On November 29, 2019, the Governor of the State Bank of Vietnam (SBV) signed Decision No. 2497/QD-NHNN on the interest rates of compulsory reserve deposits and deposits in excess of mandatory reserves of credit institutions at SBV. This decision would take effect on December 1, 2019.
As explained by SBV, this decision was issued following the current macroeconomic developments and interest rates. Specifically, the new interest rate for compulsory reserve deposits in dong was 0.8 percent per year, the interest rate for deposits exceeding the compulsory reserve in dong was zero percent per year.
Thus, the interest rate had decreased by 0.4 percent per year compared to the decision on the interest rate of compulsory reserve deposits in dong of the credit institution at SBV from July 2019, which was 1.2 percent per year. As for foreign currencies, SBV regulated the interest rate on compulsory reserve deposits was zero percent per year, the interest rate for deposits exceeding required reserves was 0.05 percent per year.
Also, SBV issued Decision No. 2498/QD-NHNN regulating the interest rates of deposits in dong of Vietnam Development Bank (VDB), Vietnam Bank for Social Policies (VBSP), People’s Credit Fund, and microfinance institutions at 0.8 percent per year. The interest rate of the State Treasury’s deposit, the Vietnam Deposit Insurance at SBV for dong deposits of the State Treasury was one percent, the interest rate for the deposits in foreign currencies of the State Treasury was 0.05%.
Before the move to lower the compulsory reserve interest rate, resonating with the reduction of lending interest rates since the beginning of 2019, many experts said that SBV was implementing loosening monetary policy.
However, many people argued that the reduction of deposit rates and lending rates actually affected the financial market, while the decrease in compulsory reserve rates, though more or less influential, was negligible. The reason is that the required reserve of banks is currently low, only about 3%.
As usual, credit institutions only maintained deposits equal to the compulsory reserves prescribed by SBV to avoid wasting resources of the banks themselves.
The fact was that credit institutions only wanted to reduce the reserve requirement to have more money to borrow or to invest to bring more efficiency for the capital. Therefore, the reduction of compulsory reserve interest rates, though having an impact, was not significant to the profits of credit institutions.
In the opposite direction, the party that had to pay interest for the compulsory reserve deposit was SBV, and this was the State budget. Therefore, the reduction of mandatory reserve interest rates was significant for reducing the interest payment burden for the State budget.
In a certain period, to be suitable with the actual conditions of the credit market as well as to support credit institutions to reduce lending rates, SBV might increase the interest rate of the required savings deposit reserve.
This increase in interest rates would have a positive impact on the economy, on capital flows from credit institutions running into the economy. However, if the economic situation was stable, safe and profitable credit institutions and SBV might reduce the interest rates of compulsory reserve deposits appropriately.
In the current case, the move to reduce the interest rate of compulsory reserve deposits of SBV might stem from the first six months of 2019. Financial statements of banks showed that their business was profitable. Even many banks had surprising profits. Thus, banks had to share the burden with the State budget by enjoying less compulsory reserve interest rates.
Sharing quickly with reporters, a commercial bank said that what banks interested in was the level of required reserve reduce. The current compulsory reserve was three percent, with an interest rate of six percent per year. Thus, every 100 dong mobilised, the bank would be granted 97 dong and 3 dong for the compulsory reserve.
This meant that the compulsory reserve level that created real costs for banks would be higher than the mobilising interest rate of six percent per year. If the required reserve level was reduced, the cost would decrease, and the bank’s lending capacity would increase; banks would have more capital to pour into the economy.
This representative also shared that many people believe that Vietnam’s compulsory reserve level was in the low average level of the world, as in the US, the compulsory reserve was up to 10%. They were concerned that the decline also led to concerns about the safety of SBV’s liquidity when an incident occurs.
However, with banks simultaneously reducing lending rates from the beginning of the year until now, the profitability of banks was significantly affected because banking activities in Vietnam still depended heavily on interest rates, unlike banks in the US having high rates of service fee collection.
Therefore, reducing the compulsory reserve ratio would help reduce bank costs and not be too imbalanced after the recent lending interest rate cuts. Banks also had a certain amount of capital to put into the economy that was currently lacking.
