Deposits skip around from bank to bank

Depositors, especially businesses with large sums, have gained the initiative in bargaining for interest rates, leaving commercial banks at the mercy of short-term depositors who are here today, gone tomorrow.

Though commercial banks have set deposit interest rates at 10.49 percent on average, many depositors are telling them that if banks do not pay interest rates of 14.5 percent, they will leave and deposit their money elsewhere. Many bankers say that they cannot control interest rates for many kinds of deposits.

Truong Dinh Song from the Vietnam Banking Association (VNBA) admitted that depositors and banks often negotiate deposit interest rates. Song revealed that big depositors invite bids from banks, and whichever pays the highest interest rate, gets the deposits.

According to Song, many VNBA member banks complain that economic groups and state-owned general corporations demand to negotiate interest rates instead of accepting the interest levels set by banks.

Though depositors know that the deposit interest rate ceiling is 10.5 percent as instructed by the State Bank, they still require banks to pay 14.5 percent per annum. In many cases, banks must offer high interest rates on deposits since they need the capital. This explains why banks lend money at high interest rates of 18-20 percent per annum.

According to Nguyen Ngoc Bao, Director of the Monetary Policy Department under the State Bank, the biggest problem now is that conglomerates and general corporations do not use their huge capital to support subsidiaries, but instead deposit the money. As a result, subsidiaries seriously lack capital and have to borrow money, while their parent group brings capital to the banks.

Duong Thu Huong, Secretary General of VNBA, remarked that the banking system is determined to ease interest rates as the State Bank has instructed, but they cannot if they must still mobilize capital at high interest rates.

“The prerequisite for banks to ease lending interest rates is low deposit interest rate,” Huong emphasized.

Nguyen Manh, a senior executive of the Bank for Investment and Development of Vietnam (BIDV), warned of negative effects if the situation cannot be improved.

Big depositors who are unsatisfied with deposit interest rates usually withdraw capital from one bank to deposit at another, making short-term (7-15 day capital) deposit transfers very popular. This trend also creates uncertainties in the market. Capital runs around from bank to bank, which adversely effects the national economy.

Huong from VNBA estimated that the volume of deposits by those who negotiate interest rates accounts for up to 55 percent of total deposits at credit institutions (the total deposits at banks by December 31, 2009 had reached 1777 trillion dong).

Thoi bao Kinh te Vietnam

Tags: Vietnam finance, Vietnam finance news, Vietnam interest rates