The country's inflation in 2014 was estimated at around 3 per cent. Such a low inflation index has allowed the banks to cut their deposit interest rate to minimize costs, particularly as many of them have had rather plentiful sources of funds. — Photo tapchitaichinh

HCM CITY (Biz Hub) — Cash flow into the banking sector will likely fall as lenders have reduced their interest rates, according to independent market observers.

Early last week, Vietcombank cut its deposit interest rate for the fifth time in 2014.

As of December 22, the bank's highest deposit interest rate fell from 6.3 per cent to 6.2 per cent per year.

In particular, Vietcombank's interest rate on deposits with terms of between 24 and 60 months is 6.2 per cent, while the rate of 12-month deposits is down by 0.2 per cent to 6 per cent.

After Vietcombank, many other commercial banks have also cut their deposit interest rates.

BacABank has reduced its highest deposit interest rate from 8.2 per cent to 7.9 per cent per year. Meanwhile, Techcombank's highest deposit interest rate has fallen from 7.1 per cent to 65.96 per cent per year.

Analysts have attributed the banks' deposit interest rate cut to several reasons, one of which was low inflation.

According to the National Financial Supervisory Committee's latest report, the country's inflation in 2014 was estimated at around 3 per cent.

Such a low inflation index has allowed the banks to cut their deposit interest rate to minimize costs, particularly as many of them have had rather plentiful sources of funds.

The deep reduction in the deposit interest rates has affected cash flow into the banking sectors, according to bank executives.

Le Quang Trung, deputy general director of VIB, told Dau Tu (Investment) newspaper that "in the first 11 months of 2014, the banking sector's mobilised capital increased by 13.3 per cent, lower than the 15 per cent rate recorded in the same period last year."

"With such a low interest rate, people's idle money would likely be injected into other investment channels," Trung said.

Many leaders of commercial banks also said the current deposit interest rates have nearly touched bottom, so some deposits would likely be moved to and invested in other sectors such as securities, real estate and foreign currencies.

Profits

According to Deputy Governor of the State Bank of Viet Nam Nguyen Thi Hong, the deposit interest rate level in 2014 decreased by between 1.5 and 2 per cent per year, and the lending interest rate level was down about 2 per cent per year compared with the rates in 2013.

These reductions have also made these two kinds of interest rates lower than those recorded in 2005 and 2006.

Analysts, however, said that a big gap was seen between deposit and lending interest rates, thus creating opportunities for banks to make profits.

Before deciding to cut its deposit interest rate on December 22, the difference in the interest rates of short-term deposits and loans in Vietcombank had been only 2.5 to 3 per cent.

But for long- and medium-term loans and deposits, the interest rate gap may climb to 3.8 and 6.8 per cent. This is because the popular interest rate of medium- and long-term loans on the market are about 10 and 13 per cent. — VNS

Dr. Tran Du Lich, member of the National Assembly's Economics Commission, said that the banks should reduce the gap between loan and deposit interest rates to about 2.3 or 3 per cent in order to enable enterprises to recover their production and business. VNS