Safety in numbers

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Many have attributed a sharp increase in deposit interest rates now nearly 19-20 percent to capital shortages at some small commercial banks.

To prevent these banks from failing, some have suggested mergers to increase liquidity and reduce risk in the banking system.

Nguyen Dai Lai, former deputy head of the Banking Development Department under the State Bank of Vietnam, weighed in on the matter in an interview with Thanh Nien.

Thanh Nien: Small commercial banks have dramatically increased their deposit interest rates.  What is the reason for the shift?

Nguyen Dai Lai: No bank wants to pour a lot of money (into paying interest rates). High interest rates on deposits demonstrate that banks are facing a capital shortage.

Generally speaking, cash does not flow into banks during inflationary periods and banks don't gain much from high interest rates. Small banks are less competitive in mobilizing capital during these times. In addition, they don't have tools to access refinancing funds from the State Bank of Vietnam, so they are engaged in this interest race to attract further deposits.

Should small banks be merged to help curb the interest rate race?

Now, there are too many banks and it's up to them to sink or swim. If some banks are eliminated, it shouldn't create any big problems for the economy. In fact, banks need to be restructured and sometimes, the merging and acquisition of banks makes them more powerful.

Generally speaking, large banks serve large businesses and small banks serve small businesses. But, financial institutions shouldn't be too small. Our country used to think that each economic group should have its own bank.

Are banks beginning with too little charter capital?

I think the size of a bank's charter capital is not so important.

Banks with large capital serve large business, while those with small capital serve small business, so there is no problem.

But, Vietnam has too many banks right now. The interest rate should be determined by the market and firms should seek out ways to deal with these difficulties by themselves. The state should not offer favors to any class of banks.

What should be done to help increase the safety of Vietnam's banking system, in general, and raise the liquidity of small banks, in particular?

Banks need a safe and secure environment to operate successfully. The most important thing for banks is careful risk management. Their activities and their income are nourished by the surplus value of the production market.

RATIONAL APPROACH

Le Xuan Nghia, deputy head of the National Financial Supervisory Committee, said that if small banks find it hard to develop independently, and see the benefits from merging, they will merge.

To help stabilize the monetary market, Nghia said, policy can be tightened or loosened but it needs to remain consistent throughout the year.

Vietnam's policy changed abruptly, he said. In the first four months of this year, the cash supply only rose by 1 percent, while credit only grew by 5 percent.

The overly tight policy has pushed many firms to the verge of bankruptcy.

The interest rate now is the highest it's been in decades. Commercial banks borrow on the interbank market at interest rates of 22-25 percent, so the decision to prevent them from borrowing from individuals (at more than 14 percent) seems highly irrational.

Tran Hoang Ngan of the National Advisory Council for Financial and Monetary Policies, said many other countries have created a deposit rate cap. However, the cap works only when the state can guarantee that commercial banks will implement it.

Commercial banks have recently made corrupt use of gaps in the law to break the cap.

For this reason, Vietnam should not maintain its deposit rate cap of 14 percent. It is necessary to remove the cap to improve market transparency. If that's done, commercial banks will offer deposit rates based on their capital source and business conditions.

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