The central bank's decision to remove a cap on long-term loans while maintaining its ceiling on short-term loans has made life even harder for Vietnam's ailing small lenders.
The central bank implemented the new policy on June 11, allowing commercial banks to negotiate rates with their clients on deposits of 12 months or more. That same day, the short-term deposit rate cap fell from 11 to 9 percent and the short term lending rate was capped at 13 percent for some sectors.
Prior to the shift, businesses took out loans at 18-20 percent interest and long-term deposit rates had hovered around 9.5 percent.
Since the move, deposit rates have risen. Le Xuan Nghia, a member of the National Financial and Monetary Policy Advisory Council, said some small- and medium-sized banks have raised rates on long-term deposits for individuals and businesses.
Kien Long Bank now offers 12 percent to long-term deposits; Viet Bank offers between 11.5-12 percent. Last week, Western Bank dropped its 13 month deposit rate to 12.5 percent from a high of 14.
Hard times for small banks
Cao Sy Kiem, a former governor of the central bank, said the 9 percent cap on short-term loans puts particular pressure on small banks which have seen lower credit growth this year. Many small banks are offering cutthroat rates on long-term deposits and special offers on short-term ones to lure customers away from their larger competitors.
Trinh Van Tuan, chairman of Orient Commercial Bank, said the measure to lure more long-term deposits will help bank increase their liquidity.
Up to 80 percent of deposits have terms of one to three months, according to some banks. While most deposits are short-term, most loans are long-term.
One economist warned that banks could dodge the deposit rate cap by simply offering high interest on long-term deposits without penalties for early withdrawal.
The central bank responded by issuing a circular on June 21, warning lenders that they would be penalized for allowing depositors to pull out of long-term loans without financial consequences. The central bank also asserted plans to intensify inspection and surveillance over credit organizations to limit violations.
Removal of rate cap
Professor Le Tham Duong of the Ho Chi Minh City Banking University said that allowing banks to negotiate long-term rates is tantamount to removing all limits on deposit rates, even though banks are still subject to a short-term deposit cap of 9 percent.
If the State Bank of Vietnam can deal with the country's weak lenders this month, as planned, it could eliminate the ceiling without prompting a race to compete for deposits, Duong said.
The head of one commercial bank based in Hanoi said some banks that are hurting for cash may raise their deposit rates if the rate cap is removed. However, many firms are not interested in taking out loans due to stagnant production and diminished purchasing power.
"Inflation and credit growth slowdown are good conditions for the central bank to completely remove the rate cap," Kiem said. "It will be hard for banks to race for deposits now due to their sluggish lending activities."
However, economist Nguyen Van Thuan said that without a rate cap, the banking system will fall into chaos, especially if weaker banks continue to borrow at impossible interest rates. The central bank should tighten surveillance over these weak lenders to prevent them from negatively affecting the system as a whole, he said.