Early debt payment giving banks headaches

VietNamNet Bridge – A lot of borrowers are accepting fines to be able to pay debts off early due to high interest rates. Meanwhile, commercial banks are not at all pleased by this.

Borrowers would rather pay debts early

In September 2008, P.T.C in HCM City borrowed VND200mil for five years with the interest rate of 2% per month from Asia Commercial Bank. The credit contract stipulated that the borrower would have to pay the fine of 0.17% per month (VND100,000 at minimum, and VND10mil at maximum) if it wanted to pay the loan off early.

One month after getting the sum of money, C decided to pay off the VND200mil debt, and so paid the fine of VND20mil.

C said he well knew the fine was 10% of the loan, but he still decided to pay it off early because he would have had to pay too much interest if he had kept it.

“I would have been up to my ears in debt if I had had to pay the interest rate of 2% per month, and additional charges,” he said.

P. Hong in Tan Binh district in HCM City said that in early 2008, she got a 5-year loan worth VND900mil from VIB Bank to purchase high-grade apartments in Tan Binh district. Hong has to pay VND10mil a month in interest to the bank. As the interest rate increased, VIB has raised the interest rate to 1.75% per month. As such, Hong has to pay VND2mil a month more to the bank.

Therefore, Hong has decided to pay the debt before it becomes mature, accepting the fine of 0.2%, or VND10mil.

The director of a commercial bank said that he has received a lot of calls these days about how to deal with the credit contracts in which borrowers want to pay debts off early.

The director said that the bank wants to negotiate with clients on an interest rate adjustment which can benefit both sides.

Dam The Thai, Personal Banking Director of An Binh Bank, also said that many banks are trying to negotiate with borrowers on interest rate adjustments, as they do not want clients to pay debts off early.

As borrowers pay debts beforehand, banks lose credit contracts, while they still have to pay high interest rates on the capital they mobilised before.

What to do?

Thai said that though banks really do not welcome early debt repayment, they have to accept it.

It is clear that borrowers who can pay debts early have good business and have good solvency. This means that though banks may lose interest on the credit contracts, they are not worried about the solvency of the businesses.

The most reasonable behaviour in this context is that the two sides should cooperate to find a reasonable interest rate and avoid breaking the contracts.

Experts have also said that clients should ask banks to adjust the interest rates of credit contracts so that they can enjoy low interest rates, instead of paying debts beforehand and paying fines. This proves to be the optimum solution for both banks and borrowers, as it can help reduce difficulties for both of them.

Quynh Chi