A board displays SeAbank's deposit interest rates outside a branch in Hanoi
The central bank’s recent cut in the deposit interest-rate cap is unlikely to have much of an impact on lending since banks already have excessive liquidity but are struggling to lend.
The cap on deposits with maturities of less than six months was cut by 1 percentage point to 6 percent Tuesday. Deposit rates at banks have declined by 0.2-1 percent on average to respond to the news
Nguyen Thi Hong, chief of the State Bank of Vietnam’s Monetary Policy Department, said the reduction is aimed at achieving lower lending rates to support businesses and spur economic growth.
But banks, struggling to find borrowers amid the economic slump, have been buying government bonds instead.
ANZ and HSBC said the rate cut is likely to cause depositors to look for other asset classes rather than spur credit growth.
While the central bank targets 12-14 percent lending growth this year, banks reported negative growth of 1.66 percent as of February end.
High levels of bad debts are acting as a drag on credit expansion, HSBC said, warning that banks cannot step up lending until they resolve the issue.
ANZ feared that the delay in implementing several regulations contained in the central bank’s Circular 02, imposing stricter bad-debt classification and risk provisions and set to take effect in June, would badly affect the system.
HSBC expects the sluggish credit growth to keep economic growth at below its potential, at around 5.6 percent this year. It had grown by 5.42 percent in 2013.
Unbalanced growths among economic participants would continue, it warned further, with export businesses performing well and those targeting the local market suffering from low demand and poor access to funds.
Banks said the decision to lower the cap did not surprise them, and called for scrapping the maximum rate.
Trinh Van Tuan, chairman of OCB, said banks have for long called for eliminating the cap.
The central bank used to be concerned about a possible deposit-rate race among banks, but that fear is no longer warranted since higher deposit rates would do lenders no good given the lack of demand for credit.
Tran Ngoc Tam, general deputy director of NamA Bank, said the current market-driven deposit rates and banks’ high liquidity mean the cap plays a minor or no function now, and this is the “most suitable” time to scrap it.
An unnamed senior central bank official told news website Saigon Times that lowering the cap was a preliminary step to scrapping it.
The central bank has also cut the refinance and discount rates by 50 basis points to 6.5 percent and 4.5 percent.
Like us on Facebook and scroll down to share your comment