Ceiling interest rate removed, deposit interest rates may rise

Friday, May 2, 2008
Experts believe that once the ceiling interest rate scheme is removed, a new interest rate race will kick off, which may see deposit interest rates rise to 15% per annum, higher than the highest peak seen in the February race.
While the State Bank of Viet Nam was still working with the Saigon Commercial Bank (SCB) on SCB’s promissory note issuance, which was denounced as violating the banks’ agreement on the ceiling interest rate of 11%, the Prime Minister decided that the ceiling interest rate scheme must be removed.
The 2-day working session between the State Bank of Viet Nam and SCB ended earlier this week, while the minutes of the meeting did not say if SCB’s move to issue promissory notes with the interest rate higher than the ceiling interest rate was wrong or right.

SCB, which was first accused of violating banks’ agreement on ceiling interest rate, has automatically become the pioneer in removing the ceiling interest rate scheme with the Prime Minister’s decision.

Immediately, bankers have expressed their concurrence with the Prime Minister’s decision.

“The decision shows that the government is trying to regulate the national economy based on economic rules, not on administrative orders,” said Luu Duc Khanh, General Director of An Binh Bank.

Khanh said that the decision will help commercial banks mobilise capital more easily and settle difficulties caused by the tightened monetary policies.

“In principle, the best solution to fight inflation is to withdraw money from circulation, and the best tool to do that is the interest rate policy. The decision on removing the ceiling interest rate proves to come in line with economic laws. The other thing the government needs to do now is to calculate and forecast the inflation rate, so that people will make deposits at banks,” said Dang Quoc Tien, Deputy General Director of Military Commercial Joint Stock Bank.

Bankers say that the removal of the ceiling interest rate scheme will pave the way for commercial interest rates to go up further, possibly to 15% per annum.

Worries have been raised that the higher deposit interest rates will bring about lending interest rate increases, which will still put heavy burdens on businesses. However, Pham Anh Dung, General Director of SCB, said that it is more important to have capital for lending than the interest rate for lending.

Dung said that if banks continue offering low interest rates, people will not make deposits at banks anymore, but will make investments in other channels, buying gold, for example. As a result, compulsory reserves will decrease, which proves to be bad for the central bank’s management of the monetary market.

Analysts have pointed out that the ceiling interest rate scheme proves to be in contrast to the government’s policy on curbing inflation. As interest rates were lowered, depositors could not enjoy real profit on their deposits and decided to withdraw money from banks to buy gold. The director of a HCM City-based bank said that during five days, March 2-7, VND600bil was withdrawn from his bank, a surprisingly high figure.

High inflation and tightened monetary policies have been putting big difficulties on commercial banks. Most of the banks had very satisfactory business results in 2007 (big capital, large operation scale, low bad debt ratios), while they all faced low liquidity in early 2008. (VNN)