Northern banks vote to maintain 11% ceiling interest rate

Wednesday, April 23, 2008
Twenty-two of 23 banks, members of the Viet Nam Banking Association (VNBA), promised to maintain the 11% ceiling interest rate, which has been applied since April 2, 2008, after four hours of arguing.
This was really a difficult decision by the banks as many of them have been facing low liquidity and finding it hard to mobilise capital.
Finally, banks decided to maintain the ceiling interest rate scheme, as the interest rate war in February 2008, in which interest rates escalated day by day, was a useful lesson.
The General Director of a Hanoi-based joint stock bank said that if the ceiling interest rate scheme is removed, the market will be chaotic as some banks may offer abnormally high interest rates of 15-16%.
A representative of a state owned bank said that if the ceiling interest rate scheme is removed, the banking system will have safety problems.
However, some bankers have expressed concerns that if they do not raise deposit interest rates they will not be able to mobilise capital. Meanwhile, they cannot borrow money in the interbank market due to high interest rates. A banker revealed that in the last few days, if a client deposited VND5bil and demanded the interest rate of 14% per annum, he had to accept the high rate.
Three solutions were put up for discussion: 1. Maintaining the agreed ceiling interest rate 2. Raising the ceiling interest rate to 12% as stipulated by Decision 02 by the State Bank of Vietnam (the 11% ceiling interest rate was the voluntary rate agreed upon by VNBA’s members) 3. Applying three different ceiling interest rates for three groups of banks (different in operation scale; the smaller banks could apply higher interest rates).
At first, many banks advocated the second solution, saying that the 11% interest rate is not high enough to attract depositors anymore. Therefore, it would be better to raise the ceiling interest rate by 1% in the immediate time and make adjustments later if necessary.
However, big banks (Vietinbank, Military Bank and Techcombank), said that the ceiling interest rate should be maintained in order to avoid chaos in the monetary market.
Finally, the majority of the banks at the meeting yesterday voted to maintain the ceiling interest rate of 11% after the Director of the Monetary Policy Department under the State Bank of Viet Nam Nguyen Ngoc Bao made strong commitments to help banks improve their liquidity.
Bao said that the demand for selling valuable papers from commercial banks will be met by the State Bank through open market operations. Banks which do not have valuable papers but need support to improve liquidity will also get support from the State Bank, which will give specific solutions with required conditions. In all cases, banks must promise that they will only use the loans from the State Bank for ensuring liquidity, not for expanding credit.
Bao also said that his department will give necessary support provided that VNBA releases an official document to the State Bank, stating that its members need support.
VNBA will convene a similar meeting in the south on April 25. If the southern members agree with northern members, the notice about maintaining the 11% ceiling interest rate will be sent to all members on April 26. If not, northern members will have to gather again and re-discuss the issue. (VNN)