VAFI proposes interest rate cut

Friday, Feb 06, 2015 08:00

Transactions are carried out at VPBank. Financial investors argue that lower interest rates will stimulate the recovery of securities and bond markets. — VNS Photo Truong Vi

HA NOI (Biz Hub) — The Viet Nam Association of Financial Investors (VAFI) has asked the State Bank of Viet Nam (SBV) and the Ministry of Finance (MoF) to cut dong interest rates on institutional deposits to about 1 per cent from the current 6-6.5 per cent per annum.

In its document sent to SBV and MoF, the VAFI said that such a dramatic cut required great determination and concerted measures from the SBV and the MoF but would have a clear impact on the country's economic development, Vietnam Economic Times reported.

The VAFI also said the central bank should drastically restructure the commercial banking system, which required dissolving ailing commercial banks, leaving only 15. Foreign banks should also be encouraged to purchase ailing financial institutions.

According to the association, Viet Nam's State Capital Investment Corporation (SCIC) should control a majority of shares in local banks such as BIDV, Vietinbank, Vietcombank,and MHB. This would save the central bank from getting too involved in their business performance or becoming a judge in its own affairs, as the central bank's function was managing currency and banking operations.

The VAFI also said the central bank should not appoint directors who had never worked for a business and did not have any achievements in business management. Additionally, they should not be appointed to boards of directors or jobs as general directors or CEOs at finance institutes managed by the SBV.

The association urged the MoF to control land prices to ensure healthy development of the property market and the State to enact an Assets Law to avoid price fever. If the interest rate for deposit in Vietnamese dong was lower, people might pour their idle money into the real estate sector, causing high land fever and bringing inflation, production and business to a standstill, the association warned.

To cut the dong deposit interest rate, the Ministry of Finance also needed to spur the development of the securities and bond markets. Lower interest rates would stimulate the recovery and development of these markets and the banking industry would be able to mobilise long-term deposits.

In addition, the State should open more room for foreign investors to invest in listed stocks, VAFI said. The Ministry also needed to outline a roadmap to minimise the budget deficit and public debt and balance the State budget and spending in the next 10 years.

Concerns from experts

Some analysts doubt the feasibility of the proposal. Can Van Luc, head of BIDV's human resources training school, said it would be too difficult to lower the deposit interest rate to 1 per cent for several reasons.

First, inflation was now low due to the impact of the decreased oil price. Second, the deposit interest rate needed to be kept at an attractive level to attract depositors so people would keep depositing at banks. Before reducing the deposit interest rate, inflation movements in the next few months needed to be observed, he said.

Former State Bank governor Cao Sy Kiem said the interest rate needed to be reduced, but the level needed to be carefully considered. If the interest rate was too low, commercial banks would suffer liquidity pressure as people rushed to withdraw their deposits from banks and invest in other financial channels such as property and securities.

Another banking expert said that the VAFI's proposal should be reconsidered after five to 10 years, when the inflation and finance market was stable as in many countries in Europe or the US.

Given the current domestic unstable finance market, bringing the interest rate for deposits down to 1 per cent was "unbelievable", he said. — VNS

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