Rate clash among banks, depositors and SBV

In the July economic analysis, Alan Pham – the chief economist of VinaSecurities said that Vietnam’s economy has enjoyed stable and solid growth and made fairly outstanding achievements, but a conflict of interest among banks, depositors and the State bank is affecting the interest rate market.

While Standard Chartered has just lowered their estimated inflation rate from 11 percent to 9.5 percent for the year, VinaSecurities believes that the rate will range from 9 to 9.5 percent. VinaSecurities projects the GDP this year will stay at around 6.8 percent but it is positively reckoned to fluctuate between 6.9 percent and 7.2 percent by the Ministry of Planning and Investment.

Pham argues that greater market liquidity will possibly help promote higher GDP growth rate. With increasing pressure on banks to lower interest rate and further money injection into banks, the state bank of Vietnam is turning to loose money policy with a view to reach this growth target till some glaring inflation symptoms arise.

Pham assumes three groups of interest conflict in the interest rate market, the first of which is banks who always approve of high interest rate for capital mobilisation and lending. The second is depositors who never find decreased deposit interest rate appealing. The rest is the state bank representing the national interest and favouring interest rate decline, which fall back on administrative methods. They have managed, to some extent, to decrease the interest rate in that commercial banks’ deposit rates have dropped to hover around 11 percent per year.

The lending rate for prioritised manufacturing sectors at many banks is presently staying between 12 percent and 12.5 percent annually. Larger banks argue that they can only operate with a spread of at least 2.5 percent to 3 percent. Many banks have to negotiate intensely with businesses to strike an agreed rate. “Many banks said that they have abundant capital but the ambiguous interest rate causes difficulty in lending”, Pham said at a meeting with commercial banks said.

At the same time, several enterprises have held back projects or are not willing to launch a new project in the hope that borrowing costs will fall further, which has forced some banks to divert idle funds to governments’ bonds.

With the bond interest rate of 10.5 percent, banks have benefited from not only profit, mortgage bonds in the open market but also avoided low lending rate which might impede the targeted margin profit. “These conflicts need resolving by clearer consensus”, a senior manager of the State bank said.

With the current consensus on interest rates, the market has witnessed the reoccurrence of the “short high, long low” condition: high interest rate for short term and low rate for long term. The same rate for terms less than 12 months is recorded at both state-owned and joint stock banks.

For instance, the flat rate of interest for all terms from one month to twelve months at Kien Long Bank is 11.2 percent, and the same for Vietinbank, BIDV and others.

The interest rate curve is again straightened, which is justified by the purpose of keeping customers as most of them prefer short-term deposits, particularly in the context of repeated depreciation with the USD/dong exchange rate reaching the mark 19.100-19.200 dong.

The above consensus does not definitely guarantee the common interest for a bank set a precedent for “breaking the barrier” in case of new movements. Also, it can probably cause lower economic growth due to the lack of capital and difficulties in banking operations as banks’ revenues principally relies on credit activities.

Apart from administrative tools, the State Bank of Vietnam has a long way to go to unfasten these knots balancing the targets of credit growth and GDP growth. Regulations should be imposed for strict compliance of the consensus with a view to avoid deflections on the market.

Impressed as he may be by the growth rate in the early months of the year, Pham regards it the cautious optimism. With current movements, he does not believe in the possibility of credit growth reaching 25 percent this year.

Tags: Vietnam finance, Vietnam financial