Commercial banks actively arrange capital source

24-Mar-2016 Intellasia | Nhip Cau Dau Tu | 6:00 AM Print This Post

At the end of 2015, when the G-bond issuance in the local currency was not as satisfactory as planned, the State then worked out the plan to issue G-bond in US dollars. Recently, there was information that Vietinbank borrowed $200 million from 18 foreign banks arranged by BNP Paribas and Taipei Fubon Commercial Bank. This information also faced mixed reactions. The cause lies in the comparison between domestic foreign currency deposit rate at zero percent and the interest rate (unpublished) borrowed from abroad.

Is interest rate the most important issue when considering the overall impact of a loan brought to a national economy? There are many different advantages between two resources mobilised externally and internally that a person would be hard to understand if he/she does not work in the financial sector.

In Vietnam’s financial market, in recent years, individuals or businesses having idle foreign currency, mainly US dollars, often give priorities to depositing in a bank and often have to weigh among three factors: deposit term, interest rates, prestige of the credit institution. Each customer, when depositing money, has to consider needs and roadmap to use that idle source of foreign currency in the future.

In other words, the plan to use foreign currency in the future will be the decisive factor on US dollar deposit term. If customers realise that they will have many arising problems in the near future such as travelling abroad; children’s overseas study, procurement of imported equipment, payment to foreign suppliers, etc., though the US dollar deposit rates are more attractive than terms greater than 12 months, it is also hard for them to deposit long-term.

Obviously, term rather than interest rate is the most important factor against any depositing decision. In fact, the history of US dollar deposit rate curve in banks shows that for a long time, the source of US dollars mobilised in the economy focuses on short terms whose maturity is less than one year rather than medium and long terms.

For individuals or organisations that have US dollar surplus, with the role as depositors to receive interest rates, the pressure on choosing time to deposit will be a lot easier than the role at the other side when the service provider is banks.

Generally, with the role of regulating the health of funds and ensuring operation effectiveness of the system, banks, especially state-owned ones have long been playing the backbone role, and there should consider macro factors based on the highest goal which is to target at the safety of the whole system and business benefits.

As per the Monetary Forecasting and Statistics Department under the State Bank, the capital mobilisation of the entire banking system will reach the average growth of 17.46 percent by the end of 2016. However, the foreign currency deposit growth will be much lower than dong. In the context of revenue deficit, budget deficit, high public debt, the pressure on increased inflation is only a matter of time.

Remember, the year 2015 set a record low bottom within the past 15 years when the CPI consumer price index only rose 0.63 percent compared to 2014. Along with the application of the central rate policy, CPI stabilisation also supports well the exchange rate stabilisation between dong and US dollar.

Thus, if increased inflation is the inevitable trend after having hit the bottom, that commercial banks actively arrange sources of finance is a smart choice. In business development that always needs to provide stable credit to businesses, serve import and export activities and make foreign currency payment, the determination of long-term loans should be made early. generally, it is beneficial to operation effectiveness because the lending cost will be cheaper, especially when there is strong support from macro factors.

In terms of profession, the source of capital of banks mobilised from the people, businesses, refinanced or borrowed from domestic and foreign credit institutions belonged to one source which is the capital division. Here, the source of capital through the mechanism of “internal capital cost” and ALM operation – management of liquidity and risks, will be calculated and allocated with high or low interest rates depending on two important factors which is the time to use that source of capital and liquidity of the cash flow.

This division plays the role of rebalancing the average deposit rate of different maturities across the whole system; then interest rates provided to commercial loans, consumer loans, personal loans, or other investments will be calculated. Thus, even when the US dollar among the people is mobilised with zero percent and the loan from foreign banks has higher interest rates, they are also “mixed up” before providing to the economy.

The bottom line is the liquidity of the mobilised cash flow. Although the volume of US dollar among the people can be higher (as evidenced by the amount of remittances reaching approximately $15 billion), it is not easy for banks to mobilise. Even before the US dollar deposit rate went back to zero percent, the US dollar deposit growth in 2015 was only 14.3 percent compared to the average credit growth of 18 percent.

The lesson in 2011 proved the “devastation” to the entire system if there is no good “vision” against liquidity, especially foreign currency liquidity. At that time, the interest rates in dong on interbank market rose 25 percent/year at times, cash was scarce. Banks holding large bond portfolio had strategic advantages when approving swaps and repos contract with foreign banks to gain foreign currency with the cost price of about two percent per year.

Meanwhile, the whole system was thirsty for cash and US dollar interest rates at that time were transacted at the five percent. These banks overcame the difficult period and recorded profound lesson about the activeness of foreign currency resources.

That a Vietnamese bank can borrow US dollars from 18 foreign banks is not simple. Borrowers, apart from complying with lending process, credit contracts following international standards, the important thing is to gain credibility within the allowed limit. Obviously, the prestige of Vietnamese banks is increasing, an evidence of the effectiveness of the debt and system restructuring process over the last four years.

On the other hand, only 55 percent of credit institutions, in the survey of Monetary Forecasting and Statistics Department of the State Bank, believes that the liquidity of the entire system in 2016 will maintain good state, i.e., nearly half of the credit institutions can start to have a separate plan for another liquidity scenario.

That Vietinbank borrows $200 million with five-year term is very likely to be in this remaining half. This is even more reasonable when considering the credit balance of the whole system in 2016 which is expected to attain the average growth of 21.4 percent. Remember, in the 2011, the system’s credit balance was only 12 percent, i.e., equal to more than half of this year’s expectation.


Category: Finance, Vietnam

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