Contrary interest rate movements
According to Bao Viet Securities Company (BVSC), the interbank rates continued fairly sharp decline in the week from July 15th to 19th, recording the third consecutive week of decline since the beginning of July. Accordingly, closing the week, the overnight rates dropped to 2.75 percent per annum, down by 0.5 percentage point compared to the end of June and down by two percentage points compared to the beginning of the year. The one-week rate fell to 1.9 percent per annum, and two-week rate fell to 3.1 percent per annum, respectively down by 0.4 and 1.8 percentage points.
“The downturn of interbank rates in the week to below three percent showed that the system liquidity has become abundant again,” said BVSC.
Another evidence showed the excessive liquidity of the banking system is the rebound of the bond auction activities in July. Most recently, in the session on July 24th, the State Treasury also successfully mobilised 7.021 trillion dong out of a total of 7.5 trillion dong. In general, in July, the State Treasury raised a total of 25.761 trillion dong of government bonds in a total offer volume of 27.5 trillion dong, equivalent to a winning rate of up to 93.7 percent, much higher than the 75.5 percent recorded in the first half of the year.
It is not difficult to see that the abundant liquidity is also partly thanks to the purchase of a large amount of foreign currency by the State Bank of Vietnam (SBV) from the beginning of the year. Indeed, with the purchase of 8.35 billion US dollars to supplement foreign currency reserves, the SBV has injected about 194 trillion dong to the market. Meanwhile, according to statistics of BVSC, from the beginning of the year until now, the SBV has only withdrawn about 86.506 trillion dong, which means that more than 100 trillion dong are still left in the market to supplement liquidity for credit institutions.
So why are banks still racing to mobilise capital while their liquidity is still in excess? Why does the strong reduction of interbank interest rates not spread to residential market? What causes these two markets to not be connected? An expert briefly responded to these three questions that the reason is the local medium and long-term capital shortage.
“In theory, the interbank market only plays the role of an emergency support channel for urgent capital needs of banks. It means that the capital sources on the interbank market are on very short terms. The decline in the interbank rates has only indicated that banks do not lack and even have excessive short-term capital,” said the expert.
Nevertheless, what banks lack is medium and long-term capital, but the very short-term capital sources on the interbank market cannot relieve the medium and long-term “capital thirst”. That is the reason why the interest rate hike of banks in the recent time mainly focused on long terms, with the aim to comply with the regulation on short-term funds used for medium and long-term lending of the SBV.
That is the reason why deposit rates are still listed at high levels despite the significant interbank interest rate reduction. In the recent time, deposit rates have tended to decline slightly on terms of less than 12 months, as the short-term funds of banks are fairly abundant. However, for terms from 12 months and more, the interest rate movements are contrary due to the dependence on capital balance to meet the requirement of short-term capital used for medium and long-term loans.
In fact, banks currently offering the highest deposit rates on the market are those having very high proportion of medium and long-term credit. For example, in the end of June 2019, the proportion of medium and long-term outstanding loans at Vietnam International Commercial Joint Stock Bank (VIB) reached up to 81.8 percent.
In contrast, at state-owned banks such as Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), this proportion was recorded at only 46.11 percent. That is perhaps the reason why Vietcombank is listing its highest deposit rate at only 6.8 percent per annum, 1.8 percentage points less than the current highest deposit rate on the market.
In the coming time, short-term mobilisation interest rates will not see much fluctuations, and may decline due to the fairly abundant short-term capital source in the system due to the impact of Circular 36/2014/TT-NHNN which regulates the safety limits and ratios in CIs’ operations. For longer terms of more than 12 months, the interest rates will continue to inch up as banks are having to restructure their capital sources, particularly when the draft circular on further reducing the ratio of using short-term funds for medium and long-term lending to only 30 percent by 2020 of the SBV is approved and takes effect.
