The interest rate on interbank market during the last week decreased significantly in short terms and less than 1-month term but money still remained stagnant in commercial banks.
The tender on open market operations (OMO) on July 11 continued to witness very low success ratio (19 billion dong on the offered volume of five trillion dong). The State Bank of Vietnam (SBV)’s decision to retain the interest rate floor level in dong on OMO at higher than the offering interest rate on the interbank market made no enthusiasm and participation by credit institutions.
In the last week, there were failures of OMO tenders. Earlier, in the first week of July, transactions on OMO occurred mainly in two terms (2 and 4-7 days) with the offered volume of five trillion dong per session and the raised volume reached 0.38 percent and 15.14 percent respectively.
Macro analyst of Bao Viet Securities Joint Stock Co (BVSC) said that the supply of majority of banks is in surplus situation while credit growth has not had significant improvement yet, which are main reasons behind gloomy transactions on OMO with raised volume/offered volume at low level in last week.
In addition, the lending interest rate on OMO, although being lowered by 2 percent from the previous month to 8 percent per annum (p.a.), is still higher than the interest rate of short terms on interbank market.
This means that money is still unmarketable and in surplus at commercial banks. In HCM City alone, according to the central bank’s HCM City branch, the total deposits of credit institutions till June 30 reached 940 trillion dong, growing 5.21 percent from the end of 2011, up 1.03 percent month on month and nearly 12 percent over the same period last year. The total deposits of banks still grew stronger than the credit growth.
The capital use ratio (the ratio of total outstanding loans on total deposits) of 14 commercial banks in the city reached 68.3 percent while this ratio by the end of 2011 was 92.7%.
Worryingly, credit quality in the city has not been much improved yet. Bad debts in HCM City by the end of June accounted for 6.03 percent of total outstanding loans.
On July 11, transactions on interbank market mainly occurred in short terms, overnight and 2-weeks due to the demand for long terms was very small. The interest rate ranged around 4-4.5 percent p.a. in overnight-term to one week, 4.5-5 percent p.a. for 2-3 week terms and 5.5-6 percent p.a. for one-month term.
These interest rate levels have fallen sharply from July 5 when the interest rate for 2-3 week terms stood at 5.5-7 percent p.a. and one month at 7-7.5 percent p.a., according to the study group-the capital division of Bank for Investment and Development of Vietnam (Bidv).
On July 9, the interest rate hovered around 4-5 percent p.a. for overnight term to one week, 5.5-6 percent p.a. for 2-3 weeks and 6.5-7 percent p.a. for one month term. However, the liquidity in dong in the interbank market was still very good and supply and demand were stable.
Earlier, in the last week of June, the interest rate in dong in the interbank market surged sharply, from 3-3.5 percent p.a. to 8-9 percent p.a. (overnight and one week terms). Members in the market explained that this sudden surge derived from banks’ temporary capital borrowing to make good books at the time of closing financial data in the second quarter of 2012 (as of June 30).
For this reason, many experts see that the central bank’s request to lower the lending interest rate for old loans to less than 15 percent per year is hardly feasible. They opined that the market needs between 1-3 months for banks to raise more cheap capital sources with an aim to reduce average capital mobilisation costs to 9-10 percent per year thereby banks can afford to reduce the lending interest rate for old loans.