Although interest rates fell sharply, banks did not dare to reduce deposit interest rates since capital mobilisation also increased very slowly. If the capital cost problem were not solved, banks would face the risk of decreasing net income margin (NIM), reducing financial health.
Interest rates evolved strangely
Slow credit growth made many people believe that there was a slump in banks’ capital. It did not like that in reality. Usually, when the liquidity was redundant, banks rushed to the interbank market, the overnight lending interest rate was only about two percent to 2.5 percent per year. Currently, the interest rate on the interbank market was still nearly 3.3 percent per year, proving that the liquidity was not too much, said the general director of a joint-stock commercial bank.
According to commercial banks, the market was showing some strange signs, proving that banks were not too redundant. Specifically, interbank offered rates did not drop deeply. In the interbank market, transactions mainly focused on overnight maturities, proving that banks were short of deposits demand. Also, lending rates fell sharply, but deposit rates fell very slowly, even from the beginning of April 2020, some banks had raised deposit rates by 0.2%.
Data from the general Statistical Office showed that, at the end of March 2020, credit increased by nearly 0.7 percent (1.9 percent in the same period). Still, capital mobilisation increased more slowly, only about 0.5 percent (the same period increased by 2.2%), which rose more slowly than credit.
Capital mobilisation grew slowly, not because of money flowing through other investment channels, such as gold, securities, real estate, but because people increased their defensive psychology. Moreover, the epidemic lasted from the beginning of the year until then, causing the income and revenue of individuals and businesses to decline, forcing them to withdraw their savings to spend.
Last week, when some banks raised deposit interest rates slightly, the State Bank of Vietnam (SBV) immediately injected money via the open market operation (OMO) to support. The Big Four state-owned banks also pioneered to lower deposit rates as an action to market orientation.
However, with the current situation of slow mobilisation of capital, would the bank have enough resources to pull down the interest rate level to support the economy?
Interest rate remained well-controlled by SBV
Although some people and businesses had to withdraw their savings to cover the epidemic season, according to experts, this phenomenon was not typical and not due to low interest rates. The fact that the SBV injected money hesitantly through OMO showed that the executive agency had stated the market to operate normally.
In fact, many banks had increased interest rates recently but concentrated in small banks which were restructuring. Mid-sized banks raised interest rates on online deposits, but the increase was not significant. Analysts all said that the trend of deposit interest rates in the near future could not increase but only decrease. Specifically, the research group of Bao Viet Securities Joint Stock Company (BVSC) said that if the disease situation had not yet been controlled, the credit continued to decrease, the mobilising interest rate would be slightly reduced so that banks could support the interest rate reduction for businesses.
Nguyen Tri Hieu, a banking expert, said that deposit rates would fall, depending on inflation and demand for credit. If the inflation were at three percent to four percent this year, credit demand would be low, and deposit interest rates might drop by another 0.5 percent from then until the end of the year.
In the condition that commercial banks did not have too much capital, the reduction of deposit interest rates required the SBV’s assistance. According to economist Vo Tri Thanh, with the rate cut in March 2020, SBV had left room for further interest rate cuts, if needed. But the cut would not be substantial because inflation was quite high.
Analysing six monetary policy management tools of SBV, many experts believed that SBV still had plenty of room to help banks reduce further input interest rates. For example, SBV might lower a range of operating rates (refinancing, re-discounting), could inject capital through OMO market, increase credit limits, and even use compulsory reserves. Moreover, from the beginning of the year until then, SBV had not had to use foreign exchange reserves to intervene in the exchange rate.
Previously, Pham Thanh Ha, director of Monetary Policy Department (SBV) affirmed that SBV reduced the operating interest rates, showing the willingness to support credit institutions when they needed capital.
In the current context, depositors must also sacrifice a portion of benefits to support the economy. For commercial banks, reducing deposit rates was not only money to save businesses, but also a vital lesson to protect themselves. When investment channels were risky, it was unlikely that deposits would flow to other channels, if deposit rates fell slightly.
