Many commercial banks are tending to raise deposit interest rates since the country’s biggest bank state-run Vietcombank launched progressive interest rates of 7.3% or more for dong deposits. Slowly, dong rates are rising despite the central bank’s determination to the contrary.
Increase in interest rates for foreign currency deposits is because interest rates in the international monetary market have jumped following the US Federal Reserve’s late December decision to once again increase its key rate to 2.25% per annum. Presently, the deposit interest rate in the Singapore interbank market, Sibor, is 2.420% per year for a one-month term are and 2.418% per year in the London interbank, Libor. The one-year rates are 3.08% and 3.103% respectively.
Closely following interest rates in the international monetary market, interest rates for foreign currency deposits of domestic commercial banks accordingly were increased. Presently, interest rates are generally fixed at 2.2% per year for three-month terms, 2.4% per year for six-month terms, 2.6% for nine-month terms, 3.0% per year for 12 month terms, 3.3% per year for two-year terms, for 3.5% per year for three-year terms, and 4.0% per year for five year terms.
In general, interest rates for domestic US dollar deposits, although closely following the international monetary market, have been always lower than that in the international monetary market. On the one hand, it is because of by the State Bank of Vietnam’s decision to increase compulsory reserve rate last year in a bid to rein in hot credit growth and dollarisation in the commercial bank system.
On the other hand, such move shows that capacity of raising domestic capital in the US dollar for investment in the international monetary market is weak, however, such funds is designed to meet investment demand for key projects only.
If such an increase in foreign currency deposit interest rates has not drawn much attention, that Vietcombank has recently decided to raise interest rates for dong deposits higher than the maximum dong deposit interest rate agreed upon in a pact with the three other state owned commercial banks has attracted great attention. Some assessed that this move of Vietcombank means the bank has dumped the interest rate pact and is competing heavily to attract as much dong funds as it can.
Under the new decision of Vietcombank, the interest rates for two-year terms are fixed at 0.70% per month for dong deposits worth less than 50 million dong, and 0.71% per month for dong deposits worth from 50 million dong to less than 200 million dong, and 0.73% per year for dong deposits worth 200 million dong or more. At the same time, the interest rates negotiated among the four state owned banks is 0.58% or less per month for six-month terms, 0.63% or less per month for 12 month terms.
Nevertheless, Vietcombank confirmed that it did not break the agreement, saying, such agreement was applicable for 12-month terms or less while Vietcombank raised interest rates for two-year dong deposits. Also, Vietcombank explained that this move was designed to restructure its capital sources, to increase medium- and long-term capital.
Known as a bank with “abundant” disposable income, that Vietcombank highly pushed up deposit interest rates showed that this bank is thirsty for disposable income, particularly for dong capital. This fact reflected a common situation of commercial banks, that is, dong capital is now scarce because Tet holiday is coming, businesses, account holders are withdrawing money to pay salary, bonus, allowance for workers, and so forth.
The fact that domestic currency sources of commercial banks is facing many difficulties is evidenced at Treasury bill auctions and the open market operations. On the T-bill market, from the start of December 2004, no commercial banks took part in the T-bill sessions and there was no bid winning results accordingly. On the contrary, on the OMO, the trading volume was bigger, interest rates quickly increased and transaction results were more regular.
According to many bankers, that Vietcombank raised dong deposit interest rates to high levels nearly equal to that of urban commercial joint stock banks will present a new competition pressure on the capital deposit market. This is because Vietcombank has a large operation network located in convenient sites in most cities and towns and in new urban areas. Moreover, Vietcombank has long been a prestigious bank. Thus, Vietcombank will attract common market share of other commercial banks.
But some say that the increase in dong deposit interest rates of Vietcombank will inevitably mean funds flowing from competitor banks into Vietcombank which obviously will for force more increases in deposit rates to keep their clients.