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Hasten process of lowering interest rates, advises economist

Dr Tran Hoang Ngan, Deputy President of the HCM City Economics University and Member of the National Advisory Council for Finance and Monetary Policies asserted that it is necessary to speed up the process of lowering interest rates to help businesses adapt to world economic changes.

Ngan recently explained his views to Tuoi Tre newspaper:

“The macroeconomic indices in the first six months of the year were relatively good. The GDP growth rate was 6.16 percent. The trade deficit was curbed at below 20 percent of the export revenue. Inflation was controlled, with the CPI expected to increase only slightly by 0.1 percent in July.

External factors, however, are not favorable for businesses: the debt crisis in Europe has forced countries to tighten their belts and import decreases in other countries may lead to decreases in Vietnam’s exports.

In April 2010, the Government decided that the lending interest rate needed to be lowered to 12 percent per annum. This is one suitable measures to cope with the new changes in the world’s economy, but implementation has been slow.”

Tuoi Tre: The banking system has begun lowering interest rates, but results are still far below expectations. Why?

Tran Hoang Ngan: Contradictions exist. Some banks have excessive capital, while the capital in the interbank market has low interest rates, but banks cannot lower deposit interest rates. The State Bank of Vietnam (SBV) continues to pump cheap capital into the market, but some banks still cannot access it. Therefore, though banks agree to reduce interest rates, the process has been going slowly.

The problem lies with small banks. These banks have been relying on capital mobilized from the public and economic institutions, while they do not have low-cost capital sources like big banks. Smaller banks also cannot access SBV capital, because they do not have Government bonds. Since the banks’ capital depends on deposits, they must keep deposit interest rates at high levels.

In principle, smaller banks can borrow capital from big banks in the interbank market. The interest rate in the interbank market is lower than the deposit interest rate, 7-8 percent versus 11 percent. However, small banks cannot borrow much capital from big banks, because they have used up their ‘quotas’. Under current regulations, the volume of capital they can borrow from other banks through the interbank market must not be higher than 20 percent of the capital volume they mobilize from the public. For example, if a bank can mobilize 100 dong from the public, it can borrow another 20 dong from other banks.

Tuoi Tre: Do you mean that the problem lies in mechanism of State Bank’s lending to small banks?

Ngan: I think we need to make a breakthrough now. SBV can lend cheap capital to small banks without requiring Government bonds.

Besides, we can change current regulations by allowing banks to borrow up to 30 or 40 percent of mobilized capital from other banks. However, this solution should be applied for a short time and under strict control. If so, small banks can get capital at a much lower cost than mobilizing capital from the public.

Tuoi Tre: To date, SBV has sent no signal on interest rate reductions, keeping the basic interest rate applied when inflation was high.

Ngan: The State Bank has not adjusted the basic interest rate maybe because it is cautious about the high inflation rate. Now it is clear that inflation has been well-controlled and I think that SBV should bravely slash the basic interest rate from eight percent, applied since December 2009, to seven percent, and cut down discount and refinancing interest rates.

Tuoi Tre: How high should the deposit interest rate be if the inflation rate is eight percent in 2010?

Ngan: If the interest rate is eight percent, it would be reasonable to mobilize capital at 9 percent. Currently, banks are paying 11 percent for deposits.

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Posted by VBN on Jul 22 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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