Deposits flow out of local banks on lower interest rates

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Bank depositors are shifting their funds to other investment channels after the central bank ordered commercial banks to comply with a 14 percent ceiling on dong deposit interest rates.

Several banks have said their deposits are now on the decline.

Sacombank said it saw a slight drop in deposits in September. Ly Xuan Hai, general director of Asia Commercial Bank, said the deposits at his bank remained stable, but he said it was only because of an increase in dollar and gold deposits.

According to the State Bank of Vietnam, deposits in the whole banking system fell 1.07 percent in September compared to August. Credit fell 0.9 percent last month.

Nguyen Van Thuan, a finance and banking professor at Ho Chi Minh City Open University, said small banks could be the hardest hit by the falling deposits.

When all banks offer the same interest rates for deposits, funds will flow from small banks to larger ones, he said.

Depositors used to favor small banks because of their high rates, but small banks no longer have that advantage, Thuan said.

Even though the central bank helped banks improve their liquidity via open-market operations in September, Thuan said it was only a temporary measure.

"Banks have to be able to attract funds themselves in order to survive for the long haul," he said. "How small banks will manage to do so from now is a question."

A banker who spoke on the condition of anonymity said many clients have withdrawn their savings from his bank. In September alone, the bank lost hundreds of billions of dong in deposits, he said.

Viet Capital Securities said in a report Monday that dong interest rates have dropped sharply. In September, dong interest rates applicable to VIP clients fell to 14 percent from 18-19 percent previously.

"Lower dong deposit rates have encouraged domestic residents to shift from holding dong to gold and foreign currencies," the company said.

"In addition, lower dong deposit rates gave banks incentive to shift their funds from dong saving deposits in the primary market to the secondary market instead," Viet Capital Securities said. But it noted that while dong deposit rates declined, there has not been a proportional decline in lending rates yet.

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