Stabilising Interest Rates for Revitalising Investor Confidence

Following information from the National Financial Oversight Committee, interest rates started to spiral up. Small commercial joint stock banks were the quickest to raise market interest rates and new deposit rates climbed to 14 % or higher plus enclosed discounts and bonuses. Fearing that deposits would be drawn to put into banks with higher rates, large banks followed suit in the rate competition.

The rise in interest rates was partially attributed to psychological reactions when the central bank decided to raise key rates like rediscount and refinancing rates from 8 % to 9 % per annum. At that time, all banks understood that the consensus in bringing down interest rates was over. Besides, the pressure from fundraising companies like financial companies and funds intensified as they willingly offered high rates. On November 10 and 11, they offered 16-17 % per annum, and even 20 % to overnight loans. Common rates on the market escalated to 17 % per annum - an abnormal jump which forced small banks to boost capital mobilisation by using its most simple tool: increasing interest rates.

 

When the fever of interest rate peaked, the State Bank met with some northern lenders and took relatively effective interventional solutions. The central bank immediately granted gold import quotas to four out of eight authorised importers, and, as of November 12, more than 30 % of gold quotas were locked in coffers. Together with that, SBV also timely intervened in the foreign exchange market by providing foreign currencies to gold importer and commodity importers. This move brought the bullion price from all-time high of VND38.2 billion per tael to VND35 million. The price of the precious metal tends to go down if there is no a strong gain in global markets.

 

The central bank also decided to pump cash into the economy through open market operations. From November 8 to 12, SBV injected up to VND75 trillion into the system. At the same time, it decided to drop one-month term transactions and only focused on 7-day terms in order to boost the market liquidity. The interest rate was fixed at 8.75 % per annum.

 

With this move, more banks joined the open market where was previously a place for big lenders with strong financial capacity and many valuable papers. Up to 30 banks traded on the open market and small lenders did not need to borrow money from bigger ones at higher rates.

 

The State Bank also decided to boost the healthiness of credit structure. Real estate, securities and consumer loans are not encouraged. Up to now, outstanding loans of non-production sectors account for 18 % of system-wide outstanding loans, primarily real estate loans. SBV required credit institutions to reduce the proportion, speed and absolute value of non-production credits.

 

Commercial lenders agreed together to proscribe bargaining borrowing costs with companies on the secondary market, helping to ease the interest rate market. However, to say no to exorbitant loans, the central bank must follow up the market and pump money into the system in case of necessity.

 

On the week starting November 15, deposit interest rates began to ease. A big commercial joint stock bank has lowered rates for one-month term deposit with value of at least VND100 million to 13 % per annum and one-week and 2-3-month term deposits to 12.2 %, a drop of 1 to 1.3 % from the previous week.

 

Interbank rate, which was heated up in recent weeks, began to cool down. On November 15, overnight rate rapidly slumped to 9 - 12 % per annum from nearly 13 % in the past week. Many small banks have refused large-valued deposits from companies, mainly their affiliates, at a rate of 15-16 % per annum as the interbank rate has eased. However, because of certain difficulties in capital mobilisation, small banks now have to maintain interest rates at around 14 % per annum.

 

Currently, SeABank posts the highest official interest rate on the market at 13 % per annum for 12- and 13- month terms. Nam A Bank also offers a rate of 13 % but deposits with a maturity of 13 months must value at least VND500 million.

 

However, with high-value deposits, customers can negotiate to enjoy higher margins. As a result of high deposit rates, the borrowing rates escalated to some 17.5 % per annum, but banks are more considerate in their financing projects.

 

According to a general director of commercial joint stock bank, the past interest rate fever has positive aspects to a certain extent. Banks will more easily attract capital from the public, increase liquidity, and fund borrowing demand from now to the end of the year. Companies must restructure and think more when they apply for bank loans because of high capital costs. Arguably, only highly profitable or urgent projects dare to apply for new loans.