency to facilitate their trade.
The current regulation permits only those businesses whose income is in foreign currency to borrow in foreign currency.
As of July, there are 42 commercial banks and 158 legal financial institutions, which are not banks.
Source: Vientiane Times