Vietnam money: softening rates to squeeze banks' profits

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Lending rates in Vietnam fell in the past week after the central bank dropped the cap on short-term loans and banks started raising deposit rates to attract funds, moves bankers say could squeeze their profits.

The State Bank of Vietnam, or the central bank, freed up short-term lending rates last week in a move to rationalise rates, following a similar move for medium- and long-term loans.

Governor Nguyen Van Giau told Reuters last week the central bank hopes to gradually lower market rates.

High borrowing costs have made it tough for companies to expand, which could undermine Vietnam's efforts to boost economic growth to 6.5 percent this year from 5.3 percent in 2009.

The central bank has pumped more cash into banks to help them cut lending rates from near 20 percent in some cases early this month.

State-run lenders BIDV and Agribank, Vietnam's largest banks in terms of assets, said they now offer dong loans at between 13-14.5 percent. They also recently announced higher deposit rates at 11.5-12.11 percent, from below 10.5 percent early this month where they had been capped.

On the interbank market, fixings for dong loan rates of terms from overnight to three-month loans also dropped, with overnight loans easing to 6.74 percent on Monday from 7.06 percent a week ago, Reuters data show.

"With deposit rates edging up to 12 percent and lending rates falling to around 13.5-14 percent, banks might face difficulties in balancing funds and gaining profits," a currency trader at a Vietnamese bank said.

"I wonder how they can manage for a long time, when the margin is so narrow," he said.

An executive at a Hanoi-based bank, however, said the moves to rationalize interest rates were necessary.

"At this time, we need to accept this and source profits from other activities, such as international transactions, as a substitute," the executive said.

Tran Hoang Ngan, a member of the National Supervisory Council for National Financial and Monetary Policy, said deposit rates of 11-12 percent and lending rates of 14-15 percent were "reasonable".

From now until year-end the central bank and commercial banks could try to bring rates even lower to 9-10 percent for deposits and 12-13 percent on lending, Ngan was quoted by the Sai Gon Giai Phong (Liberation Saigon) daily as saying.

"It's easier to raise deposits this year, because other investment options such as gold and stock trading are either closed or not attractive enough," the executive said, adding that both deposit and lending rates would drop in coming months.

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