Recent developments in the open market (OMO) show that the liquidity of capital is abundant again. However, this does not reduce the trend of pushing interest rates to mobilise capital from credit institutions. When the deposit interest rate is high, it is difficult to reduce the lending interest rate, but the State Bank of Vietnam (SBV) is expected to continue stabilising the market. However, banks assume that there will be a differentiation of interest rates among different customers and loans in the long term.
Outstanding liquidity
In the second week of March (from March 11 to March 15), the SBV withdrew a net amount of 6.374 trillion dong via OMO. Specifically, 13.961 trillion dong was withdrawn while 7.588 trillion dong was pumped into the market. The SBV also issued seven-day three percent bills with face value of 17,000 dong for the first time after four months absent on this channel.
Combining two channels, OMO and bills, the SBV withdrew a net amount of 23.373 trillion dong. Accumulated from the beginning of 2019 until now, the SBV withdrew a total net amount of 64.828 trillion dong via OMO and bills. This withdrawal trend continued to be maintained for the fifth consecutive week.
In the inter-bank market, interest rates continued to decline in the past week. Specifically, interest rates of overnight, one-week and two-week loans decreased respectively from 3.95 percent per year, 3.8 percent per year, and 4 percent per year to 3.55 percent per year, 3.45 percent per year, and 3.65 percent per year. However, the liquidity of the banking system is still relatively positive, reflected through the continuous net withdrawal activities of the SBV in recent weeks. The downward trend of interbank interest rates will remain in the coming weeks to the average level of three percent for all terms.
Talking about the system’s liquidity, Pham Thanh Ha, the SBV’s Monetary Policy Department, disclosed that in the first six months of 2018, credit increased very fast and foreign currency credit increased even faster. The exchange rate was stable; the SBV bought a lot of foreign currencies, including spot buying and futures buying, to control the money market. The situation of excess liquidity at that time also supported interest rates.
From July 2018 onwards, the market has changed, credit still increased but foreign currency credit began to decline and exchange rate fluctuated strongly. The SBV started spot selling foreign currencies and at the end of the year intended to sell foreign currency futures. Accordingly, liquidity is reduced and interest rates start to increase.
In the first two months of 2019, credit increased by one percent. Credit in January continued to increase at a rate as high as that of 2018, but in February slowed down without any sudden changes. Market liquidity was also stable. Due to the pre-Tet season, the SBV had to release money, but then the lending balance of the SBV to credit institutions also fell quickly and the current balance is very small.
Accordingly, pressure to improve liquidity quickly disappeared. At the same time, from last December, capital flows began to return, commercial banks sold foreign currencies to the SBV. From the beginning of the year until now, the SBV has been buying foreign currencies continuously. Though the purchases did not take place as widely as last year, the purchase quantity was quite large. The fact that the SBV pushed the dong to buy foreign currency supported the market liquidity.
Mobilisation race still does not cool down
However, the situation of abundant liquidity has not been able to cool down the increasing deposit interest rate in the market. Currently, more and more banks are pushing interest rates far beyond eight percent per year. At Saigon Joint Stock Commercial Bank (SCB), customers participating in ‘Dac Loc Tai’ savings programme enjoy six-month term deposits (interest received at the end of term) at interest rate of eight percent per year and 12-month term deposits at interest rate of 8.45 percent per year. Depositing for the term of 13 to 36 months in the ‘Dac Loc Phat’ savings programme, customers will enjoy interest rate of 8.55 percent per year.
Vietnam Prosperity Joint Stock Commercial Bank (VPBank) offers ordinary savings with interest rates of 5.3 to 7.8 percent per year. Customers in the priority segment depositing from 100 million dong for one-month term are offered an additional interest rate of 0.1 percent. However, customers participating in the ‘Phat Loc Thinh Vuong’ savings programme can get interest up to 8.6 percent per year for the amount of over 5 billion dong for terms of 18, 24 and 36 months.
Deposits with the same term with the amount of less than 5 billion dong are offered with an interest rate of 8.4 to 8.5 percent per month. Deposit interest rates with terms of 12 months and over are listed by Viet Capital Joint Stock Commercial Bank (Viet Capital Bank) at eight percent per year. For the term of 15 months, the deposit interest rate is 8.3 percent per year; over 24 months the highest interest rate is 8.6 percent per year.
According to the National Financial Supervisory Commission, last year, interest rates on the deposit market of economic organisations and individual customers increased. Specifically, the average deposit interest rate increased from 5.11 percent in 2017 to 5.25 percent per year. The average lending rate is about 8.91 percent (8.86 percent in 2017). The restructuring of credit institutions in order to meet requirements on safety ratios in 2019, such as the ratio of short-term capital on medium and long-term loans at 40 percent, and to prepare to raise tier two capital under Basel II mainly caused the increase in interest rates.
Some experts commented that those causes would continue to keep deposit rates at this level. Even the abundant liquidity of the financial system and favourable movements on the inter-bank market are difficult to prevent this trend until banks meet the requirements on working capital safety.
Stable but not level lending interest rates
In recent years, the government has both promoted growth and tried not to put interest rate burden on production and business activities. In the first half of 2018, favourable market situation helped stabilise the interest rate, but the situation was less advantageous in the second half of the year, resulting in an increase in interest rates. Therefore, in addition to credit issues, interest rate continues to be a concern of companies this year, especially when banks still have not stopped the race of mobilisation.
However, according to Dr Ha Huy Tuan, vice Chair of the National Financial Supervisory Commission, early 2019 witnessed a lot of favourable information about the trade war and the caution in raising interest rates of the US Federal Reserve. At the same time, the US is in the midst of a mid-term election, so the policies will be less shocking. China is also facing some difficulties and China Central Bank also sent a message to manage exchange rates and interest rates cautiously.
Domestic inflation pressure eased when world oil prices were forecasted to remain unchanged. Accordingly, the pressure on the exchange rate is not too large. This factor along with stable money supply and a good economic growth will keep the basic interest rate stable in 2019.
From banks’ perspective, Nguyen Dinh Tung, general director of Orient Joint Stock Commercial Bank (OCB) reckoned that interest rates would continue to hold as in 2018. However, the distinction in lending interest rates between different customers would become more pronounced. Firstly, it is due to the orientation of the SBV for different lending sectors.
Secondly, besides three banks that have met the requirements in Basel II, other banks will also aim to apply this standard in operation. Therefore, banks will apply the interest rates according to the risk level of the property, the customer, and the loan. Low interest rates will be applied to loans with low risk and vice versa.
Accordingly, some businesses will be entitled to loans with interest rates of five to six percent per year, while other businesses will still have to borrow at an interest rate of 11 to 12 percent per year.
