According to banking experts, the recent move of lowering regulating rates by the State Bank of Vietnam (SBV) did not have much impact on the market interest rate because this reduction was quite small.
Just an executive signal
SBV had unexpectedly announced the reduction of operating rates. Accordingly, from September 16, the refinancing interest rate will be reduced from 6.25 percent per year to six percent per year; rediscount interest rate will be decreased from 4.25 percent per year to four percent per year; overnight lending interest rates in inter-bank electronic payment and lending to offset the capital shortage in the SBV’s clearing for banks decreased from 7.25 percent per year to seven percent per year. Besides, the offering interest rate of valuable papers through the open market operation was also reduced from 4.75 percent per year to 4.5 percent per year.
According to SBV, the decrease in operating interest rates was due to the recent unfavourable developments in the global economy. Many central banks in many countries, including the US Federal Reserve System (Fed) and the European Central Bank (ECB), had reduced operating rates. Meanwhile, the domestic macroeconomic continued to be stable, inflation was under control, and the monetary and foreign exchange markets were stable.
Therefore, after more than two years of being maintained stably, SBV continued to cut down on operating rates. Previously, on July 7, 2017, SBV reduced the refinancing interest rate from 6.5 percent year to 6.25 percent per year; rediscount interest rate from 4.5 percent per year to 4.25 percent per year; overnight lending interest rate in inter-bank electronic payment and lending to compensate for capital shortage in the clearing of the State Bank for banks from 7.5 percent per year to 7.25 percent per year. The only difference was that SBV also decided to lower the ceiling short-term lending interest rate in dong for priority areas from seven percent per year to 6.5 percent per year.
Nguyen Tri Hieu, banking and finance expert, said that the operating rate which had been cut down was applied to the interbank market, while the linkage between the interbank market and the mobilisation market, lending between banks and other economic sectors were not too tight. This move, thus, did not have much impact on market interest rates.
Agreeing with this judgment, a banking expert said that it would take time for this policy to be transferred to the market. Moreover, the decrease was quite small, only 25 percentage points, so it did not impact much. This move mainly broadcasted a message that SBV was easing monetary policy to support the economy in the context that the global economy was facing the risk of recession due to the US-China trade war.
Furthermore, the liquidity of the Vietnamese banking system was quite ‘abundant’ so for a long time, SBV did not have to use market tools to support banks’ liquidity, on the contrary, there was time to issue bills to withdraw money. Therefore, the reduction of refinancing rate and rediscount interest rate did not have much effect in practice.
Market interest rates are difficult to reduce
In particular, the mentioned expert noted that SBV did not lower the lending interest rate ceiling for priority areas which may stem from the difficulties in reducing interest rates of small banks recently. Although from the beginning of the year, large state-owned banks had reduced lending rates for priority areas twice with a total reduction of one percent per year, but so far there had been rarely responses from private banks, especially small banks. This meant there were certain difficulties for reducing interest rates at present.
In a recently published report, Can Van Luc, Chief economist of Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) and the research team had pointed out four main reasons why real lending rates in Vietnam were still high. First was due to the high inflation in the domestic economy; Secondly, real deposit rates in Vietnam were high; Thirdly, there were high risk and also the high transaction costs of the economy.
Regarding the deposit rates maintained at a high level, according to Can Van Luc and his team, it was mainly due to depositors’ demand for interest rates on the ground of expected inflation and comparison between Vietnamese and foreign currencies. Accordingly, the control inflation of Vietnam this year determined at three percent to four percent along with the depreciation of dong expected at two percent to three percent, made the demanded deposit rates very difficult to be under five percent.
In fact, deposit rates had been on an upward trend recently. Accordingly, current deposit rates for terms of less than six months had been raised to the ceiling of 5.5 percent per year by many banks. The highest six-month deposit rate was up to 7.5 percent per year. Many banks started paying interest rates up to eight percent per year for nine-month terms and the number of banks paying interest rates at 8.6 percent to 8.7 percent per year was considerably increasing. Banks even started racing to issue valuable papers to push interest rates up to ten percent per year.
The reason why banks were racing to raise deposit rates was because of the thirst for medium and long-term capital to meet the requirement of reducing the ratio of short-term capital for mid-long-term loans to 30 percent in the near future. Therefore, unless this race ended, the lending interest rate level would not be reduced and there were only symbolic actions from SBV to reduce the operating rates.
Although the gradual reduction in the proportion of medium- and long-term loans was essential to ensure safety for banks, however, ‘haste makes waste’. Currently, many banks had very large medium and long-term loan balance and it was difficult to reduce in a short time, said the expert, and recommended that SBV should extend the time limit to reduce the ratio of short-term capital. Medium and long-term loans to cool down interest rates.
