Interest rates rise on news of hands-off policy

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Vietnam Bank Association fears free floating rates could destabilize market

A Sacombank branch in Ho Chi Minh City. Many banks have raised deposit rates, failing to honor an agreement reached by members of the Vietnam Bank Association to keep rates at a maximum of 12 percent a year.

The announcement that the government has let the market decide interest rates has triggered a race among commercial banks, leaving an industry cap neglected.

Banks have been offering dong deposit rates of 12-13.5 percent since last week, up from 11 percent early this month. If bonuses and cash gifts are included, some banks actually pay 14 percent interest rates or more on dong deposits.

With these new rates, many banks have failed to honor an agreement reached by members of the Vietnam Bank Association on November 5 to keep rates at a maximum of 12 percent a year.

The general director of a partly-private bank who wanted to remain unnamed told Thanh Nien local banks increased their rates after the government hiked three key rates. The State Bank of Vietnam, in an unexpected move, early this month increased its key rates by 1 percentage point each, bringing the base rate and the refinance rate to 9 percent and the discount rate to 7 percent.

The banker said the government's decision to let interest rates float freely also affected market sentiment, building anticipation for higher interest rates at banks. Large depositors, mainly financial companies and investment funds, now wanted to be paid at least 13 percent a year on their deposits.

"Even businesses in the production sector have offered to deposit their funds on seeing interest rates surge," he said.

The government had earlier targeted lowering deposit rates to 10 percent and cut borrowing costs to 12 percent to spur economic growth. But on November 4, the National Financial Supervisory Commission announced that the government had decided to halt the plan, allowing banks to freely set their interest rates.

Make it real

Some analysts have seen this decision as a strong move that can solve market problems as interest rates can finally be decided by supply and demand.

"High lending rates will sort out weak businesses," economist Le Tham Duong of the Ho Chi Minh City Banking University told Thanh Nien. If businesses do not depend a lot on bank loans, they will survive even if borrowing interest rates hit 20 percent a year.

Duong noted that banks are borrowing from one another at up to 20-21 percent annually. These banks are struggling to maintain liquidity, he said.

He claimed that even banks that are lending money to other financial institutions have raised their deposit interest rates, trying to attract more capital.

A commentary carried by the Thoi Bao Kinh Te Saigon magazine last week said there have been concerns that the government's decision will lead to interest rate hikes. The good thing is that, finally, the rates offered by banks will be the real ones, it said.

"Banking consensus to keep interest rates at certain levels has distorted the capital market," the commentary said. "Interest rates did not fall, but we forced them to fall. Some banks announced lending rates of 12 percent, but how many companies could really get loans at that rate?

"In fact many businesses have to pay 15-16 percent on dong loans, and if banks start to officially revise their rates from 12 percent to 16 percent, it is just the same thing."

The commentator felt financial institutions would be wise not to raise their deposit rates too high and have their lending rights go too high as well. Local banks will have to make sure businesses can afford to take loans, it said.

But the Vietnam Banks Association feels differently.

The Lao Dong (Labor) newspaper on Monday cited a representative of the association as saying the monetary market has been quite stable, but the decision to free interest rates could set off a new race among banks, leading to instability.

The association is waiting for confirmation from the prime minister on the decision as it does not think the National Financial Supervisory Commission should be the one to announce such an important move.

If the government actually wanted to stop the plan of having local banks cut their rates, the banking association will revoke all agreements among its members and allow them to set their own rates.

In such a situation, the association will not take any responsibility if the market becomes unstable in upcoming months, the representative said.

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