Deposit rates inch down to reluctant 11%

A customer scrutinizes deposit rates offered by Vietnam Asia Commercial Bank. Deposit rates are now at the same level of 11% for terms from one to 36 months - Photo: Thuy Trieu

HCMC – Almost all commercial banks have complied with a pledge made earlier to reduce their deposit rates, but signs of reluctance are seen in the new move when lenders quote the same rate of 11% for deposits of all terms.

Since late last week, banks have cut their rates for Vietnam dong deposits to a maximum of 11% per year for terms starting from one month instead of the previous level of 11.2% under their commitments with the Vietnam Banks Association.

Some big banks such as Asia Commercial Bank, Vietnam Export Import Commercial Bank and Vietcombank have revised their deposit rates for Vietnam dong with the highest rate standing at 11% per year.

On Monday, many other banks also followed suit.

The new common rate is believed to put smaller banks at a disadvantage in competition with larger institutions. Furthermore, operating costs will also be higher as banks may attract short-term funds only when offering the same interest rate.

That means banks will have to rely on promotions to lure depositors.

At Vietnam Asia Commercial Bank, those who deposit at least VND20 million for six, nine, or 12 months can enjoy a lot of incentives such as added rate for depositors older than 50 years, bonus cash depending on the deposit value, and vouchers to buy goods.

Therefore, depositors now do not need to compare interest rates offered by different banks but will look at available promotion programs.

However, lower borrowing rates will make it possible for banks to cut lending rates as well, a move sought by the Government and the central bank.

Dam The Thai, deputy general director of HDBank, said that if all banks agree to lower deposit rates, the capital cost will fall, offering lenders a chance to cut their lending rates.

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Banks begin to cut back interest rates

Photo: Tuoi Tre

Many commercial banks Friday started to cut their deposit interest rates by 0.2 percentage points to 11 percent per year in compliance with a recent agreement.

The agreement, made between the Viet Nam Banks Association (VNBA) and the State Bank of Vietnam, asks banks to cut their interest rates to no more than 11 percent, instead of 11.2 percent.

The move is designed to urge banks to cut capital input costs and help enterprises access more credit.

Asia Commercial Bank (ACB) is the first bank to apply the new interest rate on 36 month deposits. Interest rates for one week to 24 month deposits range from 9.9 to 10.88 percent per year.

But ACB will give depositors cash as a bonus, which is equal to 0.15 percent of their primary deposit.

Earlier this week, Techcombank, DaiA Bank, HDBank also cut their deposit interests rates to below 11.2 percent.

As inflation pressures continue to grow during the final months of the year interest rate cuts would be executed with prudence with respect to the market’s behavior and the depositor’s expectations, said VNBA.

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Banks say cutting rates still a challenge

HCMC – Several bankers say it still proves difficult to cut interest rates in the rest of the year, borrowing and lending alike, as instructed by the Government although their current capital has got a spur following amendments to Circular 13.

The general director of a bank in HCMC’s District 1 said that his bank would not lower the lending rate any more between now and the end of the year as its profit up to date was so low compared to the year’s target. In addition, given current deposit rates, mobilization in Vietnam dong at the bank cannot increase much so the possibility of trimming the rate would be low, he added.

Another banker in HCMC said the rate cut would be minimal if any.

After Circular 13 was amended, which effectively means quantitative easing, the amount of current capital has increased as banks can use part of corporate deposits under call terms for lending, a practice banned under the circular.

However, “although there is the possibility of lower lending rates, the reduction will not be substantial,” explained the banker, who serves as deputy director of the HCMC branch of a big bank.

In September, Vietnam Banks Association had meetings with banks in Hanoi and HCMC to encourage them to reduce interest rates under the Government’s requirement. The association encouraged banks to cut mobilization rates to 11% from October 15 from the current 11.2% per year.

Early this month, the association has sent a document asking banks to comply with the requirement, but Duong Thu Huong, the association’s general secretary, told the Daily that banks would look at each other before making any rate cut decision due to fear of losing depositors.

“Banks are very much hesitant over the rate cut as demanded by the association,” Huong said.

In fact, commercial banks have launched a lot of promotion programs to lure depositors. Besides, according to the leader of a joint-stock bank, several lenders even negotiate deposit rates with clients at this time.

However, Huong also said that besides amending the Circular 13, the interest rates are also determined by the country’s inflation rate this year, which usually gains a faster pace towards the year’s end, as seen in the September CPI at 1.31%.

In addition, deposit rates for the U.S. dollar and gold are increasing, making it harder to cut the rate in Vietnam dong. Therefore, Vietnam Bank Association has asked banks to lower their dollar and gold rates also.

Many banks said that their deposits in gold have strongly increased after the interest rates have increased to 1%-2% per year.

According to the third quarter report of the State Bank of Vietnam, lending rates in Vietnam dong for agricultural sector, exporters, small and medium enterprises are around 12%-12.5% at State-owned banks and 12.5%-13.5% at joint-stock banks while rates for other loans are from 13% to 15% per year. However, only banks’ close corporate clients can enjoy those rates while others are charged at least one percentage point higher.

The report also said that mobilization and lending rates could not decrease to the levels asked by the Government (deposit rate at 10% and lending rate at 12%) due to high pressure on inflation and banks’ difficulties in mobilizing fund.

The new report of the National Financial Supervisory Commission said that after changes to Circular 13, the capital flow has got bigger but basically it is still restricted by the loans-to-deposit ratio at 80% for banks.

In 2009, banks’ outstanding loans accounted for 96.93% of total mobilization, and the ratio was 92.96% in the first half this year. Reducing the ratio further to 80% from October 1 has also proved a hard nut to crack for many banks.

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Banks say cutting rates still a challenge

HCMC – Several bankers say it still proves difficult to cut interest rates in the rest of the year, borrowing and lending alike, as instructed by the Government although their current capital has got a spur following amendments to Circular 13.

The general director of a bank in HCMC’s District 1 said that his bank would not lower the lending rate any more between now and the end of the year as its profit up to date was so low compared to the year’s target. In addition, given current deposit rates, mobilization in Vietnam dong at the bank cannot increase much so the possibility of trimming the rate would be low, he added.

Another banker in HCMC said the rate cut would be minimal if any.

After Circular 13 was amended, which effectively means quantitative easing, the amount of current capital has increased as banks can use part of corporate deposits under call terms for lending, a practice banned under the circular.

However, “although there is the possibility of lower lending rates, the reduction will not be substantial,” explained the banker, who serves as deputy director of the HCMC branch of a big bank.

In September, Vietnam Banks Association had meetings with banks in Hanoi and HCMC to encourage them to reduce interest rates under the Government’s requirement. The association encouraged banks to cut mobilization rates to 11% from October 15 from the current 11.2% per year.

Early this month, the association has sent a document asking banks to comply with the requirement, but Duong Thu Huong, the association’s general secretary, told the Daily that banks would look at each other before making any rate cut decision due to fear of losing depositors.

“Banks are very much hesitant over the rate cut as demanded by the association,” Huong said.

In fact, commercial banks have launched a lot of promotion programs to lure depositors. Besides, according to the leader of a joint-stock bank, several lenders even negotiate deposit rates with clients at this time.

However, Huong also said that besides amending the Circular 13, the interest rates are also determined by the country’s inflation rate this year, which usually gains a faster pace towards the year’s end, as seen in the September CPI at 1.31%.

In addition, deposit rates for the U.S. dollar and gold are increasing, making it harder to cut the rate in Vietnam dong. Therefore, Vietnam Bank Association has asked banks to lower their dollar and gold rates also.

Many banks said that their deposits in gold have strongly increased after the interest rates have increased to 1%-2% per year.

According to the third quarter report of the State Bank of Vietnam, lending rates in Vietnam dong for agricultural sector, exporters, small and medium enterprises are around 12%-12.5% at State-owned banks and 12.5%-13.5% at joint-stock banks while rates for other loans are from 13% to 15% per year. However, only banks’ close corporate clients can enjoy those rates while others are charged at least one percentage point higher.

The report also said that mobilization and lending rates could not decrease to the levels asked by the Government (deposit rate at 10% and lending rate at 12%) due to high pressure on inflation and banks’ difficulties in mobilizing fund.

The new report of the National Financial Supervisory Commission said that after changes to Circular 13, the capital flow has got bigger but basically it is still restricted by the loans-to-deposit ratio at 80% for banks.

In 2009, banks’ outstanding loans accounted for 96.93% of total mobilization, and the ratio was 92.96% in the first half this year. Reducing the ratio further to 80% from October 1 has also proved a hard nut to crack for many banks.

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Banks expected to reduce interest rates

Commercial banks are expected to lower interest rates on deposits and
loans in compliance with the State Bank of Vietnam's Circular 19, which
took effect on October 1.

The circular, issued on September 27, amended content in Circular 13 on capital-adequacy ratios.

The major adjustment is the redefinition of deposits, which would ease the pressure on banks to mobilise funds.

Because deposits from the State Treasury are counted in the banks'
mobilisation funds for lending, banks would be able to expand the number
of deposits.

Commercial banks' demand deposits from the State Treasury this year were estimated at 57 trillion VND (2.94 billion USD).

That amount is considered to be sufficient to use as a cheap source of
capital, and to balance the high interest rates on mobilised capital.

The circular also allows banks to use 25 percent of
non-term deposits from enterprises as a source of funding for lending.
It can be used because this source of non-term deposit is often stable
at 20 percent to 30 percent.

Three months of loans from other credit institutions can be added to funds for lending, according to the circular.

Small banks will be able to more easily access cheap capital from
larger banks, with the current interbank interest rate ranging from 8 to
9 percent.

After the circular took effect on October 1, the market showed signs of lower interest rates.

For example, Dai A Bank has eased deposit rates by 0.14 percent to 0.2 percent per year.

Customers with deposits in Vietnam dong for a one-month term and US
dollars for one to two months would be entitled to get interest rates of
10.95 percent per year, and 3.75 percent per year, respectively.

Nam A Bank has announced a lending programme of up to 1 trillion VND
(51.5 million USD) for small – and medium – sized enterprises'liquid
capital at interest rates of 13 percent for dong and 5 percent for the
US dollar.

Western Bank has lowered loan rates for
small enterprises by 1 percent, and transaction fees for the first three
months by 30 percent.

An Binh Bank has given priority to small enterprises by offering an annual 1 percent rate lower.

Phuong Dong Bank has cut car loan rates by 0.5 percent.

The Vietnam Banks Association (VNBA) has recently proposed that
commercial banks cut down highest deposit interest rate from 11.2
percent per year to 11 percent.

VNBA has also
suggested that banks slash the demand deposit interest rate from the
common rate of 4.8 percent to ease business expenses, which would lower
lending interest rates.

VNBA said that the deposit
rate for US dollars at commercial banks, at 4.7 percent to 5.2 percent
per year, is an emerging trend. The rates are currently very high in
comparison to the international market.

Therefore,
VNBA has urged commercial banks to reduce US-dollar deposit rates to
create a balance with dong-deposit rates, creating conditions for dong
interest rates to drop.

Le Tham Duong, head of the
business administration department of HCM City University of Banking,
said because the total outstanding loan growth had been quite low, banks
were entering an output race that would lead to the fall of both
deposit and loan interest rates in the near future.

Total trading volume in Vietnamese dong was 65.93 trillion VND (3.38
billion USD) during the final week last month, down 29.55 percent
against the previous week, according to a report issued by the State
Bank of Vietnam.

The dramatic decrease in interbank
trading signals that liquidity at banks has improved after the central
bank loosened capital regulations through the amendment of Circular 13
taking effect last week.

During the past two months, the trading volume hovered around 90-100 trillion VND (4.61-5.12 billion USD).

Average interbank trading increased slightly by 0.13-0.19 percent for
three month loans. Interbank trading has increased on average by
6.77-8.52 percent per year. Interest rates for loans that exceed three
months were down 0.06-0.48 percent to about 10.12-10.55 percent.

During the same period, total trading volume in the US dollar was also
15.37 percent to 2.52 billion USD. Interest rates for the dollar loans
were about 0.33-1.43 percent per year.

As of
September 27, credit growth in the banking industry was 19.27 percent.
Total loan allocation for property was 218 trillion VND (11.18 billion
USD), up 18 percent, loans for securities were up 19.8 percent to reach
15 trillion VND (769.23 million USD), loans for consumers increased by
19.7 percent to 151 trillion VND (7.74 billion USD).

Loans for agricultural and rural development and small and medium enterprises were up about 19-20 percent./.

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Banks turn cautious about rate cuts

HANOI - Banks in Vietnam have received another call to lower interest rates, but neither the lenders nor the central bank are expecting any cuts to be large, said economists.

The Vietnam Banks Association, which acts as a mediator between the State Bank of Vietnam and lenders, called on banks last Wednesday for the third time in the past six months to cut dong deposit rates, this time to 11 percent from 11.2 percent by Oct. 15.

The association referred to amendments the central bank made to a new set of banking safety rules last Tuesday, suggesting that they would make it easier in future to raise deposits.

But the industry association had previously urged banks to slash deposit rates to 10 percent and lending rates to 12 percent by the end of September, and the new target of 11 percent appeared to reflect an understanding that macroeconomic developments were making it hard to bring rates down by much.

The association's request came as the Ministry of Planning and Investment said economic growth would reach 6.7 percent this year, exceeding the official target of 6.5 percent.

September annual inflation hit 8.92 percent, quickening for the first time in half a year.

"With current market movements, the recent decrease in interest rates is positive, but they cannot drop much more," the newspaper Vietnam Investment Review quoted government adviser Tran Du Lich as saying.

Many lenders considered the central bank's original set of safety rules too stringent. Lich said the amendments may not have a direct impact on rates, but they aimed to give banks with low liquidity more time to prepare for new requirements.

The central bank was also urging lenders to cut rates to help spur economic growth, but its enthusiasm appeared curbed by the 1.31 percent surge in consumer prices in September.

"Monetary policy needs to guarantee the two targets of boosting economic growth and containing inflation are met. It is necessary to cut interest rates, but it requires time and gradual steps", Nguyen Dong Tien, deputy governor of the State Bank of Vietnam, said last week.

But Le Dang Doanh, an independent economist, warned that a minor cut in rates would not be enough.

"Vietnam's economic growth this year has been fueled by public investment and an increase in exports. If interest rates remain high, businesses, especially those in the private sector, will feel the heat early next year," he said.

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Central bank holds steady on prime rate

The prime rate would be kept unchanged at 8 percent for the 11th
consecutive month as part of the ongoing effort to help commercial banks
lower lending interest rates, the State Bank of Vietnam said on
Sept. 27.

The refinancing and overnight rates for
electronic payments on the interbank market would also remain at 8
percent and the discount rate at 6 percent, the bank said.

Since the central bank gave the go-ahead for a negotiable interest
rate mechanism in March, the prime rate had not had direct impact on the
market lending interest rate that it used to, analysts said.

However, the benchmark interest rate was seen as a way of signalling
the monetary policy direction of the central bank at any given period.

The Government has ordered commercial banks to cut
lending rates to 12 percent and deposit rates to 10 percent in order to
help enterprises access credit.

Prevailing loan rates now range between 12-15 percent.

Many banks expected Circular No13's review to result in important
changes that would loosen credit requirements and help banks have more
capital on hand to make money and reduce interest rates./.

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Gold deposit interest rates increase

Interest rates for gold deposits suddenly soared, ranging from a low of 0.5 percent to a high of 1 percent in response to a dramatic rise in the global gold market last week.

The trend of increasing gold deposit interest rates was initiated by large banks but is now picking up in smaller banks.

The highest increase, 1.1 percent per year, in three-month gold deposit interest rates came from the Asia Commercial Bank (ACB).

Phuong Nam Joint Stock Commercial Bank raised their interest rates to 1 percent, from a stable 0.55 percent, based on a different set of terms; Sacombank has doubled its three-month gold deposits interest rates to 1 percent; and Dai A Joint Stock Commercial Bank hiked up their interest rate to at least 0.15 – 0.6 percent.

An official at a small commercial bank revealed that his company needed to increase gold deposit interest rates in order to stave off competition from other banks.

Deputy Director of ACB Do Minh Toan said that many customers believed that the price of gold was too high and expected gold prices to drop soon. As a result, they borrowed gold with a low lending interest rate. To avoid risks, some customers paid premiums to buy insurance for gold borrowing.

General Secretary of the Vietnam Banks Association Duong Thu Huong said that increasing interest rates may be a mechanism for banks to comply with the State Bank of Vietnam's new guidelines requiring banks to raise their capital adequacy ratio from 8 to 9 percent.

Senior consultant of the World Gold Council Huynh Trung Khanh said that commercial banks and investors should be cautious as gold prices will continue to increase due to high global demand for gold.

Experts said gold was in short supply because businesses collected gold in their domestic markets for export. According to the General Statistics Office, Vietnam exported US$1.34 billion worth of gold, equivalent to about 36 tons.

In August alone, Viet Nam exported $768 million in gemstones and precious metals, most of which was gold. However, gold imports were scarce in comparison leading to a gold supply shortage in the domestic market.

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Gold deposit interest rates increase

Interest rates for gold deposits suddenly soared, ranging from a low of
0.5 percent to a high of 1 percent in response to a dramatic rise in the
global gold market last week.

The trend of increasing gold deposit interest rates was iniated by large banks but is now picking up in smaller banks.

The highest increase, 1.1 percent per year, in three-month gold deposit
interest rates came from the Asia Commercial Bank (ACB). Phuong Nam
Joint Stock Commercial Bank raised their interest rates to 1 percent,
from a stable 0.55 percent, based on a different set of terms; Sacombank
has doubled its three-month gold deposits interest rates to 1 percent;
and Dai A Joint Stock Commercial Bank hiked up their interest rate to at
least 0.15 – 0.6 percent.

An official at a small
commercial bank revealed that his company needed to increase gold
deposit interest rates in order to stave off competition from other
banks.

Deputy Director of ACB Do Minh Toan said that many
customers believed that the price of gold was too high and expected gold
prices to drop soon. As a result, they borrowed gold with a low lending
interest rate. To avoid risks, some customers paid premiums to buy
insurance for gold borrowing.

General Secretary of the
Vietnam Banks Association Duong Thu Huong said that increasing interest
rates may be a mechanism for banks to comply with the State Bank of
Vietnam 's new guidelines requiring banks to raise their capital
adequacy ratio from 8 to 9 percent.

Senior consultant of
the World Gold Council Huynh Trung Khanh said that commercial banks and
investors should be cautious as gold prices will continue to increase
due to high global demand for gold.

Experts said gold was
in short supply because businesses collected gold in their domestic
markets for export. According to the General Statistics Office,
Vietnam exported 1.34 billion USD worth of gold, equivalent to about
36 tonnes. In August alone, Viet Nam exported 768 million USD in
gemstones and precious metals, most of which was gold. However, gold
imports were scarce in comparison leading to a gold supply shortage in
the domestic maret./.

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Interest rates rise for dollar deposits

Photo: Tuoi Tre

Several commercial banks have increased the annual interest rates they pay on US dollar deposits by 0.2 percentage points to an average of 4.5-5.2 percent, sparking worries of a new interest rate war.

Both Asia Commercial Bank and Eximbank have increased interest rates on three-month term deposits to 4.35 percent and on 12-month term deposits to 4.45 percent.

Vietcombank is offering 4.5 percent for a 12-monthterm deposit in US dollars while the Vietnam-Russia Bank, PG Bank and An Binh Bank are offering rates as high as 5.2 percent.

"In the latter part of the year the dollar supply is often limited, and to attract dollars, many banks raise interest rates," said Asia Commercial Bank deputy director Nguyen Thanh Toai.

Another senior official from the same bank who asked to remain anonymous said that the bank raised interest rates to hold onto its existing depositors and did not want to get involved in a new interest-rate war.

Total foreign currency deposits at the Ho Chi Minh City branch of the State Bank of Vietnam were down 4 percent last month against July to about $8.56 billion, according to the State Bank.

It was too early to tell whether a dollar shortage would solidify into a trend toward higher interest rates, said one treasury official at Vietcombank.

"The third and first half of the fourth quarter are the toughest time," he said. "December is the best time for dollars because of abundant remittance inflows and high export turnover."

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Interest rates rise for dollar deposits

Several commercial banks have increased the annual interest rates they
pay on US dollar deposits by 0.2 percentage points to an average of
4.5-5.2 percent, sparking worries of a new interest rate war.

Both Asia Commercial Bank and Eximbank have increased interest rates on
three-month term deposits to 4.35 percent and on 12-month term deposits
to 4.45 percent.

Vietcombank is offering 4.5 percent for a
12-monthterm deposit in US dollars while the Vietnam-Russia Bank, PG
Bank and An Binh Bank are offering rates as high as 5.2 percent.

"In the latter part of the year the dollar supply is often limited, and
to attract dollars, many banks raise interest rates," said Asia
Commercial Bank deputy director Nguyen Thanh Toai.

Another
senior official from the same bank who asked to remain anonymous said
that the bank raised interest rates to hold onto its existing depositors
and did not want to get involved in a new interest-rate war.

Total foreign currency deposits at the HCM City branch of the
State Bank of Vietnam were down 4 percent last month against July to
about 8.56 billion USD, according to the State Bank.

It
was too early to tell whether a dollar shortage would solidify into a
trend toward higher interest rates, said one treasury official at
Vietcombank.

"The third and first half of the fourth
quarter are the toughest time," he said. "December is the best time for
dollars because of abundant remittance inflows and high export
turnover."/.

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Overnight interbank rates exceed 8%

HANOI - The overnight interbank rates have unexpectedly exceeded 8% a year over the past few days after being kept below or around 7% for several months now.

The overnight interbank rates accelerated to about 8.4% on September 8, 2010 from 7.5% on September 7.

According to the central State Bank of Vietnam, the rates were relatively stable at below 7% a year from early June till end-August, and hovered around 6.9% on August 31. However, the rates climbed to 7.15% on September 1 and stayed above 7.1% until last Monday.

Le Thanh Van, deputy manager of the investment department of Vietnam Bank for Investment and Development attributed the surge to a sudden increase in demand for short-term capital from commercial banks, especially small ones, to invest in shares and real estates, and to make loans to equity investors.

Bui Quy Thanh, head of the securities analysis department in Bao Minh Securities said, said the sudden surge of the overnight interbank rate contributed to the steep fall in the main VN-Index, which she more than 12 points, or 2.65%, to close at 450 points last Friday.

Equity investors feared the movement could indicate banks were running short of money and therefore could limit access to loans for equity investments, while the base rate could go up if the trend continued in the next sessions.

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Overnight interbank rates exceed 8%

HANOI - The overnight interbank rates have unexpectedly exceeded 8% a year over the past few days after being kept below or around 7% for several months now.

The overnight interbank rates accelerated to about 8.4% on September 8, 2010 from 7.5% on September 7.

According to the central State Bank of Vietnam, the rates were relatively stable at below 7% a year from early June till end-August, and hovered around 6.9% on August 31. However, the rates climbed to 7.15% on September 1 and stayed above 7.1% until last Monday.

Le Thanh Van, deputy manager of the investment department of Vietnam Bank for Investment and Development attributed the surge to a sudden increase in demand for short-term capital from commercial banks, especially small ones, to invest in shares and real estates, and to make loans to equity investors.

Bui Quy Thanh, head of the securities analysis department in Bao Minh Securities said, said the sudden surge of the overnight interbank rate contributed to the steep fall in the main VN-Index, which she more than 12 points, or 2.65%, to close at 450 points last Friday.

Equity investors feared the movement could indicate banks were running short of money and therefore could limit access to loans for equity investments, while the base rate could go up if the trend continued in the next sessions.

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Credit sluggish as banks prefer bond purchases

Local commercial banks are more interested in bond purchases than providing loans, making the goal of lowering interest rates hard to reach, a senior government advisor said.

Interest rates have been high as capital flows do not move freely in the banking system in accordance with supply and demand, Le Duc Thuy, chairman of the National Financial Supervisory Commission, told Thanh Nien.

A tightened monetary policy has blocked money inflows, he said, noting that a restriction on interbank deposits prevents banks from lending their surplus cash to others.

The funds are flowing into government bonds instead, he said.

“At first look it seems like banks are losing money because they pay 11.2 percent on deposits and then invest in bonds with a yield of 10 percent,” Thuy said. “But in fact banks can use government bonds to get loans at the central bank’s refinancing rate of only 7 percent, hence (they make) a profit.”

“This is how banks have been doing their business, and it makes sense they are not interested in lending,” he said.

Thuy said the government should have sold its bonds to the central bank because right now it’s large commercial banks that benefit the most, leaving interest rates at high levels.

Prime Minister Nguyen Tan Dung in May told the State Bank of Vietnam to order lenders to bring down borrowing costs to 12 percent and cut the deposit rate to 10 percent.

The central bank said Wednesday that deposit rates were between 10.6 percent and 11.2 percent while lending rates ranged from 12 percent to 15 percent.

Vietnam’s “repeated” calls for commercial banks to lower their lending rates after tightening policy may damage market confidence, the International Monetary Fund warned this week.

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Credit sluggish as banks prefer bond purchases

Local commercial banks are more interested in bond purchases than providing loans, making the goal of lowering interest rates hard to reach, a senior government advisor said.

Interest rates have been high as capital flows do not move freely in the banking system in accordance with supply and demand, Le Duc Thuy, chairman of the National Financial Supervisory Commission, told Thanh Nien.

A tightened monetary policy has blocked money inflows, he said, noting that a restriction on interbank deposits prevents banks from lending their surplus cash to others.

The funds are flowing into government bonds instead, he said.

“At first look it seems like banks are losing money because they pay 11.2 percent on deposits and then invest in bonds with a yield of 10 percent,” Thuy said. “But in fact banks can use government bonds to get loans at the central bank’s refinancing rate of only 7 percent, hence (they make) a profit.”

“This is how banks have been doing their business, and it makes sense they are not interested in lending,” he said.

Thuy said the government should have sold its bonds to the central bank because right now it’s large commercial banks that benefit the most, leaving interest rates at high levels.

Prime Minister Nguyen Tan Dung in May told the State Bank of Vietnam to order lenders to bring down borrowing costs to 12 percent and cut the deposit rate to 10 percent.

The central bank said Wednesday that deposit rates were between 10.6 percent and 11.2 percent while lending rates ranged from 12 percent to 15 percent.

Vietnam’s “repeated” calls for commercial banks to lower their lending rates after tightening policy may damage market confidence, the International Monetary Fund warned this week.

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IMF warns Vietnam against rapid rate cuts

The International Monetary Fund warned Vietnam on Wednesday that it risks hard-won market stability by trying to cut lending rates too fast, and said it should maintain the level of the dong currency to safeguard financial calm.

"The repeated announcements by the government about the need to lower the commercial lending rates may be counter-productive," the IMF said in a regular review of Vietnam's economic health.

"A lack of coordination between monetary and fiscal policies, or the appearance thereof, would amplify market skepticism," it said in a statement.

"The government, therefore, needs to convince market participants that its priority rests with macroeconomic stability. For this purpose, staff believes that maintaining the current stable exchange rate ... should be the immediate goal for the government," the IMF said.

State Bank of Vietnam governor Nguyen Van Giau said last week that lending rates were expected to drop. But Giau said they were not falling quickly at present because banks were cutting deposit rates slowly.

The IMF said Vietnam's exchange rate regime policy should be reformed over the medium term.

"A move from the current system that is based on a basket of currencies including those of regional trading partners may be appropriate," the report said.

The IMF review also said there was room for further reduction in Vietnam's budget deficit. Total investment spending was expected to fall this year by three percentage points of GDP from the 2009 level to about 11 percent of GDP, the report said.

The IMF projected GDP growth of 6.5 percent this year and 6.8 percent in 2011.

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Dollar borrowers still wary, dong rates high

HANOI - Potential US dollar borrowers in Vietnam remain gun shy about taking out greenback loans three weeks after the central bank devalued the dong, despite signs that lenders have ample supplies, bankers said on Monday.

Demand for dollars was expected to pick up later in 2010, they said, likely piling renewed pressure on the currency.

"There could be a light fever this year," a currency dealer in Ho Chi Minh City said, noting that most of the demand came from importers.

The central bank cut the dong exchange rate by around 2 percent against the dollar on Aug. 18, saying the move was to help control the trade gap. It was the third devaluation since last November.

While rates on dollar deposits and loans remained stable in the second half of August, according to central bank reports, Eximbank said it had raised its dollar deposit rate by 0.2 percentage points to 4.65 percent as of last Wednesday.

It was the lender's second rate increase for dollar deposits since Aug. 18, a move bankers said was taken to catch up with the rising demand for dollar loans.

Banks in Vietnam had built up their dollar holdings before the devaluation so they were now long the dollar, the HCMC-based dealer said.

"We have dollars now sitting idle but have not found borrowers because they are afraid of the exchange rate risk," a Hanoi-based domestic bank executive said.

Industry officials have suggested that banks increase dong loans between now and year-end to meet an annual credit growth target of 25 percent set by the central bank. Loans at the end of July grew nearly 13 percent against last December, the central bank has said.

Bankers, however, said it was tough to increase dong lending now, given relatively high rates banks were paying to depositors.

"It is difficult to lower interest rates because banks have to maintain their market share and protect depositors, but in doing so they cannot cut deposit rates," the Hanoi-based bank executive said.

Banks were paying between 11.0 percent and 11.2 percent for dong deposits with terms from three months to one year, and lending the domestic currency at 13-15.5 percent.

Market rates were above a government goal which envisaged banks cutting dong deposit rates to 10 percent and lending rates to 12 percent to spur an expansion of credit to support economic growth.

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Lending rates to drop: central bank

Short-term lending rates in Vietnam are expected to come down, thanks partly to funds the central bank has extended to banks, State Bank of Vietnam governor Nguyen Van Giau was quoted on Wednesday as saying.

Lending rates were not falling quickly at present because banks were cutting deposit rates slowly, Giau said in an interview published by the Finance Ministry-run Vietnam Financial Times newspaper.

“But credit institutions are actively raising funds in coordination with funding support from the State Bank to meet credit demand for the economy,” Giau said in the interview.

“So, short-term lending rates will fall significantly, while the reduction of medium-and longterm lending rates requires time because long-term deposits often rise very slowly and account for a low proportion of overall deposits,” Giau said.

The central bank injects funds into banks via open market operations.

Bank deposits in Vietnam as of August 17 had risen 17.44 percent from the end of 2009, while credit expanded 14.15 percent, Giau said without giving any values.

Credit demand is expected to rise as usual in the last months of the year, Giau said, pledging further steps to keep annual inflation at around 8 percent, economic growth at 6.5 percent and an annual credit growth at 25 percent, as targeted.

The average rate for one-month interbank loans dropped to 8.56 percent during the week ending August 26, from 8.67 percent a week ago, and the rate on three-month loans also eased to 9.74 percent from 9.99 percent, central bank reports said.

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Lending rates to drop: central bank

Short-term lending rates in Vietnam are expected to come down, thanks partly to funds the central bank has extended to banks, State Bank of Vietnam governor Nguyen Van Giau was quoted on Wednesday as saying.

Lending rates were not falling quickly at present because banks were cutting deposit rates slowly, Giau said in an interview published by the Finance Ministry-run Vietnam Financial Times newspaper.

“But credit institutions are actively raising funds in coordination with funding support from the State Bank to meet credit demand for the economy,” Giau said in the interview.

“So, short-term lending rates will fall significantly, while the reduction of medium-and longterm lending rates requires time because long-term deposits often rise very slowly and account for a low proportion of overall deposits,” Giau said.

The central bank injects funds into banks via open market operations.

Bank deposits in Vietnam as of August 17 had risen 17.44 percent from the end of 2009, while credit expanded 14.15 percent, Giau said without giving any values.

Credit demand is expected to rise as usual in the last months of the year, Giau said, pledging further steps to keep annual inflation at around 8 percent, economic growth at 6.5 percent and an annual credit growth at 25 percent, as targeted.

The average rate for one-month interbank loans dropped to 8.56 percent during the week ending August 26, from 8.67 percent a week ago, and the rate on three-month loans also eased to 9.74 percent from 9.99 percent, central bank reports said.

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Vietnam's lending rates to drop

Photo: Tuoi Tre

HANOI - Short-term lending rates in Vietnam are expected to come down, thanks partly to funds the central bank has extended to banks, State Bank of Vietnam governor Nguyen Van Giau was quoted on Wednesday as saying.

Lending rates were not falling quickly at present because banks were cutting deposit rates slowly, Giau said in an interview published by the Finance Ministry-run Vietnam Financial Times newspaper.

"But credit institutions are actively raising funds in coordination with funding support from the State Bank to meet credit demand for the economy," Giau said in the interview.

"So, short-term lending rates will fall significantly, while the reduction of medium- and long-term lending rates requires time because long-term deposits often rise very slowly and account for a low proportion of overall deposits," Giau said.

The central bank injects funds into banks via open market operations.

Bank deposits in Vietnam as of Aug. 17 had risen 17.44 percent from the end of 2009, while credit expanded 14.15 percent, Giau said without giving any values.

Credit demand is expected to rise as usual in the last months of the year, Giau said, pledging further steps to keep annual inflation at around 8 percent, economic growth of 6.5 percent and an annual credit growth at 25 percent, as targeted.

The average rate for one-month interbank loans dropped to 8.56 percent during the week ending Sunday, from 8.67 percent a week ago, and the rate on three-month loans also eased to 9.74 percent from 9.99 percent, central bank reports said.

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