Why do some banks push up deposit rates?

29-Dec-2016 Intellasia | Tri Thuc Tre | 6:00 AM Print This Post

As reported by the National Financial Supervisory Commission (NFSC), in 2016, the liquidity of the banking system is guaranteed, interbank interest rates fall, facilitating the early completion of government bonds issuance plan.

The liquidity of the banking system is guaranteed by the increased mobilisation compared to last year and the higher growth than credit. In 2016, deposit growth was estimated at about 19 percent, about one percentage point higher than credit growth. The loan to deposit ratio (LDR) across the system was approximately 85 percent, down 0.7 percentage point compared to the end of 2015.

The second is increased money supply, expected to increase more than three percentage points compared to last year, reaching around 19-20 percent. In 2016, the central bank supplies money mainly through the purchase of foreign currency and has net withdrawn about more than 60 percent of the total amount money supplied through the open market operations (OMO).

With ample liquidity and favourable factors from macroeconomics, since the end of September, deposit rates have decreased 0.3-0.5 percent in short terms, lending rates have also declined at some banks by 0.2-0.5 percent. Especially, large state-owned banks reduced short-term lending rates by 0.5-1 percent/year for priority sectors, encouraging investment and entrepreneurship, interest rates on five priority areas came close to six percent/year.

However, although liquidity in the interbank market is rather plentiful and interest rates have signaled to decrease, they have not been up to expectation. The average deposit and lending rates across the market at the end of the year decreased from the previous months but still increased slightly from the beginning of 2015.

First, as per NFSC, was because the excess liquidity in the interbank market was just short-term, while lending structure was mainly medium and long term (accounting for more than 55 percent of the total credit);

Second, there is divergence in the capital mobilisation in the interbank market among credit organisations.

Specifically, some poorly performed credit organisations faced difficulties in borrowing from the interbank market due to the lack of credibility and collaterals for counterpart borrowing. The proportion of interbank loans/total capital of these credit institutions is very low (less than three percent).

Rediscount loan interest rate (4.5 percent/year) or refinancing loan interest rate (6.5 percent/year) is also much higher than that in interbank market. Therefore, these banks must mobilise from the people and economic organisations with 1.5-2 percent/annum higher interest rates than large commercial banks, leading to the increased average interest rate of the entire market. This partly affects the transmission mechanism of monetary policy.


Category: Finance, Vietnam

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