Banking Paradoxes

On the interbank market, interest rates have been stabilised at as low as 12-15 percent per annum in the past four weeks. Even, overnight rates dropped to below 10 percent and just revived to 10.63 percent last weekend. Rates for 3-month, 6-month and 12-month term also crept to 13 - 16 percent.

 

But, this move did not mean deposit rates moderated accordingly. Or in other words, while waiting for the State Bank of Vietnam (SBV) to review and amend Circular 13 and Circular 19 on regulations on capital adequacy ratio (CAR) applicable to credit institutions, some banks continue offering high deposit rates of 17-19 percent, or even 20 percent per annum in case of big values, to catch cash flows from personal and corporate depositors. There are many reasons for that, not just preparing for an increase in the borrowing ratio on the interbank market in the near future.

 

One of central reasons is commercial banks will face liquidity strains if they lower deposit rates from 17-19 percent to 14 -16 percent, although this may not be a threat in the near term. A banking specialist pointed out that dong in surplus, enough funds and “stable liquidity” as confirmed by the SBV Governor, are just short-term as most big loans are denominated in foreign currencies, and a significant proportion of foreign currency-denominated loans has returned to banks in the form of local dong deposits to enjoy the margin on interest rates (dong rates are much higher than interest rates on foreign currencies like dollars.) But, in the medium and long terms, when access to foreign currency-denominated loans is more difficult for companies, sources of dong exchanged from foreign currency loans to gain interest rate margin will be no longer available. Besides, in case deposit rates decline and the margin is negative (in relation to inflation for example), many depositors will withdraw their money from the banking system in favour of more profitable channels.

 

According to the SBV, as of July 20, total outstanding deposits at credit institutions were estimated to decline 0.25 percent from June. In particular, dong-denominated deposits rose 0.51 percent while deposits in foreign currencies fell 3.29 percent. Total outstanding deposits only climbed 3.96 percent from a year earlier. Total credits outstanding as of July 20 were forecast to dip 0.19 percent from the previous month. Specifically, dong credits slid 0.88 percent while credits in foreign currencies expanded 1.96 percent. Outstanding loans were projected to go up 7.57 percent from the end of 2010. Both deposits and credits in July dived from June. Given the above reasons, also including the possibility that banks will be forced to lower interest rates, both deposits and credits will probably diminish in the coming months.

 

With these prospects, in spite of being branded “capital in surplus” and “stable liquidity”, it stands to reason that banks will still have to keep high rates to avert the risk of liquidity drain in the last months of the year when spending power tends to soar.

 

As small banks have borrowed to the cap of 20 percent to total deposits, they are very active to lower interest rates to lure borrowers to reverse slowing credit growth. Housing Development Bank (HDBank) trims lending rates for secure loans by 1-4 percentage points compared with normal rates. Target customers are companies operating in supporting industries and agricultural product export. Asia Commercial Bank (ACB) announced an interest rate reduction of 1.2 percent on loans for individuals and households in need of capital for trading. However, many experts expressed doubts about the outcome of these preference programmes.

A banking specialist in Ho Chi Minh City said there are hosts of obstacles to speeding up credit growth this year. In the first seven months, the growth of deposits was still lower than that of credit. This indicates that banks do not really feel at ease with liquidity. This is partly because many banks, even large ones, previously fuelled up a rate race, which resulted in a deposit rate of 20 percent per annum, and loans on both primary and secondary markets were very high. When they have not fully digested high-rate credits, lowering lending rates on par with deposit rates is improbable.

 

With a more positive view, economist Bui Kien Thanh said commercial banks can send high-rate credits onto the market because of capital thirst. However, while they continue raising funds with high interest rates, the interest "vortex" is not only a matter of the past, but the future as well. When the economy is in trouble, production and business operations stagnate, and investing shrinks, it is hard to find a field that can afford such high rates without causing the risk of bad debt.

 

Currently, the Group-5 debts (possible loss of capital) account for 47 percent of total loans and bad debts on total outstanding loans of the entire banking system increased by 0.94 percent from 2010 (Source: The National Financial Supervision Committee). The downgrade of local currency long-term sovereign credit rating to BB- from BB last week sends a warning about a deflationary environment that may adversely affect the ability to pay interest for domestic loans, thus negatively compromising the quality of the banking system. It is a signal of concern about the financial sector, particularly when companies, people and banks are waiting for positive macroeconomic policies, including a much-expected package of solutions to be adopted by the SBV in early September. Hopefully, the waiting time will not be too long as each policy requires 3-6 months to be fully translated into reality.