Central bank urged to inject capital into commercial banks

Thursday, May 8, 2008
The deposit growth of the banking system in April was 1.2%, far lower than last month's 3.46% and 3.38% of the same period last year. The central bank has considered refinancing capital to some banks to assist their payment capacity.

The slow growth of deposits in April in two financial centres of Hanoi and HCM City caused imbalance of capital and led to difficulties in liquidity in some banks.

Most of difficulties in payment capacity of banks started from un-profitability of huge amount of loans. There were some reasons as follow:

* The monetary policy was tightened from 2008 in order to curb inflation, hence, the economy would grow slowly and more and more loans would inevitably not generate profits.

* The increasingly higher interest rate, particularly in the first four months, pushed up costs of loans. Interest rates for deposits were high, terms of deposits were shorter [mainly from one to three months] while some 40% of loans at banks carried terms of more than one-year with low interest rates. Therefore, many banks were facing up imbalance of terms between capital and capital usage.

Overdue debts of banks were also quickly increasing because clients preferred being fined an interest rate of 150% to borrowing new loans with high interest rates. Some clients were afraid that they could not continue borrowing capital after they had paid loans. This was also one of reasons for weak liquidity of banks.

* Some banks, mainly commercial joint stock banks, fell into difficulties because they had injected too much money into real estate and securities. When the real estate market and the stock market underwent recession, clients lost debt payment capacity, collaterals and mortgages could not be sold, which significantly impacted banks.

Since 2007, the interbank market in Vietnam has signalled a transformation from a market which assists payment capacity into a profitable market. Weaknesses in payment basically came from limited risk management capacity of banks and partly aftermaths of the transformation of the interbank market. Many banks used loans from other banks in order to offer long-term loans to the economy.

When the monetary market was scarce of money, some small banks, even some branches of state-run banks also did not have enough prestige to borrow loans from big banks and branches of foreign banks. Currently, some medium joint stock banks and several small banks borrowed large banks loans with interest rates of 14-18% a year, or even 20%-22% a year and then relent some small banks loans with interest rates of from 24%-27% a year.

When some banks met difficulties in liquidity, measures on interest rates, the interbank market, the open market were useless. Thus, the central bank announced that it would refinance capital to banks. However, the central bank will be very carefully because refinancing capital will help commercial banks to ensure payment capacity, avoid risks while pushing supply of money, impacting such target of reining inflation accordingly.

As for commercial banks, although they expected to be refinanced at the current low interest rate of only 7.5% a year, they were also afraid that if clients are informed of this information, clients will have negative assessments for banks' liquidity.