Is the Interest Rate Peak Over?

2:50:30 PM | 7/8/2011

Consumer price index (CPI ) growth has slowed down in the past two months and banks show signs of lowering interest rates. However, it is still too early for enterprises to pin hopes on expected rates.
Far over the cap
Although the State Bank of Vietnam (SBV) holds on to the interest rate cap, banks are still illicitly competing with each other by offering above-limit rates. Actual deposit rates have come to 18 to 20 percent per annum, though publicly quoted rates are within the 14 percent limit imposed by the central bank. Extra rates may come from in variety of forms, like bonuses or cross investment. This reality shows that market rates are hardly pulled down by administrative orders in the event that management agencies have not snuffed out the “rate war” and small lenders with low liquidity have to raise the deposit rate to mobilise capital.
 
Liquidity at commercial banks always comes close to safety standards. Banks, particularly small ones, easily fall into the status of illiquidity. They do not have any other weapons but interest rates to compete with bigger lenders. Liquidity strains make the rate cap a nominal limit for months, although authorities have repeatedly delivered recommendations of compliance to lenders. Depositors have never had more options with their money than now. They can even bargain with banks for interest rates and choose the biggest margins. To keep deposits with them, big banks cannot stay on the sideline. An official from a big commercial joint stock bank admitted that in recent months the management of his bank agreed to allow its system to apply the rates of 19 percent per annum on big savings. Many commercial joint stock banks even offer the interest rate of up to 13 percent per annum on demand deposits. As often as not, deposit rates have pushed up lending rates to 22 - 24 percent.
 
High rates have persisted for a long time and recent local socioeconomic situation reports have pinpointed the weighty drag on social and economic performance. The fact that businesses lack capital to do business and have to pay exorbitant interest rates has been reported for months, but no progress has been made to date. In a recent meeting with leaders of commercial banks, SBV Governor Nguyen Van Giau confirmed that the central bank had no plan for adjusting the ceiling deposit rate, currently fixed at 14 percent. The central bank had requested banks to strictly follow regulations on interest rates on Vietnamese dong deposits. Earlier, the Prime Minister issued Directive 922/CT-TTg with respect to the continued implementation of tight, prudent and flexible monetary policy in order to curb inflation. These developments indicate that interest rates may not be lowered in the short term. Actual reduction in interest rates occurs only when inflation is checked and monetary policy is loosened.
 
Bankers proposed that the SBV inject money into the system to boost liquidity at small banks, helping them abandon interest rate races. To this effect, Mr Nguyen Ngoc Bao, Head of Monetary Policy Department, the SBV, announced that the SBV will continue supporting small banks to maintain liquidity in the third quarter of 2011 and will consider publicising information about credit institutions to help people choose banks to deposit their money. If this move is carried out by the SBV, interest rate races will be nipped in the bud, as illiquid banks can rely on the SBV rather than mobilise at any cost.
 
Signs of cooling down
Although actual interest rates remain lofty, depositors can still comfortably bargain for wider margins. There are no major changes in capital mobilisation policies of commercial banks. Recent signals indicate the possibility of easing interest rates in the near term. The first sign is a slowing CPI growth. June CPI eased to 1.09 percent from the previous month, which was just half of the May CPI growth. This was also the second straight month CPI decelerated. Interest rates on the interbank market also softened from mid-May. Overnight rates on June 17 slipped to 11.17 percent per annum from the 12 percent rate that stubbornly persisted for nearly one month. Other term loans ranged between 12.75 percent and 13 percent. Another important signal indicates more comfortable liquidity at banks: Coupon rates of government bonds slow down. At the end of June, all government bonds sold out at public auctions with lowering coupon rates. In a recent tender, the State Treasury of Vietnam continued successfully issuing nearly VND5,000 billion worth of bonds with two-year, three-year and five-year terms, bearing coupon rates of 12.3 percent, down 40 percentage points.
 
As coupon rates of G-bonds are lower than those on the open market, banks will not purchase this form of valuable papers to trade on the monetary market, because they get no gains. This may be a sign of profuse capital at banks and improvement in the liquidity problem.
 
Another matter of concern is the deadline for banks to lower the ratio of credits for non-manufacturing sectors to 22 percent on June 30, and the room for credit growth of 20 percent this year almost reached by some banks. These lenders will be forced to use their capital more prudently. However, it is unadvisable to wait for a rate cut in the short term, as the degree of reductions will not be wide and banks cannot take strong action on this issue. Interest rates can decrease from the middle of the third quarter of 2011, when CPI is forecast to cool down and other macro factors become more stable.
 
Le Minh