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Raising interest rates, banks still lack VND
Though commercial banks have continuously been raising deposit interest rates, they still cannot mobilise much capital from the public. Statistics show that the capital mobilised in May just rose by 1.5%, much lower than the increases of previous months.
As a result, the liquidity of Vietnam’s bank system has not improved much. The State Bank of Vietnam still has to pump capital in through open market operations. However, the demand of commercial banks is always higher than the volume provided by the central bank, which explains why the interbank interest rates are always at high levels.
Money not flowing into banks, why?
According to Tran Bac Ha, Chairman of the Bank for Investment and Development of Vietnam (BIDV), there are six things preventing capital from flowing into banks, though banks have been continuously raising interest rates.
As the VND/US$ exchange rate has increased sharply, people have spent a lot of VND to buy dollars to hoard instead of making bank deposits.
The consumer price index (CPI) increased by approximately 16% in the first five months of the year (3.2% per month on average), while banks’ average deposit interest rate has stayed at 15-16% per annum (1.25-1.35% per month), which proves to be unable to persuade people to make bank deposits.
As commercial banks are limiting loaning, some people and businesses which have a lot of idle capital are not making deposits at banks, but lending directly to other individuals and institutions on the black market at the interest rate of 5-7% per month.
Some commercial banks got behind in meeting the requirements by clients to withdraw money, which made the clients lose their confidence in banks. Some of them have decided to withdraw money from banks to keep at home.
As the prices of input materials have been increasing, big sums of money have been used to buy input materials.
With the currently applied basic interest rate of 12% per annum, the maximum lending interest rate is 18% per annum. Now banks are mobilising capital at the interest rates of 15-16% per annum and they cannot push the rates higher, otherwise, they will suffer losses.
Nguyen Thanh Toai, Deputy General Director of ACB, admitted that the interest rate increases have not helped increase mobilised capital. Toai said that this is the problem of the banking system as a whole.
Raising interest rates the suitable solution
Unattractive interest rates prove to be the main reason that money is staying away from banks. Therefore, economists have urged the government to raise the basic interest rate in order to pave the ways for banks to raise deposit interest rates.
The economists say that if the official credit market cannot develop due to the limitations, this will lead to the development of the credit black market, which would threaten socio-economic stability.
HSBC’s report released on June 2 also suggested that Vietnam raise basic interest rates. According to the report, one of the most important things Vietnam needs to do now is to attract idle money from the public to banks, and restore the confidence of the public in the banking system.
Some experts say that with the inflation rate of 25.4% by May, the basic interest rate should be lifted to 14% per annum, which means that the maximum lending interest rate would be 21%, and the interest rate to break even would be 17-18% per annum.
VNN
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