Deposit rates in US dollar unlikely to go very high

Though, many banks had to raise US dollar deposit rates, However, increasing interest rates in US dollar will not occur strongly, Dr Le Xuan Nghia, vice President of the National Financial Supervisory Commission said while answering the press.

He said that the recent exchange rate adjustment has made the real values of dong and US dollar to become more balanced.

Nevertheless, in the near future, banks will still push up US dollar deposit rates higher, partially because banks are afraid that people may withdraw US dollars. According to Dr Vo Tri Thanh, vice President of the Central Institute for Economic Management (CIEM), the most important reason that causes the deposit rates in US dollar to increase is because the 2.1 percent devaluation of dong is not sufficient to generate the balance between supply and demand of the market.

Moreover, other pressures from Circular No. 13, from trade deficit, and from deficit in current payments account are the causes that have led banks to raise deposit rates in US dollar.
Too many foreign currency loans

The most mentioned reason that contributed to the strain of the foreign exchange market is the 27 percent US dollar credit growth in the first six months of the year, which has led credit institutions to become insolvent. Therefore, banks must raise deposit rates in US dollar to create new sources of capital rotation, in order to ensure borrowing demands and foreign currency payments.

Saigon Economic Times reported the foreign currency loans of the entire banking system exceed the total mobilised foreign currency of 40 trillion dong, equivalent to $2.05 billion, according to statistics of the National Financial Supervisory Commission.

Circular No. 13 was issued by the State Bank, and will take effect from October 1, 2010. It is also listed as one of the factors that cause US dollar interest rates to increase in the last few days.

According to Document No. 120/HHNN sent to the State Bank by Vietnam Banks Association and 14 members, the key reason that makes it difficult to lower interest rates is the provision of Circular No. 13, on which capital used for lending must exclude non-term deposits of the economic organisation, of the State Treasury, of Social Security and other organisations. This makes the funds for lending to decline.

ACB has raised US dollar deposit rates by 0.15 to 0.2 percent per year at terms of one to nine months, ranging from 3.6 to 4.4 percent per year. Eximbank has increased deposit rates to the highest level of 4.45 percent per year. It also awards 0.2 percent per year for customers aged from 50, for the product that allows customers to choose interest payable term. Some other banks such as SeABank, ABBank, etc. also raised their deposit rates in US dollar to maximum at or over five percent per year.

Thus, in addition to the 20 percent of the fund mobilised not to use for lending accordingly to the regulation of the State Bank, still about 15 percent of the above cash deposits would not be used for lending.

Therefore, the capital used for ensuring solvency is 35 percent of the total mobilised capital. This rate is too high and unreasonable”, stated in Document No. 120/HHNN.

Where would US dollar interest rates go up to?

The interest rates in US dollar would not increase sharply. Dr Cao Sy Khiem, former Governor of the State Bank said banks could not push up interest rates too high, since they have to also put that in correlation with dong and other foreign currencies.

The unreasonable increase in US dollar interest rate may lead people to withdraw deposits in dong, purchase dollars and deposit into banks, which may re-create imbalance in dong. Moreover, when strain occurs, the State Bank would use their management function to slow down the increasing momentum of this foreign currency.

According to Dr Kiem, the reasonable lending rates in US dollar at the current time should be around six to seven percent per annum. In order to solve this problem, Dr Kiem said it is most likely that a number of provisions in Circular No.13 would be amended. – Saigon tiepthi

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Posted by VBN on Aug 30 2010. Filed under Banking-Finance. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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