Banks hike deposit interest as bad debts drain liquidity

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  Customers make transactions at an Asia Commercial Bank branch in Hanoi. Photo: AFP

Despite low credit growth, many banks have increased deposit interest rates to mobilize more funds to sustain liquidity which has been hit by bad debts.

This is raising concern about both the liquidity problem and high bad debts which could threaten the safety of the banking system in the long term, experts said.

By late August, banks' deposits were up 11.23 percent for the year while loans had increased by only 1.4 percent, according to the State Bank of Vietnam.

But despite this large gap, many banks have increased long-term deposit rates by 0.5-2 percentage points since August.

Asia Commercial Bank now offers 12.7 percent interest for 13-month deposits, while both Sacombank and Bac A Bank offer 13 percent.

Nguyen Thanh Toai, deputy general director of Asia Commercial Bank, said banks have increased the rate to encourage customers to make long-term deposits since most loans are long-term while deposits are mainly short-term.

Former central bank governor Cao Sy Kiem said most deposits go to a few big banks, so smaller ones have to increase rates to shore up their liquidity, which has partly taken a hit from bad debts.

Many banks have to repay loans they took from the central bank to bolster their liquidity starting more than a year ago, he said.

To retain their customers, large banks have had to follow suit, increasing deposit interest, despite low credit demand in the context of the economic slump. Banks themselves are cautious about lending to firms due to their bad-debt fears.

But many customers do not want to make long-term deposits due to inflation fears, so banks are not likely to attract much deposit despite offering higher interest, Kiem said.

Bad debts were estimated at 8.6 percent of total loans at the end of March.

The rate hike has also been prompted by a recent tightening of lending norms on the interbank market, meaning banks have to turn to deposits for liquidity.

Under a new regulation effective from September 1, banks can transact on the interbank market only when they do not have overdue loans of 10 days or more.

Dong transactions in the market crashed by 58 percent to VND49.7 trillion (US$2.34 billion) in the week after the regulation came into effect, according to the State Bank of Vietnam.

Economist Bui Kien Thanh said the deposit rate hike would lift lending rates, hurting firms, which are already facing many difficulties.

"If banks pay deposit rates of 13 percent, they may offer loans at 17 percent. This is too high for firms," he said.

Normal cycle

There are concerns about low credit growth, which could affect economic development. However, some analysts said it is a common phenomenon, which would eliminate weak firms from the market.

Economist Vu Dinh Anh said: "Low credit growth is a common thing. Vietnamese firms have too heavily depended on bank loans. A large part of the credit has been used for ineffective investments, which do not help create economic growth. This is also a cause of high inflation in recent years."

The most important thing to do now is to force firms to sell inefficient assets to raise funds for business, instead of continuing to lend to them. This would also help eliminate weak firms, he said.

"In the current context, big credit growth could cause macroeconomic instability," he warned.

Another economist said the low credit growth is an understandable reaction by the economy. Banks, after high credit growth for years, are more cautious about lending to avoid bad debts, and invest in more effective asset classes such as government bonds.

Truong Van Phuoc, general director of Eximbank, said: "Credit is the main business of banks, but it has not increased for a few months. So they have to accept another asset class with lower returns."

The average interest rate on government bonds is only around 9.5 percent, much lower than the loan interest rate of 12-15 percent that banks get.

Banks held 86 percent of government bonds as of March, according to a report by the Hanoi Stock Exchange.

"If banks have a lot of money, they buy bonds," Nguyen Tan Thang, fixed-income investment director at Ho Chi Minh City Securities JSC, was quoted by Bloomberg as saying Tuesday.

Vietnam should accept lower credit growth and that many weak firms could go bankrupt so that it could set aside more resources for good firms which could create better economic results, an economist said.

"Vietnam, in its economic restructuring process, should accept low credit growth for a few years. This is the situation in many countries like China, Thailand, and Malaysia."

Moody's last week downgraded Vietnam's credit rating from "B2" to "B1", citing weaknesses in the country's banking system. "Moody's considers that the restoration of macroeconomic stability, as represented by a fall in inflation, the relative health of the balance of payments, and the accumulation of foreign exchange reserves, has not adequately offset the vulnerabilities posed by weaknesses in the banking system," the agency said.

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