High interest rates may make banks ‘unprofitable’

Wednesday, May 21, 2008
Bank interest rates have witnessed a new record high of 16.92% per annum. With the interest rate, banks will struggle to make profit as the maximum lending interest rate is capped at 18% per annum.

Barrier removed, banks raise interest rates at will

On May 20, VIB Bank and Military Bank announced new interest rates with the highest rate of 15%. Meanwhile, SeABank, which always leads in the interest rate race, has offered the interest rate as high as 15.6% per annum.

As such, the peaks of interest rates have been set up and then overturned continuously in the last two years.

The first record high was 14% per annum, and then 15% per annum, which is now being offered by many joint stock banks. Meanwhile, state owned banks now mostly apply the interest rate of 13.8% per annum. However, the state owned banks, sooner or later, will have to raise interest rates to 14-15% per annum; otherwise, they will not be able to mobilise capital as depositors will make deposits at joint stock banks.

However, it was quite a surprise that a branch of a state owned bank, Agribank’s Dong Anh branch, not a joint stock bank, countered with a new record interest rate, 16.92% per annum for 18-month term deposits, very close to the ceiling lending interest rate of 18% per annum.

Meanwhile, on May 20, the State Bank of Vietnam released a lot of documents on strengthening inspections of banks’ operations and fining banks that violate the current interest rate regulations. The Governor of the State Bank of Vietnam has requested directors of central bank branches to supervise the capital mobilisation of local banks, threatening to punish banks that offer abnormal interest rates (deposit interest rates nearly equal to lending interest rates).

Interest rates high, banks cannot make profit

In order to compete with other banks in mobilising capital, commercial banks have been rushing to raise deposit interest rates. However, experts have warned that banks will not make profit if they keep overly high rates.

According to Tran Xuan Huy, General Director of Sacombank, with the average deposit interest rate now is 14% per annum (1.166%/month) for 6-12 month term deposits, and maximum lending rate of 18%, banks will get the margin of 4% per annum (0.33%/month). However, banks will not ‘swallow’ all that 4%. They have other expenses as well (business premises, staff salaries).

Sacombank’s maximum lending interest rate will be 18%, but the bank will offer the ‘soft rate’ of 16-17% per annum for loyal clients.

The General Director of a small bank said that his bank is now offering 15.3% on 6-month term deposits, which means he can get the margin interest rate of 2.7% per annum, which he will use to pay for expenses, including premises and staff salaries, which are all on the rise.

Supposing that a bank mobilised VND2bil at 14% per annum (1.166%/month), it would have to pay VND23.32mil/month of interest to depositors, and make compulsory reserves of VND220mil to the state bank, which means that the bank would have VND1.78bil for re-lending at 18% per annum at maximum (1.5%/month). As such, the bank would get the net profit of VND26.7mil/month on VND2bil worth of capital after tax and paying salaries. However, it is possible that the bank would incur losses as it might have to spend money on other expenses. Moreover, it might not re-lend the entire VND2bil.

Dodging laws?

Experts have warned that commercial banks may dodge the laws to lend at interest rates higher than 18% per annum.

In fact, before the ceiling interest rate scheme was removed, banks lent at 20% on average, and sometimes 24% per annum. Now, while banks raise the deposit interest rates by 4-6% per annum, they have to lower the lending interest rates by 4-6%. This will put big difficulties on banks, prompting them to collect fees and surcharges in order to ensure turnover and normal operations. (VnMedia, VietNamNet, TBKTVN)