Dollar deposit interest rates may drop on fewer allowed borrowers

Given the information that the State Bank of Vietnam will soon release new regulations on restricting the subjects who can borrow foreign currencies, commercial banks believe that the dollar deposit interest rates may go down a little in a few days.

The Instruction No 01 issued on March 1 of the State Bank of Vietnam on the monetary solutions to curb inflation and stabilize macro economy says that the central bank will apply necessary measures to ease dollarization and encourage businesses to buy dollars from banks instead of borrow dollars. Besides, the bank has said it will maintain stricter control over the use of foreign currencies, restrict loans in foreign currencies, and restrict loans in Vietnam dong that borrowers use to buy dollars to make payment for the imports of unnecessary goods.

Prior to that, an article about the monetary policies that need to be applied to implement the government’s instruction on macroeconomic stabilization, said that the State Bank will adjust the foreign currency lending mechanism in order to control the growth of foreign currency lending. The adjustment will also aim to increase the attractiveness of the dong against the dollar and control the shifting of the dong into the dollar. The principle in lending in dollar is that foreign currency loans will be only provided to serve the most important production and business sectors, and will be only provided to the enterprises which have income in foreign currencies.

As such, it is very likely that the enterprises which import goods to sell domestically, especially the importers of luxury goods, will not be able to borrow dollars any more. If so, the demand for dollar loans will be decreasing in the time to come.

Nguyen Thi Kim Xuyen, Deputy General Director of Dong A Bank, said if the subjects to dollar loans are narrowed, the outstanding loans in dollars will be decreasing, which will lead to the deposit interest rates decreasing.

However, Xuyen said that the interest rate reduction should follow a roadmap in order to avoid shocks to depositors. “I think that now commercial banks are also consider lowering the dollar deposit interest rates,” she said.

She went on to say that the reductions in providing loans in foreign currencies to the enterprises which import goods to sell on the home market will help ease the price quotations in foreign currencies. “If they borrow dong to purchase goods, their cost prices will be anticipated and fixed. Meanwhile, if they borrow in dollars, the cost prices will be defined in dollar,” Xuyen explained.

Agreeing with Xuyen, the general director of a joint stock bank in HCM City said if the central bank restricts the subjects to dollar loans the deposit interest rate in dollar may go down in a few days.. However, he said the interest rates will go down just by a little. Commercial banks now find it very difficult to mobilize capital in dong, while it is very costly to mobilize dong, therefore, banks would still keep high dollar deposit interest rates in order to ensure their liquidity.

Currently, dollar deposit interest rates are hovering around 5-5.5 percent per annum for less than 12 month term deposits. Some commercial banks now offer very high interest rates, including Phuong Tay Bank, which is offering the interest rate of 6.35 percent per annum for 13 month term deposit, while SeABank is offering 6.2 percent per annum as the highest interest rate.

However, the new move by the central bank has raised the worry that import companies will borrow dong and use the dong to buy dollars to import goods. If so, the demand for the dollar will be increasing, thus putting a hard pressure on the exchange rate.

However, representatives of banks believe that the demand for loans to import goods will be decreasing as a result of the central bank’s policy on tightening loans to fund the import of unnecessary goods. Besides, the current overly high dong lending interest rates will not encourage importers to borrow much money.

According to the HCM City Branch of the State Bank of Vietnam, the outstanding loans of local banks had reached 709 trillion dong by the end of 2010, an increase of 26.7 percent in comparison with late 2009. The outstanding loans in dong had increased by 21.9 percent, while outstanding loans in foreign currencies increase by 41.5 percent. – Vietnamnet

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