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Deposit interest rates may go up again
Commercial banks have lowered deposit interest rates to 10.5-11% per annum, but this does not mean that the monetary market has cooled down. On the contrary, the interest rates on the interbank market are escalating and may trigger a new bank interest rate race.
Commercial banks well understood that VND capital was seriously lacking, but they still agreed to slash the ceiling deposit interest rate to 11% per annum.
The State Bank of Vietnam earlier this month announced unchanged interest rates for April compared to March. The base interest rate is 8.75%, while the recapitalisation and discount interest rates are 7.5% and 6%, respectively. The interest rate for the open market also remains unchanged at 9% per annum.
However, the monetary market seems to be heating up with the interest rates on the interbank market rising over the last few days.
Lacking capital, once again
The overnight interest rates on the interbank market soared to 15-16% in the first days of last week and then stayed firm at 17% on April 10. The interbank market has become hotter as the money supply is diminishing.
It is quite surprising that Agribank and the Bank for Investment and Development of Vietnam (BIDV) are now looking to borrow capital on the interbank market, while they have been the big suppliers of capital so far.
Sources say that state owned banks now have big demand for capital as the Central Treasury, at the request of the government, is going to transfer the money it has been depositing at state owned banks to the central bank for management. It is estimated that the total amount deposited at state owned banks is VND52tril, of which some VND20tril has been withdrawn from the banks so far. The remaining sum of VND30tril will be gradually taken back in the time to come.
The details of the process of withdrawing money from state owned banks and transferring to the central bank have not been revealed. However, sources say that this work will be done from now to the end of September 2008.
As state owned banks, the biggest capital suppliers on the interbank market, are now also experiencing capital shortage, the market has become tight in money supply, while many joint stock banks say that they cannot borrow money to ensure liquidity.
However, a source from the State Bank of Vietnam has denied the fact that the withdrawal of money has led to the heated up monetary market, adding that the central bank is still consulting banks about the money withdrawal, and that this work must be carried out step by step in order to avoid bad consequences.
The official said that the central bank is withdrawing money from circulation, but it is also still pumping money into the market to ensure liquidity. He stressed that the interest rates rising on the interbank market should be seen as a result of the hotter credit of banks, not of the government’s decision on taking back government money from state owned banks.
Meanwhile, as the deposit interest rates were cut by 1.5% in March and the first half of April compared to February 2008, people aren’t interested in making deposits at banks now.
Interest rates to escalate, once again?
The banks which voted on lowering deposit interest rates several days ago under the arrangement of the Vietnam Banking Association now say that if it remains difficult to mobilise capital, an interest rate race will re-occur, soon.
By the end of April 2, the deadline for banks to slash deposit interest rates as agreed before, only five state owned and 25 joint stock banks nationwide had announced interest rate cuts. Other banks said that they would cut interest rates later, but some of them have still not done this yet. The banks hesitated to cut interest rates because they anticipated a capital shortage.
The director of a joint stock bank, who asked to remain unnamed, said that it is highly possible that he will have to re-adjust the deposit interest rates, as the VND supply is nearly exhausted, while the overnight interest rates are skyrocketing on the interbank market.
The director said that the ceiling interest rate may go back to the 12% threshold instead of 11% as currently applied.
Dang Van Thanh, Chairman of Sacombank, the biggest joint stock bank now in Vietnam in terms of chartered capital, said that if the interest rates keep going up on the market, his banks will have to adjust the current interest rates. If other banks raise their offered interest rates, Sacombank will find it difficult to attract clients if it retains its current rates.
The director of a Hanoi-based joint stock bank complained that money has stopped flowing into the bank since it, responding to the call from the Vietnam Banking Association, slashed deposit interest rates.
Some economists say that the ceiling interest rate scheme, which proved to be helpful when the market was chaotic, should be reconsidered now, as the market has returned to normal.
They say that the ceiling interest rate scheme will ‘pave the way for big fish to swallow smaller fish’. As state owned banks, big fish, apply the same interest rates as smaller banks, smaller fish, depositors will certainly choose state owned banks to make their deposits.
VNN
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