Challenge of Stabilising Interest Rates

Commercial banks are walking a fine line between raising rates to retain depositors and keeping lending rates low to support business recovery.

At a meeting in August, the government determined stabilising interest rates as one of its key tasks. The governor of the State Bank of Vietnam has also sent a message reiterating the commitment not to increase the Vietnamese dong interest rates in the near future. However, this task looks to be a tough challenge amid the global economy’s complicated developments and waves of interest rate rises in recent days.

The early days of September saw slight increases of between 0.1 and 0.3 percentage points in deposit rates at a number of banks. At LienVietPostBank, for example, deposit rates for terms of one, two and three months were 4.2 percent, 4.4 percent and 4.6 percent respectively, up 0.2 percentage points. Rates for longer terms -- nine, ten and eleven months -- also rose to 5.6 percent. SeABank raised its rates for six-month deposits by 0.4 percentage points to 5.9 percent and 12-month by 0.2 percentage points to 6.8 percent. At a number of VPBank’s transaction offices, rates for six-month and 12-month deposits also rose by between 0.1 and 0.4 percentage points. On the contrary, larger commercial banks such as Vietinbank, BIDV and Vietcombank have kept their interest rates virtually unchanged although they are already quite low.

Commenting on this phenomenon, many economic experts have said that smaller banks may want to be more competitive in attracting depositors and therefore raise their interest rates. This has been confirmed by a number of commercial bank leaders. It indicates that the upward pressure on interest rates is real, not because of the lower demand for holding Vietnamese dong in cash thanks to higher rates, but because of a rapid recovery in the property market, leading banks to mobilise more funds to meet a projected increase in credit demand from now towards the year-end.

Some analysts, however, say that rate rises at a number of small commercial banks are only temporary, noting that rates of between 4.5 percent and 7 percent guarantee positive real interest rates for depositors, and lending rates of between 6 percent and 10 percent are reasonable.

It is apparent that banks are facing an interest rate challenge. It is not easy to keep rates stable until the end of the year in the face of greater competition between banks.

Since it is no longer easy to boost credit growth and to retain creditworthy borrowers, commercial banks have to accept lower profits or the breakeven level so as not to increase lending rates. On the other hand, it is undeniable that the business community is expecting further cuts to lending rates. Commercial banks have been placed in a very difficult situation -- they have to make interest rates attractive enough to retain and keep depositors away from other investment channels while having to hold lending rates at moderate levels to prop up business production recovery.

NDO