Deposit Rate Ceiling Likely to Be Lifted in June?

Although there are different standpoints to this issue, banking specialists agree that banks need to lower interest rates soon to rescue Vietnamese businesses. Actual low interest rates are only formed when the market mechanism is in place. However, before removing ceiling interest rates, the SBV must basically deal with current weaknesses like liquidity and bad debt.

 

Not a few market members are wondering why deposit interest rate ceiling will be lifted in only June and July, not this month or next month, given low inflation rate (2.5 percent in the first three months.)

 

It is suggested that deposit rate ceiling should be removed. This will benefit banking system but small banks may face stiff competition. If there is no ceiling rate, interest rates will be pushed up higher. This will slow down the progress of lowering interest rates.

 

In this regard, Dr Tran Hoang Ngan, a member of the Advisory Council for National Monetary Policy, said it took at least six months to remove ceiling rates because the banking system reorganisation is basically stabilised.

 

“SBV needs time to carry out the Project 254 on bank reorganisation. Liquidity and bad debt will be dealt by weak banks in April and May. Thus, June will be the best time for SBV to remove ceiling rates, he said.

 

Sharing this view, banking specialist Nguyen Tri Hieu also stressed that the central bank should allow free floating rates. Weak banks should go bankrupt if there is no other way. Then, interest rates can be lowered and businesses will have access to capital sources carrying low interest rates.

 

The central bank said liquidity of the banking system is relatively stable. However, if the ceiling is lifted, it may cause more serious impacts and instability on the market.

“Although deposit rates have been reduced to 13 percent, some banks, including big ones, are still trying to raise interest rates to a level that higher than the official ceiling. The SBV showed that no country in the world has the ratio of outstanding debts on deposits is as high as Vietnam, nearly 100 percent. This shows that commercial banks have liquidity problems,” Mr Hieu said.

 

Nonetheless, if interest rates are floated, some banks will be ignored by depositors. These banks will be forced to raise interest rates to ensure liquidity, basing on supply - demand laws.

 

“On the other hand, if the interest rate ceiling is removed while weak banks are not allowed to go bankrupt, depositors will place their money into banks with higher rates because the security is the same from bank to bank,” Hieu added.

 

Dr Le Xuan Nghia, a member of the Advisory Council for National Monetary Policy, said: A market-driven interest rate mechanism will form more reasonable interest rates for businesses.

 

"To do this, the SBV needs to step up the process of bank restructuring. When weak banks are removed and liquidity is stable, no banks want to raise interest rates,” said Mr Nghia.