VND lending interest rates on the rise, menacing monetary policy
Contrary to all predictions, the basic interest rate will be kept unchanged at 7% per annum for May. Meanwhile, VND interest rates applied by commercial banks have been increasing.
Interest rates attempt to rise
If the basic interest rate sees no adjustment in the time to come, it may happen that the interest rates of short-term and medium- and long-term loans applied by commercial banks will be nearly the same, which once occurred in 2008. This is because under the current laws, the ceiling lending interest rate must not be higher than 150% of the basic interest rate.
Since the second half of February 2009, banks have raised VND deposit interest rates by 0.5-1.5% per annum. However, the lending interest rates still remain unchanged as big banks, especially state-owned ones, have ‘taken no action’.
However, there have been signs that lending interest rates are increasing. The interest rate increases have been triggered by joint-stock banks, which have offered high lending interest rates for consumer credit.
While still preserving the same deposit interest rates, Vietcombank has raised lending interest rates, commencing from April 14. The new preferential interest rate is 9.5% per annum, while any loans at interest rates lower than 9.5% must be approved by Vietcombank’s general director himself. The lending interest rates must be higher for normal borrowers, with the highest possible level equal to 150% of the basic interest rate, 7%.
The move by Vietcombank is expected to be followed by other big banks, which signals a new wave of interest rates and hotter monetary market.
The reasons
VND lending interest rates have been put under pressure to escalate for several reasons, including the deposit supply and demand basis (the relationship between banks and depositors), credit supply and demand basis (the relationship between banks and borrowers), and credit risks, considered high in the current conditions.
Another reason cited is the temporary excess of mobilised capital in foreign currencies which they still cannot lend. As banks have to bear costs for the undisbursed capital, they have to seek other sources of income to cover the expenses.
The director of a commercial bank said that in 2008 alone, the 10 interest rate adjustments brought high risks to the bank’s balance sheets. Banks have to pay the same interest rates for the whole life of deposits, while they have to adjust interest rates on medium- and long-term lending contracts. Meanwhile, when interest rates go down, borrowers always try to pay debts before they become matured to get new loans at lower interest rates.
The highest VND deposit interest rate is now as high as 8.8% per annum, or 1.7% lower than the ceiling interest rate (the basic interest rate is 7%, i.e. the ceiling rate is 10.5%). As banks have to pay other fees for the capital (management cost, wages, asset amortisation), the margin between the capital mobilisation cost and the capital sale price turns out to be relatively low.
This will lead to the fact that the income from banks’ credit activities, especially the branches of state-owned banks, will decrease rapidly. This explains why banks are trying to raise lending interest rates to ensure satisfactory profit.
The impacts on demand stimulus policy
A paradox now exists that while the government and State Bank of Vietnam are trying to loosen the monetary policies and increase public investments, the interest rate increases will hinder their efforts.
Some people have said that the lending interest rate will not be able to increase to overly high levels, as it is capped by the ceiling rate. However, if banks cannot raise the lending interest rates, they will limit credit growth, which means that the monetary policies will be tightened instead of loosened as expected.
The question that has been answered is why the lending interest rate is increasing while the demand for loans is not high (the credit growth rate in Q1 2009 was modest at nearly 4%).
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