Interest Rate Once Again Hot Topic

According to Reports by the Vietnamese Government at the Annual Press Conference in July, outstanding loans remain low, up only 0.93 percent regarding loans in VND. But according to a report by the Ministry of Planning and Investment (MPI), outstanding loans in the economy as of July 20 decreased by 0.03 percent compared to late 2011. Statistics from the MPI also show the expected credit growth in terms of VND is 0.93 percent, while foreign credit growth is expected to decrease by 3.51 percent. Another source from the State Bank of Vietnam (SBV) reveals that as of July 31, credit growth in the economy increased by 0.57 percent compared to late 2011.

There is a slight difference between the timeframes, but the abovementioned credit growth numbers differ from one another. According to Mr Vu Duc Dam, Minister and Chairman of the Office of Government; the 0.93 percent is inclusive of capital to purchase bank notes such as corporate bonds.

 

Regardless of calculation methods, credit growth of banks is extremely low, after the negative growth rate in the first six months, there is a change for the better in July. In general, banks all have unusually lower credit growth rate compared to the last few years.

 

Big banks all have humble credit growth rate, despite being allowed to have a maximum credit growth rate of 17 percent this year. Vietcombank has a 2.96 percent credit growth rate, while Vietinbank reduces its credit growth rate by 3.1 percent compared to the beginning of the year. Asia Commercial Bank (ACB) and Eximbank both have their credit growth rate increased by below one percent after six months.

 

Mr Trinh Van Tuan, Chairman of Orient Commercial Joint Stock Bank (OCB), shares that in the first seven months of the year, OCB’s credit growth has just reached 1 percent, while the target for the entire year is 15 percent.

 

Likewise, as of late July 2012, credit growth of Dong A Bank is a mere 3-4 percent, rather low considering the 15 percent target for the whole year.

 

When the economy heads south, many people postpone their business plans. Real estate continues to nosedive; the stock market is unstable; and gold has a long stressed price decrease, leaving many people “stuck” in executing their business plans. Depositing money into banks to earn interest is still a safe choice at the time being, although the interest rate ceiling is quickly brought down, from 14 percent to 9 percent per year in the span of only three months.

 

Credit growth rate is low, but banks still compete against one another to attract more capital. SBV has relaxed its stance on the interest rate ceiling by floating long-term deposit interest rate of deposit contracts whose term is over 12 months. This is the opportunity for banks to “circumvent” the deposit interest rate ceiling. Though customers only initiate short-term deposit contracts, they still enjoy over-the-ceiling interest rate. Some banks currently push their real short-term deposit rate to 11 percent per year. There are many tricks employed by banks to circumvent the rules and regulations, such as documenting the rate as 9 percent and pay the differential rate to another account opened by the same customer. The differential rate is handed over to customers in cash immediately after the customers make the deposit or when the contract term is over.

 

Another recurring trick to circumvent the interest rate regulations is promotional programs when customers make their deposits.

 

SeABank continues their second round of the deposit-to-win-prize program named “SeABank birthday, scratch fast and win big” with a total of VND15 billion worth of prizes. For each VND50 million (or the equivalent in terms of foreign currency) being deposited with a deposit term of one month, customers will receive a lucky draw card with a 100 percent chance of winning a prize. In addition, customers with a minimum deposit account of VND10 million and a minimum term of one month will receive a code to enter the lucky draw at the end of the program. Among the prizes are savings accounts, and Visa cards worth from VND1 million to VND100 million issued by SeABank.

 

Other banks also initiate promotional programs using cash rewards when customers open a deposit account with them.

 

A more sophisticated method to exceed the interest rate ceiling is compound interest. For example banks set a daily interest rate, at maturity the interest will become double interest, which if summed up will exceed the 9 percent per year ceiling.

 

Banks currently do not monitor and criticise one another for exceeding the rate ceiling, the story of which has become normal. Banks’ liquidity is still low and the pressure to maintain the old capital and concurrently increase deposits forces banks to find ways to attract more deposits. These are small banks, at the bottom of the ranking table with low liquidity. When they start exceeding the interest rate ceiling, big banks have to join the game and the previous interest rate race will recur.

 

SBV once guaranteed that no weak banks would go into bankruptcy and that people just need to look for banks with high deposit rates, therefore the uncontrolled increase in interest rate. Big banks have no choice but to join the race to push up the deposit rate to retain their customers.

 

A notable critic at the moment is Mr Pham Duy Hung, former CEO of Viet A Bank: “Why always blame the small banks. Small banks do not have the capacity to become a ‘culprit’ of the race to exceed the interest rate ceiling. This is because the biggest 12 banks already represent over 80 percent of the total number of customers, so the remaining small banks can not be the main factor which pushes up the market interest rate.”