So far this year, the interest rate on Vietnam’s monetary market has been continuously on the rise. In attempts to slow down the seemingly unabated increase of the interest rate, affecting profits and rocketing credit risks, in the middle of August domestic banks had to sit down to seriously table this issue and finally, “an unwritten accord” was also made.
Under the accord on deposit interest rate amongst banks chaired by the Vietnam Bankers Association (VNBA) on August 17, for state owned commercial banks, the dong-based deposit interest rate for six-month terms caps at 0.65% a month or 7.8% a year while the ceiling interest rate for 12-month terms is no more than 0.7% a month or 8.4% a year. Joint stock commercial banks are allowed to raise dong deposit rates by another 0.03% for above corresponding terms. If there are nothing changes, this agreement is scheduled to officially take effect from September this year.
However, the agreement is focused on deposit interest rate for 12 month or less terms while banks could be fully active to rule how far for their own rate for more than 12 month terms competitively.
Currently, Vietcombank, the country’s largest state-run commercial bank ranks top with the dong-based deposit interest rate for two-year terms standing at 8.76% a year while the Bank for Agriculture and Rural Development of Vietnam (Agribank)’s rate for the corresponding terms is 0.80% a year and Bank for Investment and Development of Vietnam (Bidv) 0.75% a year.
The above interest rate levels actually have already jumped over the rate ruled in the latest accord many times, so it’s certain that there is no reason that those state-run banks will never reduce their rate.
With regard of joint stock commercial banks, this accord has no legal tie because it is only an unwritten agreement in the framework of the VNBA. Therefore, if there is any difficulty in raising deposits, JSCBs could easily bypass the agreement by other tactics such as raising capital with agreed, or pre-paid interest rates.
Furthermore, this accord is only applied to dong-based deposits while the interest rate in US dollar completely depends on the US Federal Reserve’s key rate.
Of course, the State Bank of Vietnam, the country’s central bank could make direct interventions on this rate via increasing or reducing the statutory reserve ratio.
Financial specialists forecast that from now to the end of this year, the interest rate in US dollar will continuously increase. Therefore, businesses specialised in importing machinery, equipment and materials will have to face up to the increase of costs in borrowing US dollar-based loans. In addition, the rate in the domestic currency also could hardly be kept at the levels as currently while commercial banks are short of dong-based capital to lend.
If the SBV reduces the statutory reserve rate by 1–2% compared to prevailing rate, an estimated three–four trillion dong of commercial banks will be “liberalised” to lend to parts of the economy, partially contributing to reducing pressures on raising capital on the local capital market.