Small banks face another challange in new interest cap

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Small banks are having trouble competing with other lenders since the central bank introduced a 6 percent cap on deposits held for less than a month, industry insiders say.

The State Bank of Vietnam has capped interest rates on dong deposits that are non-term and those less than a month at 6 percent since October 1. The move aims to address liquidity risks in the nation's banking system, the central bank said.

Previously the monetary authority set a 14 percent ceiling on all deposits irrespective of their terms.

Some small banks, taking advantage of the rule, offered high interest rates of up to 14 percent on short-term deposits to attract funds. 

"The need for funds left banks no other choice," said Nguyen Thi Mui, a training official at VietinBank.

"All lenders know that paying the same rate of 14 percent a year to depositors on a daily or weekly basis is not a wise move. The sum of the interest and principal will keep growing each day or each week," she said, adding that paying interest that way is similar to promising depositors a return of 15-16 percent a year.

Mui said the practice was actually a way for banks to break the 14 percent cap without getting caught by the central bank. It could be the reason why the State Bank of Vietnam decided to introduce the new 6 percent ceiling, she said.

Vo Thi Sanh, a manager at state-run lender BIDV, said when all banks offer almost the same interest rates, small lenders, already having liquidity problems, will worry about their chance to secure deposits.

"They are standing in front of two options: either lying to get deposits or facing liquidity risks that could cause their system to collapse," Sanh said.

A manager at a bank speaking on condition of anonymity said that as small banks now pay the same interest, clients will just move to large banks with better reputations.

When deposits fall, small banks will have to sell their assets to improve their liquidity, he said.

"I was told that if the assets are not enough, we will have to lie about our deposit interest rates again. But then being punished and having a chance to survive is still better than being caught in a liquidity crisis."

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