The State Bank of Vietnam (SBV)’s decision to reduce operating rates had true value with large balances reflected in banks’ financial statements, especially when entering the peak season.
SBV just decided to reduce 0.25 percentage points of operating rates.
Accordingly, the refinancing interest rate reduced from 6.25 percent per year to six percent per year. The rediscount interest rate reduced from 4.25 percent per year to four percent per year. The overnight lending interest rate in inter-bank electronic payment and lending to offset the capital shortage in the clearing of SBV from banks from 7.25 percent per year to sevent percent per year.
At the same time, SBV lowered the interest rate of offering valuable papers through open market operations (OMO) from 4.75 percent per year to 4.5 percent per year.
According to experts, cutting down on interest rate would help credit institutions access to capital from SBV at a lower cost and support the interest rate stabilisation of credit institutions.
In terms of capital cost, banks having the most loans from SBV would be the biggest beneficiaries of this decision.
Depending on a BizLIVE survey, till the end of Q2/2019, group of state-owned commercial banks had currently the highest debt of SBV.
In which, Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) ranked first with a balance of more than 10 trillion dong. Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) ranked second with 5.7 trillion dong, and Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) ranked third with over 3 trillion dong of debt to SBV.
Followed by joint-stock commercial banks including HCM City Development Joint Stock Commercial Bank (HDBank) (nearly 2.2 trillion dong), Tien Phong Commercial Joint Stock Bank (TPBank) (1.6 trillion dong), Vietnam Technological and Commercial Joint-Stock Bank (Techcombank) (over 1 trillion dong)
Besides, banks in the restructuring category were also members benefiting from this decision. Despite not disclosing financial information, borrowing from SBV of these members could be significant.
Commercial banks borrowed money from SBV through pledge channels on OMO, refinancing, rediscounting. Interest rates on all three sources decreased by 0.25 percentage points mentioned above.
According to BizLIVE survey at 22 commercial banks announcing the financial statements for Q2/2019, the total capital they borrowed from SBV was only around 25 trillion dong. This scale was likely to be greater if there had been a specific announcement from Vietnam Bank for Agriculture and Rural Development (Agribank) and three cases of compulsory acquisition by SBV in previous years.
However, the figures given above were only for reference, due to the nature of closing quarter time on books with unknown sources of maturity as well as the actual size of loans in the period, etc. However, when being among the flow of the market, the decrease of 0.25 percentage points of operating rates had a direct impact on capital costs of banks, especially when the system enters the peak season.
As in Q4 of every year, when the capital demand of the system is high, the amount of loans generated in OMO channel alone has been quite large with the permanent participation of many members.
At the peak, the loan balance at OMO channel at the end of the year until after the Lunar New Year recorded a large scale, from 150 trillion dong to 170 trillion dong; such as the peak record during the Lunar New Year 2019 reached 154.637 trillion dong. With the interest rate further reduced by 0.25 percent per year, the cost reduction here was significant.
In terms of interest rates, after the decision to reduce the operating rates had been announced, the market immediately witnessed interest rates on the interbank market fell sharply with overnight interest rates plummeting to 20 percentage points percentage, to 2.78 percent.
The downtrend continued until the end of the session on September 17, the overnight interest rate on the interbank market dropped to 2.54 percent per year, one week was 2.68 percent per year; two weeks was 2.94 percent per year and one month was 3.36 percent per year.
In theory, cheaper capital costs in the interbank market will provide an important basis for commercial banks to adjust interest rates on market one.
However, because the interbank capital only met short-term capital needs, was not used for credit and was limited by the ratio of 20 percent compared to mobilised capital of economic organisations and the population, it would need some space long enough time for cheap capital inflows to penetrate from market two to market one.
Although the impact of reducing interest rates on lending rates was assessed to be limited and delayed, it showed the operator’s efforts and initiative in supporting direct mitigation of expenditures capital costs for the system. This, thereby, contributed to other conditions to stabilise and aim for reducing lending rates.
