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No one expects basic interest rate reduction
Rumours have been spread these days that the State Bank of Vietnam plans to slash the basic interest rate. However, no representative from commercial banks who were present at the workshop on the interest rate policy held in Hanoi on April 8 wants to believe that this will become realistic.
Associate Professor Dr. Nguyen Thi Mui, Director of Vietinbank’s Training and Human Resource Development Centre, said that the monetary policy has never been adjusted so many times before like in the period from 2008 to now. The monetary policy was tightened in the first half of 2008, and then loosened in the second half, and has been ‘flexible’ up to the present.
During that time, the State Bank of Vietnam continuously adjusted the basic interest rate, refinanced and re-discounted interest rates. The basic interest rate alone has seen eight adjustments after it stayed firmly at 8.25% during 26 months.
Duong Thu Huong, Secretary General of the Vietnam Banking Association (VNBA) said that the VNBA has received a lot of calls from commercial banks these days, asking about the information on basic interest rate cuts. Commercial banks said that if this happens, they will incur heavy losses.
Pham Xuan Hoe, MA, from Vietinbank Thang Long branch, also said that the regular adjustments of the basic interest rates have brought interest rate risks to commercial banks.
Despite the basic interest rate reduction, depositors still require high deposit interest rates for the whole duration of deposits. Meanwhile, commercial banks have to adjust the lending interest rates of loans, especially medium and long term loans. When interest rates decrease, borrowers always try to pay debts before the maturation to get new loans, which allows them to enjoy lower lending interest rates.
“In other words, the input interest rate tends to decrease more slowly than the output interest rate, which makes the NIM (net interest margin) of commercial banks decrease quickly,” Hoe said.
Nguyen Dai Lai, Deputy Director of the Credit Information Centre under the State Bank of Vietnam, said that in the current conditions, Vietnam should not remove the basic interest rate scheme, but it should not slash the rate any further or it will cause shocks to banks in profit balancing and risk management.
Experts nowadays have been arguing if it is necessary to remove the basic interest rate scheme. Some believe that the market interest rate should be defined by the market capital supply and demand, while the market should not be regulated by any institution.
In theory, when capital supply meets capital demand, the reasonable interest rate will appear.
However, Quach Thi Hong Lien from Vietinbank’s Training and Human Resource Development School said that this is true only when the market provides perfect conditions for competition, while Vietnam’s market still does not have this condition.
“If we had not set a limit on interest rate in the last time, we would not have been able to imagine where the ‘whirlwind’ of loaning to securities investments would drive the national economy to,” Lien said.
Therefore, Lien said that it is still necessary to have the ‘tangible hand’ of the State Bank in setting up interest rate policies. The thing that the State Bank of Vietnam needs to do is to define reasonable basic interest rates and reasonable interest rate bands so that the market interest rate can bring benefit to the national economy.
dau tu chung khoan
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