Vietnam central bank says to review deposit rate cap

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Vietnam's central bank said it will consider lowering the dong deposit rate cap in December, admitting that the cap has created an advantage for large banks over smaller lenders.

The 14 percent cap was introduced at the end of 2010, but until last September, the ceiling was breached by many banks that offered 17 percent to 18 percent per year for dong deposits, news website VnExpress quoted Governor Nguyen Van Binh as telling lawmakers Friday.

"Banking inspectors could not discover any violation after many attempts in the first six months of 2011. That's a weakness of the inspectors and the responsibility of the State Bank officials," he said.

Binh admitted that applying a single rate cap across the banking system may give large banks an advantage. However, he said small banks with strong financial positions will not have any difficulty retaining clients.

The governor also told the National Assembly that the low 2 percent cap on dollar deposits was a measure to prevent dollarization in the economy. Interest rates on dollar loans, on the other hand, are set as high as 8 percent because local businesses are not encouraged to take out dollar loans.

Bad debts in the banking system now account for 3.3 percent of total loans, compared to 2.14 percent late last year. The level could rise to 3.6-3.8 percent by the end of this year, Binh said.

Binh took his position in August, replacing Nguyen Van Giau, who now heads the Economic Committee of the National Assembly.

Bank reforms

Speaking at a question and answer session with lawmakers Thursday, Binh said inflation has eased since August, allowing the central bank to review the 14 percent rate cap on dong deposits.

A new cap of under 14 percent will still give depositors enough earnings, considering the inflation target for 2012 has been set at under 10 percent, he said.

Consumer prices rose 19.83 percent this month from a year earlier. Prices rose 0.39 percent in November from October, according to data released by the General Statistics Office Thursday.

Binh said the central bank has completed a plan to restructure the banking system and will submit it to the government in the next few days.

There are eight small lenders that are weak, accounting for 5 percent of the system, while eight partly-private lenders are strong enough to become the "pillars" for the whole system, he said.

"The most difficult task of the restructuring will be dealing with weak banks," he said. "We accept that there will be banks of small and medium sizes, but they have to be healthy financially."

Binh said the goal of the reforms is to have two banks that can compete on a regional level and 10 to 15 banks that can support the whole system, he said.

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