Removing ceiling deposit interest rate is logical: central bank's official
29-APR-2008 Intellasia | 25/Apr/2008 Dau Tu Chung Khoan page 30
Apr 29, 2008 - 7:00:00 AM
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The meeting between the Vietnam Bank Association (VNBA) and its members this week continued agreeing to maintain the ceiling deposit interest rate of 11% a year for some more time in the future. The central bank announced that it will assist the market by supplying more cash in the interbank market. However, the question is that how long the market will be able to deal with the difficult time and whether it is true that maintaining the ceiling deposit interest rate is creating gold opportunities for large-scaled banks to do business. Le Xuan Nghia, director of the central bank's banking development strategy department talked with Dau Tu Chung Khoan newspaper about this issue. Excepts:
How do you think about removing the ceiling deposit interest rate by this time?
Deposit interest rates relate to different aspects. Normally, the shorter terms deposits have, the lower interest rates deposits carry or if money is deposited at banks with higher risks, depositors will be entitled to higher interest rates. Among depositors, some accept low interest rates to deposit money at banks with lower risks while others prefer higher interest rates at banks with higher risks. Thus, forcing banks with different scales, different levels of risks to follow the same interest rate will cause losses for small banks but bring profit to large banks. If because of this, small banks are short of liquidity, it is very dangerous. Lifting the ceiling deposit interest rate is logical.
Right after the prime minister issued an official letter asking to remove the ceiling deposit interest rate, VNBA asked the prime minister about this issue again and was responded that the government issued the official letter based on banks' agreement on the ceiling deposit interest rate but the official letter was not aimed to breach the agreement. What does the central bank think about this issue?
The association has a good idea, namely lower interest rates will facilitate businesses to do business however it is impossible to fulfill two targets of monetary tightening while maintaining low interest rate and it is impossible for both large, and small banks with different levels of risks to have the same deposit interest rate. Similar to lending interest rates, for example, businesses, which have low risks, will be entitled to low lending interest rates or businesses, which had previously had close partnership relations with banks, will also be offered loans with low interest rates. Large-scaled and prestigious banks often have lending interest rates lower than small banks. That is a normal thing in business. Lifting the ceiling interest rate is logical. The central bank is considering removing the ceiling interest rate however the central bank wants to maintain the rate until the end of June when the market is more stable.
If the ceiling interest rate is abolished, do you think that a race of hiking interest rates will happen again as last February?
We should not think that when the ceiling deposit interest rate is abolished, deposit interest rates will rocket. I think that deposit interest rates will increase to more than 12% a little bit and then stop rising because of demand and supply relations. Commercial banks should not be attributed to the race of hiking interest rates but such a race should be seen as demand for capital of the economy and impacts from management of the central bank. If banks are short of capital, they can seek capital from the open market or residents. Banks should not be prevented from raising capital from all ways. It is very dangerous.
The government has issued an official letter defining that any bank which lacks of liquidity, they will be able to get assistance from the central bank via the open market with an interest rate of 9% a year. Why have small banks still faced up various difficulties?
In fact, small banks find hard to borrow capital from the open market. Because small banks fail to set aside investment provisioning funds for buying valuable papers in the open market, they often have to re-borrow capital from large banks.
By this time, what the managing body should do?
If banks meet problems in liquidity, the central bank must allow them to increase deposit interests rates to raise deposits from residents or the central bank must increase money supply in the open market with proper regulation.
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