Liquidity crunch forces banks to violate deposit cap

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Mired in liquidity problems, banks in Vietnam are, once again, breaking the central bank's limit of 14 percent on deposit interest rates, offering to pay as much as 21 percent to depositors.

Deputy Chairman Le Xuan Nghia of the National Financial Supervisory Commission said some banks have violated the rate cap in recent days.

"I even learned from a bank chairman that deposit rates have hit 21 percent," he said.

A banking expert speaking on the condition of anonymity said the interest rate limit has badly affected small lenders, who have difficulties attracting funds from depositors or borrowing from other banks.

"It's like they are trapped in a place where oxygen is running out," he said. If small banks do not merge with each other, it could be the end for them, he added.

The 14 percent cap was introduced at the end of 2010, but it was repeatedly breached by many lenders until last September when the central bank explicitly warned banks of tough punishments. At least two partly private lenders, Dong A and HDBank, were found violating the cap. The central bank ordered the dismissal of a deputy CEO of HDBank while banning Dong A from opening new branches.

The strong actions proved effective, helping stabilize the money market in the last months of 2011. However, as liquidity problems continue to haunt banks, the rate cap violations are returning.

Experts said this time banks are even more discreet in making sure they are not caught and punished when offering illegitimate bonuses to depositors. The violations can also be found in the interbank market where banks offer each other very high interest rates to attract funds, they said.

According to the National Financial Supervisory Commission, the money market will continue to face shortages in the early months of 2012.

It said the central bank should inject cash into the market and help banks improve liquidity. The central bank can also regulate capital flows among banks, allowing small lenders to borrow money easily from larger banks, it said.

The commission said banks should be allowed to export their gold holdings, which total 100 tons, to get more money. Selling just 1 percent of that gold would be enough to ease liquidity problems, it said.

The central bank aims to bring down lending interest rates this year to support businesses. For this plan to work, the 14-percent cap on deposit rates may be lowered.

Nghia said the situation is getting more complicated. As the confidence of depositors is now weak, a lower deposit rate cap could cause them to switch from dong to dollar deposits.

Vietnam's banks face liquidity problems as depositors show preference for short-term deposits, Bloomberg cited central bank governor Nguyen Van Binh as saying at a press conference in Hanoi Wednesday. Last year was a "difficult" year for banks and businesses, he said.

Nghia said lending rates are believed to rise to 26 percent this year, compared to last year's 23 percent.

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