The State Bank of Vietnam (SBV) has sent first signals in a predetermined roadmap to lower interest rates and stabilising foreign exchange rates. A series of recently issued ruling circulars provide such a forecast.
Easing local currency credit
The clearest signal is said to be stated in the Circular 22 which provides amendments to the Circular 13. The Circular 22 removes the regulation related to the ratio of credit extension against the mobilised capital resources as prescribed in the Circular 13. Specifically, commercial banks may lend over 80 percent of their deposits. The new regulation would also allow non-bank credit institutions to lend up to 85 percent of their deposits.
However, lending operations of credit institutions will still be governed by four safety ratios provided by the Circular 13, namely minimum capital adequacy ratio; credit limit; solvency; and limit on capital contribution and equity acquisition.
Credit institutions, except foreign bank branches, must maintain a capital adequacy ratio of at least 9 percent of owner’s equity on total risk-bearing assets (called individual capital adequacy ratio) while maintaining a minimum capital adequacy ratio of at least 9 percent of consolidated capital and assets of credit institutions and subsidiaries (consolidated capital adequacy ratio).
The Circular 22 also raises the risk ratio from 20 percent to 50 percent on assets being receivables in foreign currencies secured by valuable papers issued by such credit institutions; receivables secured by valuable papers issued by other credit institutions established in Vietnam, etc.
Following the Circular 22, the State Bank issued Circulars 23, 24, 25 and 26 with the major contents concerning the simplification of banking administrative procedures. For example, the Circular 25 considerably simplifies administrative procedures in foreign exchange operations. It stipulates that as per foreign borrowing and repayment, the SBV is entitled to attest registrations on medium and long-term loans of companies with a turnover of from US$10 million onwards within 15 days from the date of submitting valid documents of companies, credit institutions, and branches of foreign banks.
The circular also specifies two conditions, namely, infrastructure and personnel, banks shall have to be considered by the SBV and confirmed to have adequate conditions to provide foreign exchange services in the domestic market. Specifically, infrastructures are defined as machinery, equipment, information and data storage devices; professional software, and fully-equipped working offices.
With respect to personnel, managing personnel and professional personnel must hold at least university graduation degrees with majors being economics, banking and finance (three year experience is required if they graduate with other majors), Level B English or higher, at least three months of training in business knowledge and risk management of foreign exchange services.
Also according to this Circular, economic organisations having with foreign branches and representative offices or wishing to open foreign currency accounts in foreign countries to receive foreign loans can register this with the State Bank (Foreign Exchange Management Department). The SBV will decide licensing or rejecting the account opening within 15 days.
Lower interest rates in September?
Despite signs of easing domestic currency credits from the SBV, experts still cast their doubt on an immediate interest reduction in September and foreign exchange rate fluctuation of less than 1 percent. Although the SBV and 12 leading commercial lenders reached a consensus on monetary policies for the remaining months [of this year], given currently high inflation rate, the drop of deposits may inhibit commercial banks from lowering rates. Besides, many specialists recommended that inflationary pressures may intensify towards the end of this year if lending cash flows are not strictly managed.
On contrary to the easing regulations on local currency credit, the Circular 22 tends to tighten foreign currency-denominated credits. The risk ratio on foreign currency-denominated receivables of domestic and foreign credit institutions is raised from 20 percent to 50 percent and forex requirement reserve is added another 1 percent. Indeed, the SBV is narrowing the “input” of foreign currency credits and this will lead to narrowed output of this source of credit. According to experts, this move aims to ease forex pressures towards the end of the year.
After the Circular 22 was announced to the public, USD/VND exchange rate on the free market, commonly called as black market, slid 50 percentage points. However, according to specialists, the sharp rise in foreign currency credits since mid-2010 will result in a strong demand for foreign currencies towards the end of this year.
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