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Experts say interest rate cap bubble fragile
Last week was a “burning” week of the interbank market, when the overnight interest rate soared to 20 percent per annum, and the 1-week loans jumped to 23-24 percent per annum. Meanwhile, the highest deposit interest rate banks pay to depositors was 14 percent per annum only.
The interest rate escalation on the interbank market has raised a worry that the financial market would not be “peaceful” in the last months of the year.
Interest rates jump, banks unable to borrow money
As the State Bank of Vietnam has instructed commercial banks not to pay more than 14 percent per annum for deposits, the capital has been flowing from small banks to big banks. Nowadays, as both big banks and small banks offer the same interest rate of 14 percent, people would prefer deposit their money at big banks, because they believe that their money would be safe if it is deposited at big banks.
As a result, the capital outflow has put big difficulties for small banks, which now have to struggle to settle their liquidity problems. Unable to mobilize capital from the public, small banks have to seek capital on the interbank market. Saigon Dau tu has quoted a banker who said that even he accepted to borrow money at high interest rate; it was not easy to find lenders
Phan Thanh Hai, Head of the Capital Sources Division of Giadinh Bank, said that some banks, which could not arrange money, have asked for an extension of time for paying debts, the thing that rarely occurred in the past. Therefore, big banks now tend to hesitate to lend to small banks, and they only provide overnight loans at the sky high interest rate of 19-20 percent per annum.
Meanwhile, small banks do not have capital to lend to each other, which has made the interbank exchange rates jump.
Tran Phuong Binh, General Director of Dong A Bank, said that all big banks now have abundant capital, but they lend at different interest rates after considering the credit ratings of borrowers. In general, the banks which need to borrow money, are small banks which do not have high credit ratings, therefore, they have to accept high interest rates. Meanwhile, the banks, which can borrow at low interest rates, do not need to borrow capital now.
In principle, small banks can seek capital from the State Bank of Vietnam by borrowing money from the bank. However, in order to access loans from the central bank, commercial banks need to mortgage commercial papers and fulfill the requirements set by the State Bank of Vietnam.
A banker has revealed that the central bank would be ready to refinance small banks, provided that small banks commit to reduce the outstanding loans. However, as banks are racing against time to make profit in the last months of the year, none of them wants to reduce lending.
Meanwhile, a lot of banks cannot ask for the financing from the State Bank, because they still cannot lower the outstanding loans to non-production sectors to 16 percent as requested by the State Bank.
Interest rate cap bubble fragile
Experts have warned that once the gap between the interbank interest rate and the deposit interest rate at which banks mobilize capital from the public becomes too big, this would lead to the fact that banks would break the ceiling interest rate to mobilize capital from the public and ease their reliance on the interbank market.
The experts have also warned that when banks have to borrow capital at high interest rates from the interbank market, they would have to lend to businesses at high interest rates. It may happen that the capital would get stuck because the capital gets too expensive which is unaffordable to businesses.
At a recent meeting gathered by the Vietnam Banking Association VNBA, a lot of commercial banks proposed to remove the ceiling interest rate, and let the market supply and demand define the interest rates. Trinh Van Tuan, General Director of OCB, said that if the central bank continues applying administrative orders, this will cause “side effects”.
vietnamnet, Saigon Dau tu
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