Interest rate caps not needed: experts

Monday, May 14, 2018 09:13

Transactions being carried out at a VPBank branch. — VNA/VNS Photo Tran Viet

The State Bank of Viet Nam should consider developing a roadmap to remove regulations on credit growth limits and interest rate caps as it isn’t suitable due to the country’s achievements in stabilising the nation’s economy, according to experts.

The General Statistics Office (GSO) reported that the country’s GDP growth reached 7.38 per cent in the first quarter of 2018, the best first-quarter performance in the last ten years, backed by growth in manufacturing and agriculture, as well as momentum from high GDP growth rates of 7.46 per cent and 7.65 per cent in Q3 and Q4 2017.

Meanwhile, January-March average annual inflation was also controlled at 2.82 per cent, GSO reported.

Based upon this positive growth, Nguyen Xuan Thanh, Director of the Fulbright Economics Teaching Program, suggested that it is time to remove the regulations and replace them by indirect ones based on market principles, reported.

Thanh proposed that instead of assigning a specific credit growth limit for each commercial bank, as is currently done, SBV might set a credit growth target as a guidance for the entire banking system, so that banks with positive capital sources would not be restrained by its credit growth.

This current administrative measure is called an ask-give mechanism. Each bank is assigned a specific limit and it must seek permission from the SBV for expansion of the limit, if needed. This system, however, will not bring competitive advantages for the nation’s banks.

“For banks of which the scale is already large, it is not necessary to pursue too high growth; but for small banks with good potential, their credit growth ability is currently being restricted. Such administrative measures do not create healthy competition and motivation for banks,” said Thanh, adding that the SBV might soon announce the policy adjustment roadmap.

As for the management of interest rates, instead of setting a cap for short-term deposits, as currently done, the central bank could regulate by using open-market-operation (OMO), he suggested.

At present, Viet Nam still applies an interest rate cap of 5.5 per cent for short-term deposits of 1-6 months. The rates for longer terms are floating. The cap regulation has been imposed since 2010 when commercial banks, especially ailing ones with poor liquidity, took part in a race to increase deposit interest rates to lure depositors, causing a sharp rise in lending interest rates.

Meanwhile, the central bank has complied with the credit quota allocation policy since 2012 when many banks accelerated their lending by up to 50 per cent, causing a sharp rise in non-performing loans. According to SBV, the allocation is aimed at not only ensuring that credit growth serves the economy, but also to control the quality of credit and restrict new non-performing loans arising in the future. SBV divides commercial banks into four groups, depending upon their performance in the previous years, to allocate the credit growth quotas.

A number of years ago, industry insiders and experts also proposed removing the deposit interest rate cap and credit growth limit, saying that the cap regulation is an administrative measure and does not follow international rules, so it should be removed at a suitable time when the macro economy is stable, inflation remains low and liquidity in the banking system is good. — VNS

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