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Bank interest rates: flexibility in the face of uncertainty
The year 2008 saw fluctuations on the banking and finance market and the State Bank of Vietnam (SBV) devised strong measures to manage the market.
In the closing days of the fiscal year 2008, despite fluctuations in both domestic and global economies, SBV governor decided to cut the prime interest rates.
Over the past two months, the SBV has cut prime interest rates and other rates five times and decreased compulsory credit reserves of commercial banks four times. The highest prime interest rate was 14 percent per year and the compulsory credit reserve of Vietnam dong was 11 percent but now they have been reduced to 8.5 percent and 5 percent, respectively. The SBV’s successive decisions showed the banking and finance sector’s flexibility despite complicated financial meltdown. Therefore, the SBV’s management policies are very flexible and in line with each target of the economy in specific times.
In the early months of this year, commercial banks, especially joint stock banks raced to mobilize capital at high interest rates. Some banks even adjusted interest rates several times a day.
Transaction departments were always crowded with depositors. The increase in the interest rate led to a rise in loan rates, causing a number of difficulties for businesses. Some businesses even deposited their operating capital in banks to profit off the new rates. While national economic growth is limited it is not good for businesses to deposit their capital in banks, instead of using it to run their business. Thus the SBV decided to impose a ceiling on loan rates for commercial banks at 150 percent of the prime interest rate.
At times, the loan rate stood at the ceiling level but this is difficult for businesses to afford, due to additional fees imposed by commercial banks. The banks were forced to do this because their capital was controlled by the increased compulsory reserves.
The rush to mobilize capital at high interest rates was accelerated constantly and as banks in the association pledged to keep their interest rates at certain levels, they silently broke their own promises.
Another impact on the psychology of the financial market last year was a virtual fever for US dollars when there were still enough for enterprises and the economy but the dollar prices in some major markets surged. Quite a few citizens rushed hastily into buying dollars and then had to sell them quickly at lower prices and suffered great losses. The ‘fever’ ended after the announcement by the State Bank of Vietnam that dollars were sufficient and the bank injected US dollars directly into banks in a timely manner.
Policies adopted by the government and the State Bank have helped contain inflation and have even created negative growth in the consumer price index. The State Bank issued several decisions on loosening monetary policy. In the past two months, the lending rates of commercial banks have dropped quickly, giving enterprises more access to investment capital for business and production. These days, many commercial banks are offering loans for purchasing the remaining rice in the Mekong Delta and assisting farmers to sell rice of the previous crops. As of December 22, commercial banks’ basic rates have decreased even further to just 8.5 percent per year.
Many foreign monetary experts said that the monetary policy of the State Bank of Vietnam is timely and on the right track. Hisatsugu Furukawa, a monetary expert from the Japan International Cooperation Agency, remarked that Vietnam has adjusted interest rates flexibly and successfully.
The banking system has an important position in the government’s recent stimulus plan. At a governmental meeting on the five-solution package to stimulate demand, much attention was given to loosening monetary policy in a rational way, by lowering interest rates.
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