Priority of Curbing Inflation

He pointed out that, in early 2010, interbank borrowing at 15 banks was equal to 50 % or more of capital mobilisation from the public, but the rate has currently been reduced to only 21 % on average, near the statutory 20 % provided by the State Bank.

 

To drive the rate down to 21 %, banking regulators have adopted strong measures, including State Bank loans for banks to settle interbank borrowings. The Vietnam Bank for Agriculture and Rural Development (Agribank) - the largest lender in Vietnam by assets and the top debtor to the central bank, was reported to have cut its interbank borrowing from VND27,000 billion to just over VND9,000 billion.

 

Furthermore, to ensure liquidity for credit institutions, the Governor said the central bank will continue regulating transactions on the open market flexibly. “The State Bank is holding more than VND140,000 billion worth of valuable papers,” he said, adding “Many thought that the credit growth in the first half of the year was low, but the State Bank deemed the growth rate of 10.52 % reasonable.”

 

In June 2010 alone, the credit growth was forecast at over 3 %. It is rather difficult for banks to lower the lending rate because it is affected by many factors and because deposit rates have not fallen, causing a narrow margin of input and output.” Clearly, the Governor’s message on monetary policy is to continue with priority of curbing inflation.

 

While the interest rate cut is one of the top concerns of the State Bank, commercial lenders seem to be ignorant of this. “What we need is a reasonable margin of deposit and lending rates, enough for an operating profit,” said a bank leader. Credit institutions are now not short of money, but the current plenty is short-term because it is provided by the State Bank throughout the open market. Because borrowing demand was restrained by the 20 % threshold on the interbank market, the interbank rate is falling and will continue to do so.

 

Many banks have lost their interest in interbank market transactions. Instead, several lenders provided money for their subsidiaries to put into other banks at a high deposit rate of 11.5 % per annum. This is potentially risky to the system because most deposits are short-term, usually of a few weeks.

 

Most importantly, many banks are ready to lower their lending rate by 1-2 % to 12 % per annum for well-performing borrowers, but the credit growth is still slow. Credit growth at some banks was just 7-8 % in the first half of this year compared with the end of 2009, of which 70 % belonged to growth in foreign currency credits. Enterprises did not want to borrow because of slow sales. Actually, the problem now is probably not merely the interest rate, but the very competitiveness of the economy, domestic demand and exports.

 

The second message of State Bank the Governor is that there will be no delay in applying the statutory registered capital of VND3,000 billion by the end of 2010. According to Mr Giau, as many as 22 joint stock banks and one State-owned bank have an authorized share capital of under VND3,000 billion. By the end of September, if these banks have not raised the capital to the statutory level, they must submit self-settlement plans.

 

“Decree 141 providing the authorised share capital of a bank was promulgated in 2006. All banks have had time to do this and there is thus no extension of time,” the Governor confirmed.

The determination of the State Bank will cause a headache to some banks. Although most of the 22 undercapitalised banks have submitted the capital rise plan, mainly relying on existing shareholders, they must wait for the approval of the State Bank. What will happen if shareholders fail to contribute enough money? Public offering at par value seems hardly feasible because current prices of bank shares on the over-the-counter market are below the par value. In such conditions, bank mergers seem to be the best way!