Contrary to the world, Vietnam’s deposit rates have not decreased. Some securities companies even forecast that there would be new interest rate hikes shortly. Can Van Luc, Chief Economist of Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV), discussed this issue.
Countries around the world were racing to lower interest rates to stimulate growth. What about in Vietnam?
Lowering interest rates was such a trend in the world that, according to Luc’s calculations, two-thirds of central banks in countries around the globe had reduced interest rates so far. In particular, that the US Federal Reserve (Fed) lowered interest rates of the US dollar had a positive impact on Vietnam’s exchange rates and inflation. However, lowering interest rates of Fed and other countries had little effect on the dong interest rates. In fact, from the beginning of the year until then, mobilising interest rates continued to inch up slightly. Although happening locally in some banks, the increase ranged from 0.2 percent to more than 1.1 percent per year.
Deposit rates increased continuously despite a slow increase in credit. Does this reflect problematic banking liquidity?
As Luc answered, this interest rate fluctuation had not reflected the liquidity of the banking system because it had happened only locally. In his opinion, banks had raised interest rates recently to restructure capital to ensure the implementation of the State Bank of Vietnam (SBV)’s requirements, specifically the regulations to reduce the ratio of short-term capital for medium and long-term loans and satisfy Basel II standards. Besides, banks also need to mobilise to supplement short-term funding for the end of the year loan season.
Also, to continuously stabilise the money market, increase the attractiveness of the dong, the banking system had to maintain a certain difference between the interest rate of dong and US dollar so that people would not reserve foreign currency. That was also one of the reasons why interest rates were hard to reduce.
On September 16, SBV reduced the operating rate, mainly regulating liquidity and partially reducing costs for commercial banks. Individually, weak commercial organisations could borrow SBV in the form of refinancing, overnight interbank loans, etc.
However, that loan was limited to some instances and the loan amount was narrow. Therefore, the SBV’s decision to reduce interest rates did not have a significant influence on market one (between banks and residents, economic organisations) as well as interest rates on the market.
2019 was the time for sprinting banks to raise long-term capital to meet Basel II standards. By 2020, when Basel II would officially apply, the pressure to increase capital reduces, could interest rates be reduced?
According to Decision 986/QD-TTg on the Development Strategy of Vietnam’s Banking Sector to 2025, Orientation to 2030, by 2020, only 12 to 15 banks were expected to meet Basel II standards. More than 20 banks would have their deadlines extended to 2025.
For most of the remaining banks, raising the medium and long-term capital to meet Basel II standards was not easy, especially raising Tier 1 capital (by selling shares). Increasing Tier 2 capital was more accessible, which can be achieved by issuing bonds but also limited to a certain percentage. Thus, the pressure to raise capital to meet Basel II standards of the banking system cannot be reduced by 2020.
In Luc’s opinion, there might still be slight increases in deposit rates in the near future. However, lending rates can be kept under the government’s policy. In general, in Q4/2019 and 2020, keeping interest rates stable would be a success; the expectation of interest rate reduction might be quite tricky.
