Banks Bypass Rules on Short-term Deposits

In the context of increasingly fierce competition, commercial banks are still trying to flout the law to keep existing customers and attract capital from new ones. This situation is leading to imbalanced and non-transparent restructure of mobilising and lending capital. As a result, borrowers will have more difficulty accessing loans at reasonable rates.

 

In March 2011, the State Bank of Vietnam (SBV) issued Circular 04/2011/TT-NHNN providing that commercial banks must apply non-term rates on deposits withdrawn before the due date. This rule is expected to inhibit depositors from prematurely withdrawing deposits from banks with lower rates to shift to those with better treatments, as this behaviour will cause capital mayhem. According to the regulations of the central bank, commercial lenders can take only 30 percent of short-term capital for medium- and long-term loans, while most capital mobilised is now in the form of short-term deposits.

 

To circumvent this regulation, commercial banks previously created termed deposits but they still allowed depositors to withdraw their premature money at an interest rate equal to their registered term. Banks wrote these deposits as long-term capital on their balance sheets - an effective but riskier way to increase long-term funding.

With Circular 04, the State Bank tightened capital mobilisation and disallowed banks to wield the aforementioned form to forge balance sheets, while knowing the actual structure of mobilised and lending credits. To cope with this regulation, in the past two weeks, many banks began raising interest rates to levels which are only 200 -300 percentage points from the ceiling deposit rate.

 

Explaining this behaviour, an official from a joint stock commercial bank said banks raised interest rates on demand deposits to ensure that their customers do not suffer further loss when they withdraw their money prematurely.

 

However, according to a leader of VietABank, in reality, more than 90 percent of deposits at banks have 1-month, 3-month and 6-month terms and only 10 percent have terms of more than 12 months. The central bank’s Circular 04 is aimed to stabilise the monetary market, particularly when interest rates tend to be volatile.

 

This means that people are waiting for a more attractive investment channel than depositing at banks. They prefer very short terms, normally from one week to one month, in order to use their capital more flexibly when new better investment channels turn up. To retain customers, banks accept to raise non-term deposit rates.

 

Many commercial banks said the central bank’s recent rate-raising moves (rediscounting, refinancing and OMO rates) have caused indirect effects on interbank rates.

Small banks have very high demand for capital to ensure immediate liquidity, thus, overnight inter-bank rates sometimes climb 17 - 20 percent per annum. Hence, banks see it is better to borrow non-term money from the public at an annualised rate of 9-12 percent than on inter-bank markets.

 

However, according to Ms Duong Thu Huong, General Secretary of the Vietnam Banks Association, when Government Resolution 11 is in force, commercial banks need to comply with the central bank’s regulations on interest rates and should not cause market turmoil with unfair competing behaviours. If they need quick money, they can access State Bank capital on the open market where the State Bank is willing to refinance for a period of several months at reasonable interest rates.

 

According to experts, the central bank should immediately cap interest rates on demand deposits at 2 percent per annum. In addition, its inspectors must follow up on the structure of mobilised capital at commercial banks as well as their use of refinanced funds so as to realise the target of keeping credit growth at 20 percent or lower as stated in Government Resolution 11 and State Bank Directive 01.

 

However, some pointed out that if commercial banks strictly follow Circular 04, they will encounter more difficulty in enticing capital because banking products must meet customers’ requirements. For instance, potential homebuyers will put money in banks for a short term but they still want to enjoy high interest rates.

With the current regulations, banks will hardly attract a large amount of this form of capital.