Interest rates directed by market forces

Tuesday, Jul 02, 2013 17:16

A staff counts money at a Maritime Bank transaction point. An interest rate cap is still needed to generate long-term stability for a banking system that was still in a vulnerable position. — VNA/VNS Photo

HA NOI (Biz Hub) — Recently, interest rates have tended to be directed by market forces even though deposit rates are still capped, according to industry insiders.

Late last week the State Bank of Viet Nam cut the interest rate cap on deposits for terms of one to six months by 0.5 percentage point to 7 per cent while also removing the ceiling rate on deposits with terms of more than six months.

Unlike previous short-term rate cuts, which often forced banks to adjust their rates for longer terms to ensure business efficiency, this time around, interest rates have remained stable.

The deposit rates for terms of more than six months are hovering around 8-8.5 per cent per year and even lower at some of the major banks.

Banks say that the improved liquidity has enabled them to maintain low rates, even though lending has remained difficult, and setting high deposit rates would be self detrimental.

The deputy general director of HDBank, Le Thanh Trung, told Dau tu Chung khoan (Securities Investment) online that despite the drop in interest rates, deposits at the bank were still increasing with growth rising by over 12 per cent in the first half of the year. But growth in the credit market remains limited.

Deposits at SeABank, Sacombank, Eximbank and Asia Commercial Bank were also reported to show no signs of a decline. Sacombank said its deposit growth had reached over 15 per cent and outstanding loans expanded almost 8 per cent in the first half of the year.

The chairman of a small bank in HCM City said that letting interest rates become decided by market forces was very important, and with the improved liquidity of banks, some say that now is the right time to remove the interest rate cap. Small banks would also find it easier to compete, in terms of interest rates, if the cap was removed, he added.

National Financial and Monetary Policy Advisory Council member Tran Du Lich agreed, saying that doing this as well as easing deposit rates could help end the prolonged situation where banks had money lying idle but firms couldn't approach them for capital.

In the last few months, many banks have had to buy bonds at a low interest rate because lending has remained tough, he noted.

Lich said that there was little chance of deposit rates being lowered any further as many businesses have expected, because of difficulties relating to bad debt, rising inventories, low purchasing power and inefficient commercial bank operations.

With inflation expected to reach 6.5-7 per cent this year, the current lending rate of between 4-6 per cent would be too high and this could hamper firms that were trying to stick to current production levels or looking at expanding their investments.

State Bank Governor Nguyen Van Binh said at a meeting in HCM City late last month that without doubt the ceiling on deposit rates could now be removed as the liquidity of banks had recently improved. However a cap was still needed to generate long-term stability for a banking system that was still in a vulnerable position.

The important thing for banks to do now was to prove to customers that they are reliable, he said. — VNS


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