Interest rates wing clipping for businesses

Businesses suffer from a chronic capital shortage. However, the problems seems more serious in 2011, as commercial banks plan to tighten credit.

Tran Ngoc Anh, Director of Do Ba Company Ltd, says that in general, a footwear company can get a gross profit of 5-7 percent. “The production cycle takes three months, from the time when companies collect input materials, sign contracts, make and then sell products. if the profit is five percent per cycle, the companies would get the maximum profit of 20 percent per annum. “If we then deduct the bank loan interests, we don’t get any profit,” Anh says.

He went on to say that if the interest rates remain at current levels footwear industry will not be able to compete on the international market

The orders received by Footwear enterprises can ensure enough jobs until the second quarter of the year. Many of them say they are negotiating for the orders for the third quarter. Though there are many orders, enterprises still feel worried, because the high interest rates will make the production costs increase.

Anh says that the input costs have increased by 20 percent, while enterprises can only raise the sale prices by 10 percent at maximum in the negotiations with partners.

Sharing the same view, Dien Quang Hiep, Director of Mifaco Company, says that the current overly high interest rates will only encourage businesses to provide services or pour money into the real estate market, and discourage production.

A senior executive of Duy Tan Plastics Company also says his company now has to borrow money at the interest rate of 18-19 percent per annum, which makes it unable for the company to expand its production. “We expanded our production in all the previous years. However, we will have to delay our plans to expand this year because of the overly high capital costs,” the executive says.

Tran Tan An, Deputy General Director of Vissan, a food processor and supplier, has called on the State to take actions to ease the interest rates and help businesses expand their production and create more jobs. An anticipates big difficulties in 2011: high interest rates, fluctuating exchange rates and fuel price increases.

According to financial experts, there are two ways for enterprises to improve their financial capability. First is to increase the stockholder equity and debt capital in a suitable proportion .

In order to increase stockholder equity, enterprises can issue popular stocks, sell preferential shares, sell convertible bonds or make M&A (merger and acquisition) deals. These are the measures of mobilizing the strength from outside.

Besides, enterprises can also improve their financial capability internally: they can persuade shareholders to accept lower dividends, which would allow reserving more capital for expanding production.

However, businesses have been warned that it will be difficult to implement the measures.

As for the former measures, Nguyen Huong Loan, a senior executive of Maritime Bank says that with the gloomy stock market, institutional investors will be hesitant to make investment, which will badly affect the businesses’ plan to mobilize capital through the stock market.

It will be also not easy for enterprises, especially small and medium enterprises, to list their shares on the bourse to seek capital. There are only 650 enterprises out of the existing 520,000 enterprises in the country with their shares listed on the two bourses.

Le Tham Duong, Dean of the Business Administration Faculty under the HCM City Banking University, says that only big enterprises can mobilize capital by issuing convertible bonds. Meanwhile, M&A, though considered a good solution, has not been widely used in Vietnam due to the lack of an appropriatelegal framework.

As it is difficult to call for capital from outside sources, enterprises can use their internal capacity. However, they have been warned that it would be very difficult to persuade shareholders to accept lower dividends, because Vietnamese shareholders all want quick profit.

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