Interest rates may be pulled down gradually

The public in general are very much concerned since bank interest rates have not yet been lowered as directed by the government. The pressure to prepare the conditions for the implementation of Circular 13, which took effect from October 1, 2010 has put the capital and interest rate markets into more stressful situation, although the central bank has made some minor amendments.

Nevertheless, it would be a mistake if assuming that Circular 13 or the unpredictable fluctuations in foreign currency and gold markets have led interest rates to be in the risk of being uncontrollable.
The assumption may sometimes cause subjectivity, and the pressure on the market may be enlarged by administrative orders. This approach has proven to be ineffective, and has caused market distortions. The adverse effects from the policies to deal with high inflation and recession prevention in 2008 and 2009 are the clear evidences.

It is common that once demand exceeds supply, the interest rates tend to go up or it is difficult to pull them down as expected.
Nevertheless, the current paradox is that a number of banks have been in excess of capital for a long time, but they still have to maintain lending rates at relatively high levels, aiming to offset the loss for the part of capital, which have not been lent out or was raised at high deposit rates in the previous time.

An equally important cause is hunting for feasible, efficient projects with high reliability for lending is not easy work, especially when the global economy has not really overcome the stagnation period. In addition, the chain effect of the Vinashin restructuring has made many banks hesitant in credit investment, leading the credit growth in the recent time to be mainly based on old and traditional customers.

Currently, some large banks have started cutting interest rates. This is expected to be the positive signs to overcome the situation when banks standstill and observe each other, and are not active in reducing interest rate, thereby creating momentum for the interest rate reduction to take place more evenly throughout the banking system in the near future.

However, to accelerate that process to take place smoothly and quickly, there should be radical solutions to cut down the deposit rates in both dong and US dollar.

Ceiling level is proposed to be applied to deposit rates in US dollar (of organisations and the public). This measure would not only have a dual effect to minimise foreign currency speculation and curb dollarisation, would but also have positive effect on increasing dong supply in the condition that exchange rates continue to be relatively stable.

One of the major obstacles for the current capital mobilisation is that the psychology of inflation expectations continues being uncertain.

The inflation target of seven to eight percent in 2010 set by the government has not really created positive signs to the market. Especially, the unexpected rise of dollar and gold prices, the high trade deficit, resonating with “Vinashin debt crisis” have raised many concerns from the public about the trust in the value of dong. The drop of Vietnam in credit rating done by the international credit rating orgranisations in the recent time was not random and should be considered valuable warning.

In brief, the handling of the increase-decrease interest rates issue still focuses on the effective management of the capital demand and supply in the economy. The two important subjects in the interest rate reduction process are the State Bank of Vietnam and the commercial banking systems. This is not only the responsibility but also the duty that they cannot refuse.

In a narrow aspect, effective management means the central bank should be a step ahead in harmoniously dealing with the relationship between banks and customers towards a win-win situation, actively lower lending rates along with the consensus deposit rate cut, and together with commercial banks to create the strong interaction status to support the economic grows towards the set targets. – TBKTSG

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial, Vietnam interest rates