On March 17, 2014, the State Bank of Vietnam (SBV) announced the reduction of operating interest rates. The market is expecting a lower interest rate to support the economic recovery. This interest rate change of SBV shows that money supply is loosened.
According to the central bank, the maximum interest rate applicable to call deposits and term deposits (under one-month) decreased from 1.2 percent to 1 percent per year; the maximum interest rate applicable to term deposits (from 1 to 6 months) from 7 percent to 6 percent per year. The refinance interest rate also fell to 6.5 percent from 7 percent per year; rediscount rate from 5 percent to 4.5 percent per year; overnight lending rate in inter-bank electronic payment and loans to offset capital shortages in clearing of SBV to others banks from 8 percent to 7.5 percent per year.
SBV also cuts the maximum short -term interest rates in Vietnamese dong towards capital requirements for agriculture and rural development, export, supporting industries, small and medium enterprises. This interest rate reduction equals to the loan rate reduction, from 9 percent to 8 percent per year. Maximum short -term lending rates in Vietnamese dong of People's Credit Fund and microfinance institutions towards these capital requirements decreased from 10 percent to 9 percent per year.
Hope of lower interest rate floor
SBV cuts operating interest rate because banks, before and after Tet, are in a state of excess liquidity (more deposits, less loans). Most commercial banks make profits by purchasing bonds. Low bond interest rates, which reduce profits of banks and weaken the economy, caused the incapability of recovery. This interest rate cut is quite high, at 1 percent. In addition to the monetary overhangs, the most vital factor affecting SBV’s decisions is low rate of inflation. Interest rates, exchange rates and currency market remain stable, foreign exchange reserves go up. Meanwhile, the economy needs more support to recover.
According to Deputy Governor Nguyen Dong Tien, the reduction of deposit interest rates will serve as a basis for the reduction of lending interest rates. Credit institutions shall also take measures to reduce lending interest rate in accordance with the new deposit interest rate floor with new cost.
Lower interest rate floor is an opportunity for businesses and individuals to access loans with more reasonable costs. However, it is too soon to expect a large-scale loan interest rate cut as the recent operating interest rate cut. This action of the central bank of Vietnam primarily benefits the banking system, and after that banks "calculate" how to cut lending interest rates. Thanks to cheaper capital mobilisation, banks may reduce lending interest rates and increase credit rates. Banks having stable credit activities do not need to reduce loan interest rates so the banks’ profit rate increases. In addition, interest rate is not the key of the state of current idle credit. A report by HSBC indicates that the purpose of SBV in reducing interest rates is to promote credit growth. Negative credit growth until now proves that the banking system of Vietnam will still freeze unless important reforms are implemented to solve bad debts.
During tough economic times, plans of investment and fund raising are cancelled or cut. Therefore, enterprises would not borrow more even though lending interest rates is lower. New catalysts for economic growth such as public finance stimulation, market promotion are necessary to encourage enterprises in production funding. Therefore, interest rate cuttings will motivate the economic recovery.
Shifting of long - term capital resources
Even though deposit interest rates are below 7 percent per year, capital resources pouring to banks are abundant. Does interest rate reduction to below 6 percent/ year affect these funds? When deposit interest rates are not attractive enough, people with idle balances can withdraw the money to pursue other forms of investment with a higher interest rate such as buying stocks with impressive gains in last few months, or buying gold and housing in the low-price areas.
The economy, however, does not look optimistic. Many people expect to preserve their capital and wait for their chances so they keep their savings to earn interest. Current deposit interest ceilings still encourage people to consign money on banks. This is reflected in the increase of deposit balances recently. This trend will continue as interest rates have been significantly cut. This helps to stabilise the deposit base of the banking system and to grant a loan for production.
Furthermore, if the operating interest rate is analysed carefully, the decrease of interest rates just appears in under six-month terms, with the longer ones the rate is still negotiable and attractive. The policy shows that the deposit stimulation concentrates on longer terms with higher interest rate. And in fact, banks also confirmed a capital shift from short terms (commonly less than 3 months) to longer ones. This change is healthy and necessary for banks in capital balancing.
When there comes a cut in deposit interest rate and an abundant capital, many banks are planning to boost credit growth through a number of encouraging policies which aim at promoting preferential lending packages and programmes such as “Preferential lending – reduced rates all year”, in which customers can take out a loan with interest rate from 7 percent/ year – one of the lowest interest rates in market recently. Individuals and households in need of consumption loans will have chances to access to the lowest interest rates and many other flexible incentives about time limits, loan limits and disbursement speed.
Anyway, the reduction of deposit interest rates also contributes to reduce lending interest rates. SBV used to orient lending interest rates in Vietnamese dong, in favourable conditions, to further fall by 1 or 2 percent/ year.
Minh Chau
Vietnamese
