Interest Rate Cut - A Hard Lesson

On May 28, the State Bank of Vietnam (SBV) issued Decision 1141/QD - NHNN adjusting the compulsory reserve ratio of credit organisations. This measure aims to reduce the money supply and control increasing inflation.

According to this decision, the compulsory reserve ratio, on demand VND deposits and VND deposits with maturity of less than 12 months, applied to state-run commercial banks, urban commercial joint stock banks, joint venture banks, foreign bank branches and financial companies, is 10 per cent over the total compulsory deposit balance. For the Bank for Agriculture and Rural Development of Vietnam (Agribank), the rate is 8 per cent. The rate applicable to rural commercial banks, central people’s credit funds and cooperative bank is 4 per cent over the compulsory reserve balance. For termed VND deposits with maturity from 12 to less than 24 months, the rate is 4 per cent, applicable to all credit organisations, financial companies and finance leasing companies.

 

The SBV explained that the compulsory reserve ratio adjustment for credit organisations results from the high CPI increase of 5.2 per cent (far exceeding the initial forecast of 4 per cent) and the significant increase of payment tools and credits in the first six months this year compared with previous years. Meanwhile, commodity price hikes may further push up CPI growth in the last months of 2007: prices of petrol, foodstuff, energy, coal, electricity, fertiliser and other materials. At the same time, the government’s advocacy of a new rise in salaries, the continued expansion of the State Budget and sharply rising incomes also pushed inflation up. Under that context, the SBV’s adjustment to the compulsory reserve rate to control CPI growth is a crucial measure.

 

The doubling of compulsory reserve ratio concurred with the Vietnam Banks Association’s appeal of interest rate reduction. However, not all banks agreed.

 

Saigon Thuong Tin Commercial Bank (Sacombank) was the first to introduce interest rate reduction to VND deposits. From June 26, Sacombank reduced interest rates on all term VND deposits. Accordingly, the interest rates for 12-month deposit dropped to 0.76 per cent/month and 9-month to 0.745 per cent/month.

 

At present, several state-owned commercial banks like Vietnam Industrial and Commercial Bank (Incombank) have decreased deposit interest rates after a period of increases. Particularly, Incombank’s 12-month deposit interest rate was reduced from 0.73 per cent/month to 0.70 per cent/a month.

 

Mr Nguyen Phuoc Thanh, director of the Bank for Foreign Trade of Vietnam (VCB)’s Ho Chi Minh City branch, said VCB is considering a flexible interest change to reduce input costs. However, according to Mr Thanh, VCB Ho Chi Minh City is now listening for responses from other banks. Thanh explained that the interest rate of state-run commercial banks, including VCB, is still quite low in comparison with commercial joint stock banks. For example, the interest rate for 3-month VND deposit at VCB is only 7.2 per cent/year while the similar deposit at Nam Viet Commercial Joint Stock Bank, upgraded from a rural bank to an urban one, is between 8.61-8.76 per cent/year.

 

However, on June 29, Eximbank raised deposit interest rates, with the highest rises for deposits with maturities of over 18 months. Eximbank announced “This creates a competitive position in mobilising capital for the bank and expanding the market in order to meet the increasingly high demand of customers. Eximbank believes this interest rate hike will attract a large volume of individuals and enterprises to the bank.”

 

At present, liquidity capital at many banks is still available but demand for long-term capital is under pressure. The lower interest rate will discourage people from depositing now and in the future at banks, while increasing the attractiveness of promotions will cost banks more. On the other hand, the hike in lending interest rate will increase input costs for enterprises and the economy. This will possibly lead to price hikes in commodities and services.

 

When banks see hardship in mobilising the domestic currency, they turn their attention to foreign currency deposits. The tendency of USD deposit interest rate rise is clearer when banks need large USD capital to lend expanding enterprises. The average interest rate is some 0.08 per cent/year (long-term deposit) and 0.1 per cent/year (long-term deposit) higher than in March 2007. Within only six months of 2007, at least six banks increased USD interest rates. Vietcombank Ho Chi Minh City started on June 8 with a hike to 5 per cent/year on 12-month deposits and 4.75 per cent/year for 9-month deposits. On June 20, East Asia Bank also increased interest rates for all USD deposits, with a rise to 5.25 per cent/year on 12-month deposits and 5.1 per cent/year on nine-month deposits. Sacombank also increased its interest rate for all deposits by 0.05-0.2 per cent/year. Eximbank joined the interest race on June 29, applying an increase of 0.05-0.2 per cent/year to all USD deposits.