Vietnam's small banks work around interest limit to lure deposits

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Small banks facing a liquidity crunch have breached the central bank's short-term deposit cap of 9 percent in an attempt to attract more funds, and experts say the trend could spread to even large lenders.

Staff members of a small-sized bank in Hanoi said for short-term deposits of more than VND300 million (US$14,380), the bank could offer up to 12 percent by falsifying the term as 12 months to avoid the rate ceiling. The extra money would be paid in cash instead of going directly to the account, they said.

Former central bank governor Cao Sy Kiem told Thanh Nien that it is hardly a surprise to see small banks breaching the 9-percent limit.

Since banks are allowed to set interest rates on long-term deposits on a negotiable basis, they can easily avoid the short-term cap by changing the term, Kiem said. "Banks have taken advantage of this policy to contravene the short-term cap and it's very difficult for the central bank to control the practice."

He said most of the long-term deposits might be short-term funds in disguise, giving people a wrong impression about the liquidity of the banking system.

Analysts said with credit expanding less than 1 percent in the first six months, the banking system seems to have ample funds now. In fact small banks are still struggling to attract deposits since many clients have favored major banks of the G14 group, which accounts for 90 percent of the banking market in Vietnam.

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An expert who asked not to be named said the central bank has also tightened regulations on the interbank market, banning cash-strapped banks from receiving deposits from other lenders.

That policy, coupled with the customer favor toward large banks, has forced small banks to pay out high interest rates on short-term deposits.

"If market surveillance is not strengthened, it's possible that large banks enter the interest rate race too, bringing chaos to the whole market," he warned.

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