New Interest Rates, New Hopes

The March consumer price index (CPI) fell 0.19 per cent against February, the first decline in nine months. Inflation is low in March by and large because prices tend to decline after being pushed up during the Tet, the most important public holiday in Vietnam. Besides, the purchasing power is weak because the health of Vietnamese economy has not fully recovered. This is a good opportunity for further rate cuts to support the economy.

 

Right after the March CPI was announced, the central bank decided to slash regulatory rates. From March 26, the cap on interest rates applicable dong deposits with a maturity of 1-12 months was lowered from 8 per cent per annum to 7.5 per cent. Meanwhile, deposits with the maturity from 12 months onwards will be decided by the agreement between banks and their customers. Other key regulatory rates like refinancing rate, rediscount rate and overnight rate in the inter-bank electronic payment were also brought down by 1 per cent. Specifically, the refinancing rate declined from 9 per cent per annum to 8 per cent while the rediscount rate slid from 7 per cent to 6 per cent. Overnight lending rate in the interbank electronic payment was settled at 9 per cent per annum.

 

At the back of the move by the central bank, commercial banks are cautiously weighing up new deposit rates. Although they do not make official announcement on mass media or on their websites, officially quoted rates at their transaction offices still read 10 - 11 per cent for the term below 12 months.

 

Before that, some banks caught the downward trend by lowering their interest rates. On March 20, the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) was seen as the first lender to cut interest deposit rates when it slashed the rates on 1-3-month dong deposits to 7.5 per cent per annum from 8 per cent. The rates applicable to deposits of 12-month or longer terms were trimmed down to 9.5 per cent per annum from 10.5 per cent. On March 23, the Asia Commercial Bank (ACB) lowered the short-term deposit rates to 7.8 per cent per annum and the long-term rates to 9.8 - 10.5 per cent.

 

In its market analysis report released on March 26, HSBC Bank said the move was likely to bring sentimental effects rather than domestic demand. The report authors explained that declined public spending and investment reflected the government’s priority for macroeconomic stability as well as reduced [financial] support for inefficient State-owned enterprises. The Government may maintain this policy, or in other words, it will not provide low-cost credit support for inefficient enterprises.

 

A big bank leader anticipated a more positive outlook. He said this rate cut does not affect deposit mobilisation but it is expected to change deposit term structure. With short-term rates cut, banks want to people to place their money with longer terms when inflation growth and exchange rate are now stable enough.

 

The rate curve is being gradually restored, characterised by higher deposit rates for longer terms and vice versa. The interest rate regulatory policy also clearly expresses this stance. Banks want to attract deposits with longer than 1-3-month terms.

 

When market prices are stable and inflation is low, many will prefer longer deposit terms. The matter is whether the depositor confidence has been really restored after several years of high inflation? Nguyen Thanh Nhan, a regular customer at ACB, is firm with her three-month term options given high flexibility. In reality, a decrease of 0.5 percentage points leaves an insignificant impact on the psychology of short term depositors.

 

In general, credit operations did not improve much in the early months. Many banks reported zero credit growth but the liquidity was boosted. The cut in short-term deposits will help them save borrowing costs. The first to benefit from the rate cut is banks.

 

Since August 2011 when Nguyen Van Binh was appointed the Governor of the State Bank of Vietnam, the ceiling deposit interest rates were reduced six times from 14 per cent to 7.5 per cent. According to experts, interest rates will fall further this year. ANZ Bank said interest rates may be reduced another 1 per cent in 2013 to support enterprises when economic data are pessimistic. This point of view coincides with the content in the Asia - Pacific Economic Update released by JP Morgan. Given current macroeconomic situation of Vietnam, the SBV may cut 1 -2 per cent more in 2013.

 

The operator has persisted with rate-cut direction. SBV Governor Nguyen Van Binh has repeatedly asked the commercial banks to cut lending rates. In mid-March, he reiterated this request, saying that reasonable interest rates are from 10 per cent to 13 per cent per annum.

 

The sharp reduction in deposit rates have given rise to the fast decline in lending rates, thus widening the access to capital sources for businesses and for the economy. Currently, lending rates are in the range of 12 - 15 per cent per annum.

 

However, companies are still bemoaning about the difficulty in accessing credit while banks are fiercely vying for good customers to lend and spur credit growth. Truong Van Phuoc, General Director of Vietnam Export Import Commercial Joint Stock Bank (Eximbank), said the biggest concern is now how to increase aggregate demand and boost sales of enterprises, not interest rates.

 

In fact, a company with good credit ratings and fine profile can easily borrow at 10.5 - 12 per cent per annum. But, there are not many good customers to find. For the time being, hardly any bank dares to give a risky loan because they are struggling with bad debts. A banker admitted that the zero credit growth was because businesses did not borrow money on lack of good business plans.

 

In practice, from the beginning of this year, many banks have offered attractive credit packages to increase lending with interest rates ranging from 10 - 12 per cent per annum. These programmes aim to attract new customers.