In late 2017, a large commercial bank reduced deposit rates. The decision came after the bank’s deposits strongly rose, the Incremental Capital Output Ratio was fairly low and it had to balance the expenses.
Talking to the press at that time, leader of the bank said that despite applying the lowest deposit rates on the market, and had even lower the rates, its deposits still grew sharply, higher than the average level of the industry.
There is a fact in that case. In 2017, many risks involved deposits occurred, the flow of deposits tended to focus more on large commercial banks instead of being attracted by high interest rates as before. Leader of the above bank further explained that “the strong deposit inflow despite the low interest rates shows that the bank’s reputation is being confirmed on the market”.
It points out a clear difference in interest rates within the same system. The difference between the highest deposit rates among large and small banks now stands at up to 2.3-2.5 percent per annum. In previous years, this difference was less than 2 percent per annum.
There are some reasons leading to this situation
Firstly, there is an unevenness in competition, position and prestige in attracting deposits in the system, and in competitive advantage, especially with the large and outstanding source in 2017 the budgetary deposits, which were considered the privilege of the group of state-owned banks.
Secondly, state-owned banks reached the credit growth limits, while they themselves could not improve sustainably the Capital Adequacy Ratio (CAR) as they were almost unable to increase charter capital. Accordingly, restructuring output source through asset shifts, and reconsidering input source via lowering competition in deposit rates to minimise expenses are the short-term solutions.
Meanwhile, at some joint stock banks, the deposit rates still directly or indirectly increased.
If in 2017, the highest deposit rate in dong of 8 percent per annum was only seen in some members, it is now found in more banks. Along with that, some other bonus rates of 0.5-0.7 percent per annum are added to deposit rates without being included on the official deposit rate list.
A local capital backlog
In a recent report, the National Financial Supervisory Commission (NFSC) said that the dong interbank rates have been very low in recent time, but not all banks could have easy access.
The rates of 1.5-4 percent per annum on the interbank market were not for members which are in difficulty or lack of secured assets. Thus, these members still have to compete in mobilising capital from the public and other organisations. This is also one of the reasons that the low interbank rates could not create a stability on the normal deposit rate lists of many banks.
Although the two markets differ in characteristics, the difference has become clearer between the rates on interbank market (market 2) and rates offered to the public and normal economic organisations (market 1).
The State Bank of Vietnam (SBV) mainly regulates indirectly via market 2, via open market operations (OMO) and via other instruments, but the clearer difference in the system and among the markets shows that the regulation of SBV has not really been effective to the ultimate beneficiaries which are the people and borrowing businesses.
That is perhaps one of the reasons the prime minister once again emphasized the acceleration of lending rate reduction at the February regular meeting. This guidance was given when the Vietnamese banking system was showing signs of partial capital backlog. The difference is also seen clearly here, as some members have to apply high interest rates to find capital on market 1, while a large number of banks are urgently attract capital by low interest rates.
In the last week, after the peak season of the Lunar New Year, SBV has issued bills to partly withdraw capital by a series of sessions worth 20 trillion dong, with terms expanded from seven days to 14 days and then 28 days. This temporary capital backlog is now very large, as in the last week, the total bills in circulation reached a rare high level in the past decade over 80 trillion dong. The dong interbank rates have become very low from just 1.28 percent to less than 2.5 percent per annum on short terms.
