Will interest rates continue to be reduced?

08-Sep-2017 Intellasia | DTCK | 6:00 AM Print This Post

It is estimated that by the end of August 2017, credit increased about 11.5 percent compared to the end of 2016, just a bit higher than the target of 21 percent in 2017 following the direction of the prime minister. One again, interest rate reduction is mentioned.

The economic situation and financial market report in August 2017 by the National Financial Supervisory Commission (NFSC) shows that the liquidity of the banking system is still quite abundant in the month, reflecting in two aspects.

First, interbank interest rates in terms remained low (one percent/annum for overnight and one-week terms, 1.6 percent/annum for one-month term, up 0.2-0.3 percentage points from the end of July 2017).

Second, on the open market, from August 1 to August 22, the State Bank of Vietnam (SBV) net withdrew 4.494 trillion dong. Cumulatively, the State Bank net withdrew 32.632 trillion dong since the beginning of this year.

In market 1, interest rates were relatively stable compared to the previous month. As of August 21, 2017, the average interest rate for one-month term was 4.7 percent/annum compared to 5.68 percent for 6-month term; 7.07 percent/annum for 12-36 month term, equal to the deposit rate in July.

Lending rates for five priority sectors was 6.5 percent/annum and even six percent/annum at some banks. For normal production and business sector, interest rates mainly range around 9.3-11 percent/annum for 6-month term and above.

Talking with Dau Tu Chung Khoan, NFSC leader said there are still supporting factors to lower lending rates in the last months of 2017.

Specifically, the pressure from exchange rate was not too large as Bloomberg Dollar Index fell quite sharply from the beginning of the year (down 9.3 percent); the pressure from the issuance of government bonds was also not much (about 20 percent of the plan); support factor from the regulator on bad debt settlement will contribute more positively to the interest rate reduction.

Sharing with the local Newswire Dau Tu Chung Khoan, a bank CEO said inflation trend is one of the key points in the decision to reduce interest rates of bank leaders.

As per data released recently by the general Statistical Office, the consumer price index (CPI) in August 2017 improved 0.92 percent from the previous month, up 3.35 percent from August 2016 and 1.23 percent from the beginning of the year.

The average CPI in the first eight months of 2017 swelled 3.84 percent from the same period. As such, inflation has shown signs of rebound in August after six consecutive months of decline.

Analysing components of inflation, we can see that seasonal factor contributed zero percentage point while cyclical factor (inflation due to price factor) added 0.1 percentage point to the overall inflation in August.

“This is an early sign for a new price increase cycle which might start in the following months, especially the end of the year”, said Dr Le Xuan Nghia, economic expert.

Another important thing that banks concern now is the low Net Interest Margin (NIM). Reportedly, in 2016, the bank’s NIM reached 2.8 percent. In 2017, it is forecasted that banks are difficult to maintain this.

“Statistics show that the NIM of the entire banking system is 2-2.2 percent”, said a bank CEO.

A financial director of a bank said the low NIM is because the 5-year tenor government bonds that banks invested in 2011-2012 period with high interest rate of 10-12 percent/year are gradually maturing while investment bonds in recent time have much lower interest rates, just 5-6 percent/annum. Therefore, the fixed source of income from government bonds can be affected by the declining profitability.

Besides, capital mobilisation cost may increase as over the last period, many banks have strengthened the bond issuance to increase Tier-2 equity besides the issuance of deposit certificates at high interest rates.

At the same time, deposit rates in long terms are raised to increase medium and long-term capital, ensuring the ceiling for the usage of short-term capital for medium and long-term loans to decrease from 60 percent to 50 percent in 2017 following the State Bank’s Circular No.06/2016. These measures may cause the LDR and NIM to decrease.

“The NIM of the banking system is currently quite low, and is hard to be further narrowed because it will affect the operational safety”, said the aforementioned bank CEO.

Leader of banks said the current lending rates must be stabilised in line with the government’s direction and the State Bank to support the economy. Therefore, the input-output interest rate margin continues to narrow in reality.

Most importantly, the room to reduce lending rates has almost been fully exploited and reflected through the lowest interest rates in 10 recent years.


Category: Finance

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