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Bank reserves increase on cards
In efforts to reduce interest rates, Viet Nam's State Bank may adjust capital regulation, increase compulsory reserves and alter State Bank note issuance.
Newly-named State Bank governor Nguyen Van Binh told the Sai Gon Economics Times the target to slash commercial lending rates to 17-19 per cent per year was feasible.
He said the banking system had sufficient capital on hand which indicated rather low lending rates on the inter-bank market, which ranged from 12-15 per cent per year and under 10 per cent annually for overnight interest rates.
However, capital is not balanced within the banking system and some banks hold more than others, which discourages them to cut interest rates.
Binh said the central bank could raise banks' compulsory reserves or issue a State Bank note to absorb excess capital and refinance high-capital demand within the banking sector, which would not add more to interest rates at commercial banks.
When all banks have sufficient capital, they do not have to price capital at a high cost, and can cut lending rates.
Deputy general director of Asia Commercial Bank Nguyen Thanh Toai said assuming banks having large amounts of capital was wrong.
"It's not really right to say many banks have abundant capital. If it were true, banks have no reason to offer costly deposit interest rates. High inflationary pressure hoops attempt to cut interest rates," Toai said.
The State Bank of Viet Nam has applied a deposit ceiling for interest rates of 14 per cent per year, while lending interest rates are negotiable.
Governor Binh said banks were concerned about the profit margin between deposits and lending rates, not common interest rates, and profit margins of 2.5-3 per cent were reasonable if deposit interest rates stood at 14 per cent and borrowing interest rates were 17-19 per cent.
Current borrowing costs at state-run commercial banks are 17-21 per cent per year, 21-24 per cent at private banks, and 20-22 per cent at finance companies.
To lower interest rates in the coming months, Binh suggested amending current capital regulations, including provisions issued last year to address problems with risk-management and to ensure market stability and well-managed capital circulation in 2010 and 2011.
"Shortcomings of these regulations have annulled the capital supply function of the inter-bank market - a series of existing capital regulations must be reconsidered in order to make capital flow run smoothly and effectively," Binh said.
Circulars 13 and 19 allow banks to calculate 25 per cent of non-term capital deposited by companies as mobilised funds which can be used as loans and capital borrowed from other institutions with a three month or longer term and capital borrowed from foreign banks will also be added to funds for lending.
The circulars allow the loans-to-deposit ratio of 80 per cent for commercial banks, and 85 per cent for non-banking credit institutions. The central bank has also left the risk coefficient at 2.5 for stock and real estate loans, restricting cash flow for these two sectors, while the capital adequacy ratio is set at 9 per cent.
When released in October last year, the two circulars generated controversy amid fears that deposit and lending rates would remain high and enterprises would find it harder to access loans.
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