Banking paradox could hinder economic growth

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The banking system is caught in a conundrum. Small banks are finding it difficult to attract deposits following interest rate cuts, while their larger brethren are not happy with surplus cash they cannot make good use of.

Tran Son Nam, general director of TrustBank, said the bank's deposits fell by nearly VND20 billion within just one week when it cut deposit rates to under 11 percent early this month.

In an attempt to retain clients, the bank, based in the Mekong Delta province of Long An, had to adjust its rates to 11.2 percent, the highest level allowed under an industry agreement.

Banks in Vietnam this month agreed to cut their dong deposit rates to around 11 percent and to refrain from offering any other bonuses to attract deposits. Small banks facing problems in attracting funds could set their rates at 11.2 percent, it was agreed.

The agreement was reached in response to a government request that they cut their dong lending rates to 12 percent and deposit rates to 10 percent to help economic growth reach the targeted 6.5 percent this year.

As interest rates are now practically the same in the whole market, smaller banks find themselves at a disadvantage.

Truong Hoang Luong, general director of Kien Long Bank, said his bank was trying its best to attract deposits but couldn't compete against bigger lenders. With banks offering similar interest rates, depositors would lean toward large banks, he said.

Meanwhile, the big lenders are stuck with funds they cannot use profitably.

Nguyen Van Se, a senior official at the Vietnam Bank for Industry and Trade, the nation's second-biggest listed lender by market value, said high lending rates have put off many businesses and some have even focused on repayment. As a result, the bank worries that deposits will fall even though it has a lot of funds to use up.

General director Pham Huy Hung said staff members of the bank were trying to find clients for loans, no matter small or large, because it would not make any profit keeping funds in its safe.

Bankers said large banks often lend their surplus cash to smaller banks which had difficulty in raising funds. However, since the central bank has warned commercial banks against letting interbank deposits exceed deposits from clients by more than 20 percent, the money inflows between banks are partially blocked, they said.

A manager at a partly-private bank who wished to be unnamed said as loans on the interbank market have fallen this year, the bank had to use its surplus funds to purchase government bonds.

"Local banks are very interested in purchasing short-term bonds at the moment because they have surplus cash," Nguyen Tan Thang, head of fixed-income research at Ho Chi

Minh City Securities Corp., was quoted by Bloomberg as saying Tuesday. The yield on three-year bonds was around 10.1 percent this week.

Paradox

Analysts said it's a paradoxical situation that while many businesses are "thirsty for credit," some banks have excessive funds to purchase bonds.

Cao Sy Kiem, a member of the National Financial and Monetary Policy Advisory Council, said many small and medium-sized enterprises were having to downsize their business and halt projects due to the lack of funds.

Kiem said banks offered high rates for deposits and thus set high lending rates. "It's time to put an end to this and bring interest rates down to meet the demand of businesses."

"The economy is lacking credit because interest rates are too high and businesses can't access bank loans," he said, noting that loans only expanded by 10.52 percent in the first half this year.

If credit access is not eased, it's unlikely that the full-year credit growth target of 25 percent can be achieved in order to maintain national economic growth, Kiem said.

Economic growth should be the focus now as inflation is no longer a concern, said Le Duc Thuy, chairman of the National Financial Supervisory Commission. Inflation rose only 4.78 percent in the first six months and is expected to be between 7.2 and 7.5 percent at the end of the year, Thuy said.

He said the government needs to be more flexible with its monetary policies and that it may consider increasing money supply to encourage rate cuts. "Tightened policies in the first months resulted in slow credit growth."

Le Xuan Nghia, vice chairman of the National Financial Supervisory Commission, said all barriers on the interbank market should be lifted to allow banks to lend and borrow funds from the market without restrictions.

"Small banks are unable to borrow from the interbank market so they have to attract funds from clients, and the best way to do so is to offer high interest rates," Nghia said. "When small banks set their rates high, large lenders can't just cut theirs even if they have surplus funds."

He also said the State Bank of Vietnam should use its interest rate tools to adjust market rates.

The central bank on Tuesday said it will leave its benchmark base rate unchanged at 8 percent in August, keeping it at the same level since December. It will also keep the refinancing rate at 8 percent and the discount rate at 6 percent.

In a separate statement published Wednesday, the bank said it will take measures to lower borrowing costs in the second half of 2010, including boosting money supply and increasing trading volumes in open-market operations. The average interest rate on dong loans among four state-owned banks and seven large commercial joint-stock banks was about 13.3 percent in the first half of 2010, according to the statement.

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