Transactions in progress at a Vietinbank branch in Dong Nai Province. Some commercial banks have cut deposit interest rates by 0.2-0.5 percentage points to reduce capital costs and encourage borrowing. VNA/VNS Photo Thanh Vu

HA NOI (Biz Hub) — Some commercial banks have cut deposit interest rates by 0.2-0.5 percentage points in the past 10 days to reduce input capital costs and further lower borrowing costs.

Vietcombank, one of the big four by assets in Viet Nam's banking system, cut the annual deposit interest rate for three months and shorter terms by up to 0.3 percentage points to 5 per cent. Some branches of Military Bank lowered its highest deposit interest to 7.5 per cent from 8 per cent per year. Other small banks listed deposit interests at 8.5-8.7 per cent annually.

Economist Tran Du Lich, cited by Thoi Bao Tai Chinh (Viet Nam Financial Review), said, "The cut is to test the market validity."

The 5 per cent deposit interest will be good as it was likely to guarantee a positive real interest rate for depositors and to help banks circulate their capital in the economy, Lich said. [A positive real interest rate is a situation when the nominal interest rate is higher than the inflation rate].

This early step on deposit cuts is likely to mark the second wave of adjustments since the beginning of the year. It should be noted that the cut occurs at a time when banks are struggling with high-cost abundant capital sources that are getting harder to lend.

Prior to the cut, industry experts said trimming deposit rates was a must to make capital cheaper for borrowers and make loans more accessible.

Luu Duc Hai at the Development Strategy Institute under the Ministry of Planning and Investment said, "Vietnamese enterprises are bearing too high capital costs that reduce their competitive and productive capacities in exports and domestic markets."

Although Vietnamese exporters have access to special interest rates ranging between 8 per cent and 10 per cent annually, the borrowing costs are estimated to be 1.4 to twice as high as those prevailing in some regional countries. On the other hand, Vietnamese producers in non-priority sectors are paying between 10 per cent and 13 per cent.

At the May Government meeting, the State Bank of Viet Nam Nguyen Van Binh said credit demand was weak.

The credit growth of Viet Nam's banking system rose to 1.31 per cent between January and May 23; the total supply was an estimated 5.28 per cent higher than in the end of last year; and the total mobilised capital increased by 4.2 per cent. This is sparking doubts about the feasibility of a 12-14 per cent credit growth by the year-end. —VNS