Vietnam VP Bank cuts lending to ensure liquidity

HANOI, Aug 7 (Reuters) - Vietnam's VP Bank, 10-percent owned by Singapore's Oversea-Chinese Banking Corp (OCBC.SI), has been reducing loans to avoid credit risks due to a low ceiling rate for lending, a state-run newspaper reported on Thursday.

The State Bank of Vietnam, or the central bank, has been keeping its 14-percent base rate unchanged since June 11, based on which banks can lend at up to 21 percent per year.

"With the lending rate of 21 percent per year banks do not make profit," VP Bank Chief Executive Le Dac Son was quoted by the Saigon Economic Times weekly as saying.

"Having forecast economic difficulties, we have to actively cut outstanding loans to ensure liquidity and reduce credit risks," he said in an interview with the weekly.

Outstanding loans at the Hanoi-based unlisted VP Bank in June dropped 6.3 percent from February to 14.9 trillion dong ($904 million) and are expected to fall to 14 trillion dong by September, Son said.

VP Bank, or Vietnam Bank for Private Enterprises, made a gross profit of 120 billion dong in the first half of this year, less than half the 313 billion billion dong in gross earnings for the whole of last year, the weekly reported.

The central bank said loans in July rose 0.7 percent from June, slowing from monthly growth of 1.22 percent in June while outstanding loans during the first seven months of 2008 expanded 18.36 percent from the end of 2007.

Lending in Vietnam so far this year is in line with a policy by the central bank, which aims to curb annual credit growth at 30 percent to help subdue double-digit inflation, after loans surged 54 percent last year.

The central bank has drained money from banks through market operations and by raising banks' obligatory reserves. It also raised interest rates three times since January, with the last increase in June for the base rate from 12 percent previously.

Separately, the central bank said it has approved VP Bank to sell another 5 percent of stake to OCBC, allowing Singapore's third-biggest bank to own 15 percent of VP Bank.

Vietnam caps the foreign ownership in a domestic bank at 30 percent, with a 15-percent limit for a strategic investor. ($1=16,489 dong) (Reporting by Ho Binh Minh; Editing by Kim Coghill)