Although the roadmap for tightening short-term capital for medium and long-term lending has been loosened, many experts believe that the race to increase interest rates to attract medium and short-term capital may heat up again.
The State Bank of Vietnam (SBV) has issued Circular 22/2019/TT-NHNN regulating safety limits and ratios in operations of banks and foreign bank branches to replace Circular 36/2014/TT-NHNN.
One of the notable adjustments is that the SBV will further reduce the maximum ratio of short-term funds used for medium and long-term lending to 30 percent according to schedule Specifically, this ratio will be reduced to 40 percent in the period of January 1st 2020 to September 30th 2020, 37 percent in the period of October 1st 2020 to September 30th 2021, 34 percent in the period of October 1st 2021 to September 30th 2022, and to 30 percent from October 1st 2022. Thus, this roadmap has been extended by the regulatory authority compared to the two initial plans outlined in the draft circular.
The above decision is intended to support liquidity and minimise the term risk between banks’ source and the use of source. At the same time, it requires banks to regularly base on the actual capital available at the time of lending to have a loan plan.
Another basis for the management agency to make this decision is that the current ratio of short-term capital used for medium and long-term loans of all banks is much lower than the current level of 40%. Specifically, statistics of the SBV showed that by the end of August, this ratio of state-owned banks was only 30.61%, while that was 30.91 percent for private joint stock banks.
There are also opinions that the tightening of the ratio of short-term funds used for medium and long-term loans also means tightening the medium and long-term credit when the mobilised capital of banks is mainly short-term. This will be a pressure for Vietnam to further develop the capital market and stimulate businesses to seek capital from the stock market, thereby overcoming the imbalance in the financial system.
According to forecasts of many securities companies, reducing ratio of short-term capital used for medium and long-term loans to 30 percent poses a risk of increasing the medium and long-term deposit interest rate level of the entire system. The current level is about0.5-0.7 percent higher than in 2018.
This concern is understandable when the interest rate race has started since mid-2018 to attract medium and long-term capital source in order to meet the requirement of reducing the ratio of short-term funds used for medium and long-term loans to 40 percent from the beginning of 2019. This race is getting hotter after the SBV announced the draft circular replacing Circular 36/2014/TT-NHNN, which included a plan to reduce this ratio to 30%.
Many banking experts such as Dr Can Van Luc, Dr Nguyen Tri Hieu also thought that the deposit interest rate race of banks in recent time was mainly to restructure the capital sources to ensure the implementation of the SBV’s requirements, specifically the regulation to lower the ratio of short-term funds for medium and long-term loans and to meet Basel II standards.
Meanwhile, since the average ratio of using short-term funds for medium and long-term lending of both state-owned banks and private joint stock banks is higher than 30%, these banks still need to continue restructuring credit and reduce the proportion of medium and long-term credit, or increase the size of capital source, especially medium and long-term capital.
However, at many banks, since the proportion of outstanding medium and long-term loans is currently very high, even reaching up to 60-80 percent at some banks, it is difficult to be reduced in short term. Thus, the immediate solution is to increase the size of capital.
From a different angle, the SBV has issued a decision to lower the deposit rate ceiling of terms of less than one month to0.8 percent per annum and of terms from one to less than six months to five percent per annum. Nevertheless, the deposit rates of terms from six months and more are determined by banks. That is an opportunity for banks to race to attract medium and long-term capital by interest rates. Certainly, when deposit rates increase, lending rates can hardly be lowered, especially medium and long-term lending rates which are not restricted by ceiling interest rates.
