High dong interest rates expected to ease slightly

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Vietnamese banks' high dong interest rates are expected to cool slightly due to improved liquidity as the central bank cut one of its key rates to tackle distorted rate-levels, bankers said on Monday.

On Monday, the central bank lowered the cost of funds for banks via open market operations, cutting the reverse repo rate to 14 percent from 15 percent, giving the market hope that interest rates could ease.

Monday's move "will increase money supply and help to decrease interest rate," Deputy Chief Executive Le Quang Trung of Vietnam International Bank said.

"Interest rates will fall but not deeply," he said, adding that the reasonable lending rates should be 15-18 percent and deposit rates at 13-15 percent.

Banks were offering to pay dong deposits at 20 percent while charging companies at around 25 percent, far above the central bank's deposit rate ceiling of 14 percent, Monday's official Lao Dong newspaper quoted a report by the National Assembly's Finance and Budgetary Committee as saying.

"Interest rates are in a complete distortion and putting banks in trouble," an executive in a major bank said.

"Borrowing and lending interest rates are high and the competition in raising funds is not sound," Deputy Governor Nguyen Van Binh of the State Bank of Vietnam said in remarks to a World Bank workshop last week.

He said banks were competing to protect market share by paying additional amount to depositors.

"Recently, interest rates have been flat or eased slightly but remained high because the central bank is still withdrawing cash via open market operations while cash flows at small banks seem tight," said Doan Tran Phuong Phi, head of the brokerage team at Ho Chi Minh City Securities.

Many companies hesitate to take loans while banks that have raised funds at high cost are reluctant to lend, Deputy Director Quach Manh Hao of Thang Long Securities said.

Banks were raising mostly short-term funds while 77 percent of their loans were for the medium- and long-term, which posed a risk to them, central bank's Binh said in his workshop remarks.

"Liquidity might be an issue as a result," he said.

Banks paid an average 15.15 percent for deposits in the first five months of 2011, or 3 percentage points higher than the end of last year, while lending rate averaged 18.6 percent, up 3.2 percentage points from December 2010, Binh said.

Economist Vo Tri Thanh at the Central Institute for Economic Management, a government think-tank, said the macroeconomic message was clear that interest rate should decrease only when inflation eases.

If there any rate drops now, "it's for the internal problem of the banking system", Thanh said, because banks' rates have been higher than they should be.

The International Monetary Fund said in June that interest rates ought to be increased, warning at an aid donors' meeting that confidence in the government's policies was fragile.

Meanwhile, Vietnam's credit growth as of June 20 stood at 7.13 percent from the end of 2010, well below the annual target for 2011 of 20 percent, while money supply grew 2.45 percent, central bank data showed, which economists said were too little.

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