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Paying excessive interest puts banks at risk
An intense interest rate race among commercial banks is taking place to attract depositors and deal with the dong shortage and poor liquidity.
A recent move by the State Bank of Viet Nam (SBV) to lift the cap on deposit interest rates, which previously stood at 12 per cent, partially helped credit institutions attract customers with these better rates. Limits, however, have still been set as commercial loans must be lower than 18 per cent under SBV’s decision.
Viet Nam News reporter Phuong Hoa spoke with Pham Huy Hung, management board chairman of the Viet Nam Bank for Industry and Trade (Vietinbank) on the issue.
What do you think about the race to raise deposit interest rates after the recent decision by SBV?
Following SBV’s recent decision, most commercial banks have raised deposit interest rates to 14.5-15 per cent per annum.
The rates become particularly high because on top of the interest pay-outs, credit institutions have to cover an additional combined cost of around 2 per cent for liquidity reserve, compulsory reserve, deposit insurance and other costs. This means that the total of costs climbs up to 17 per cent.
According to SBV’s decision, with the prime rate fixed at 12 per cent, the cap for commercial loans will stop at 18 per cent under the current rules. This is giving banks a very low margin of profit.
Under these rules, is it difficult to raise the deposit rate higher than 15 per cent without leading to a rate race?
I can’t say. In reality, boosting the deposit rate will not guarantee that the bank will get more clients. When a bank pushes the rate up too high, it’s like taking a toxic drug.
When a credit institution raises the deposit rate to 16-18 per cent there’s a problem. That bank’s liquidity may be so poor that it has to boost the rate to gain liquidity. Customers should be careful because of the high risk.
Any bank that hikes their rates unsustainably should be investigated by the SBV, under the current banking rules.
To ensure margin profit, do commercial banks ask for banking fees as a loophole?
I’m not sure about these kinds of fees in other commercial banks. In Vietinbank, clients don’t pay any fees.
In theory, the higher the loan rate, the riskier it is. Other than expensive loans, enterprises are now suffering from high costs for materials and the labour force among others.
Companies are having to reach a growth rate of at least 30-40 per cent to pay these high costs. As these firms cope, banks will surely feel the impact.
Ahead of the current situation, did Vietinbank have any problems when it recently changed its tradename from the previous Incombank?
There was no impact because it was only a small change in the tradename, while we kept our official full name as Viet Nam Bank for Industry and Trade. Vietinbank has already registered its tradename abroad and has become one of the first Vietnamese banks to get international tradename registration.
In the first five months this year, Vietinbank maintained solid growth at 13-14 per cent in capitalisation and 16 per cent in commercial loans over last year.
At present, Vietinbank has 140 branches and 600 transaction offices nation-wide, accounting for 15 per cent of total market share. As of July 1, Vietinbank plans to extend its hours from 5pm to 7pm.
Some firms claimed that despite the high loan rate, it is not easy for them to access loans. What do you think about this?
Vietinbank absolutely has enough capital to satisfy the demand of companies and individuals. We also provide capital for smaller banks. We limit our loans to projects we find profitable. We don’t provide loans for clients in risky sectors, such as real estate and securities.
Can you say something about Vietinbank’s equitisation process and your foreign strategic partners?
In early April this year, Vietinbank submitted its equitisation plans to the Government for approval. The exact time to equitise and make its IPO (Initial Public Offering) will be decided by the Government. However, Vietinbank hopes to make its IPO late this year.
Eight international companies from the UK, US, Germany, France and Japan expressed interest in becoming strategic shareholders of Vietinbank. However, we can not release the exact names of these firms at the moment.
VNS
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