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Banks try to outdo each other to draw depositors
An interest rate race among both small and large banks is taking place among commercial banks nationwide due to the increasing demand for deposits.
Although the interest rate of dong deposits is capped at 14 per cent per year by the State Bank of Viet Nam, several commercial banks have still been illegally raising interest rates to improve liquidity, which is being affected by inflationary pressure and difficulties in mobilising capital sources.
Small banks are offering much higher interest rates than larger ones. The rate could climb to between 17 and 19 per cent per year.
To dodge the SBV's 14 per cent cap, promotion programmes, gifts and cash are offered by banks to encourage people to deposit their savings.
For example, some banks give depositors savings books with an interest rate of 14 per cent per year, as regulated.
But when the customer makes the deposit, the bank subtracts the difference between the regulated interest rate and the offered bank rate, and gives the customer upfront an amount of cash equivalent to the difference, depending on the length of the deposit term.
By doing this, it is less likely that banks' illegal actions will be discovered when inspected.
Dr. Cao Sy Kiem, member of the National Advisory Council for Financial and Monetary Policies, said this practice was not new but it was difficult to control.
Other experts agreed with Kiem, saying that deposit interest rates should be adjusted to a higher level. They said that banks needed to lure more capital to improve their liquidity.
Another high-ranking official in the banking and financial sector also admitted that raising the interest rate ceiling was done to regularise the real interest rate that is actually being used in the market.
When asked about the reasons behind the interest rate increases, a representative of a commercial bank in HCM City said commercial banks had to raise the interest rates higher than the capped rate in order to retain depositors.
Low interest rates would prompt people to inject money in other investment channels instead of depositing funds in banks.
High inflation rates have made depositors hesitate to make deposits, especially long-term ones, he said.
The central bank recently increased the refinancing rate and discount rate to 14 per cent and 13 per cent per annum, respectively; thus, causing the interest rate on the interbank market to rise.
This made it more difficult for banks, particularly small ones, to seek low capital sources at the interbank market (secondary market) to improve their liquidity. So, they were forced to offer interest rates higher the cap to attract depositors, he said.
The interest rate race does not appear to be abating even though there is a policy to constrain credit growth of under 20 per cent and reduce the number of loans for non-manufacturing sectors, Kiem said.
Kiem warned enterprises to rearrange production and business strategies to reduce their lending capital as lending and deposit interest rates would not fall as soon as expected, due to increasing inflationary pressure.
According to the State Bank of Viet Nam's figures, total deposits at nationwide banks by April 1 fell by 1.09 per cent month-on-month. Dong deposits alone dropped by 1.84 per cent. The country's outstanding loans rose by 0.11 per cent month-on-month.
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