New central bank’s decision put small banks on tenterhooks

Small banks have become worried stiff after the State Bank of Vietnam released a decision on setting a cap on short term deposit interest rates.

Under the State Bank’s Circular No 30, dated September 28, 2011, the short term (less than one month) Vietnam dong deposits of individuals and institutions at credit institutions and foreign bank branches, can enjoy the interest rates of no more than 6 percent per annum.

The decision is compared as a strong blow dealt to small banks, because their only instrument of the banks to attract deposits – high interest rate – has been taken away by the central bank. From now on, since both big banks and small banks offer the same interest rates, money would flow into big banks instead of small ones.

A further step to force interest rates down

As such, since October 1, banks cannot offer no more than six percent per annum for less-than-one-month deposits, and no more than 14 percent per annum for one-month and higher term deposits (the ceiling interest rate is 14.5 percent for local people’s credit funds).

The decision has been described as another step taken by the central bank in an effort to force the interest rates down. Commercial banks, for a long time, had been offering the same interest rate of 14 percent (the ceiling interest rate) for all terms of deposits in order to lure more capital.

The move by the central bank has been applauded by analysts, who say that the single interest rate only can exist in Vietnam and that the unreasonable thing needs to be adjusted.

Big banks happy, small banks moaning

In the press release sent by the State Bank of Vietnam, the bank said that some credit institutions once paid very high interest rates of 14 percent per annum for very short term deposits (24 hour, 2 day, 1 week and 2 week), which badly influenced the implementation of the Instruction No 02 of the State Bank, shows latent liquidity risks for the commercial banks and the whole banking system in general.

An Binh Bank, for example, offered the interest rate of 8 percent per annum for one-day deposits worth from 50 million dong to less than 500 million dong, 9 percent for the deposits worth from 500 million dong to less than one billion dong. The higher interest rates of 10 percent and 12 percent per annum were offered to the deposits worth 1-5 billion dong and for 5 billion dong, respectively.

Phuong Tay Bank also launched the credit program, under which it offered the 14 percent per annum interest rate for 1-6 day term deposits.

Nguyen Thanh Toai, Deputy General Director of the Asia Commercial Bank (ACB), said that small banks find it hard to compete with other banks to mobilize capital; therefore, they had to set up high deposit interest rates, which then triggered a short term interest rate race.

The new decision has made big banks happy, because they will not have to make big efforts to attract deposits. People, who have idle money will surely deposit at big banks, especially state owned banks, because they believe that the State will never let state owned banks “die”.

A finance expert has commented that in theory the advantage of banks lies in the quality of services. However, in Vietnam, it seems that the prestige and the state’s ownership are the biggest advantages.

Small banks do not think the same way with the State Bank and big state owned commercial banks. The only thing they can see is that the new policy will make them unable to attract more deposits.

However, small bankers have declined to comment about the decision by the central bank. One of the banker said that with the new decision, the bank will face bigger difficulties, which means that they will have to make greater efforts. However, he did not say how “greater efforts” means.

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial