Vietnam banks offer higher dollar rates than allowed

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Several banks have broken an interest rate cap on dollar deposits in an attempt to attract funds to meet the increasing credit demand.

In June, the State Bank of Vietnam lowered the rate cap on dollar deposits from 3 to 2 percent, and cut the limit for institutions to half a percent.

Bankers told Thanh Nien the new cap has made it difficult for them to attract clients. As a result, some banks breached the limit and offered higher rates for deposits of more than US$5,000.

A client in Ho Chi Minh who requested to be identified only as Nam said a bank even accepted to pay 5 percent per year on his dollar deposit.

According to commercial banks, the demand for dollar loans is rising fast as banks offer them at around 7-8 percent, much lower compared to the 19-22 percent on dong loans.

Dollar liquidity will be strained in the next few months if the demand remains high, said the Vietnam Bank Association. Exchange rates will be affected at the end of the year because supply is unlikely to increase, the association said.

Economist Le Tham Duong of the Ho Chi Minh City Banking University said due to loose lending regulations, local companies have borrowed dollars and converted them into dong. Then they deposit the funds to profit from large gap of up to 15 percentage points between dong and dollar interest rates.

"That's why dollar credit has expanded at a fast pace, causing an imbalance between supply and demand," Duong said.

Dollar loans rose 2.3 percent from May to June while dong credit fell 5.88 percent during the same period.

Duong said the central bank should consider raising foreign reserve requirements at banks to 10 percent from 7 percent. Such a move would force banks to raise their dollar interest rates, narrowing the gap between interest rates of the two currencies, he said.

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