Merging small banks to curb inflation?

Friday, May 9, 2008
Merging small banks to form bigger ones, loosening the conditions for bank refinancing and removing the ceiling interest rate are the three things suggested by experts to solve banks’ problems.
Dr Nguyen Chung Binh, lecturer at Harvard University:
The channels of distributing capital to the national economy are stuck, which is the result of the tightened monetary policy. With the low interest rates capped at 12% per annum, depositors are enjoying negative interest as the interest rates prove to be lower than the inflation rate. Instead of making bank deposits, people inject their money in short-term investments, gold, construction materials and rice, which has been distorting the finance market.

However, the removal of the ceiling interest rate scheme alone will not help much in making money circulate, though. If the ceiling interest rate scheme is removed, a new interest rate race will occur, which will certainly burden businesses and the national economy. It may happen that a series of people’s credit funds will collapse, the scenario that we once saw in 1990.

I think that the central bank should take necessary measures to reduce the number of banks in order to make the monetary market open and clear.

There are too many banks in Vietnam, while there is no powerful bank. Commercial banks have been trying to develop their business scope by expanding their networks to mobilise more capital. Therefore, they have been fiercely competing with each other in developing credit, while not paying attention to developing associated services. Banks have been focusing on expanding operation scales, while their corporate skills are not commensurate with the growing network. Banks cannot control their risks, while the central bank does not know what banks are doing. Therefore, state management agencies do not have reliable figures to make suitable policies.

It is necessary to merge small banks into bigger banks in order to improve corporate skills. Only the banks that can meet three requirements of big capital, good risk management system and transparent management should be maintained. South Korea, a $1,000bil economy, is an example. Prior to 1997, the country had 25 banks, and the number has been reduced by half.

Le Tham Duong, Head of the HCM City Business Administration Faculty under the HCM City Banking University:

The official capital channels for the national economy are getting stuck, while the unofficial channel, the black market, is now bustling.

If the ceiling interest rate scheme is removed, the deposit interest rate may go up to 17% in the highest scenario, while the lending interest rate 25%. If so, this would help improve the liquidity of commercial banks, while helping curb inflation and boost economic growth. With high lending interest rates, businesses will have to think carefully before borrowing money, and they will only get loans if they have feasible business projects. Those projects which do not have feasible projects will stay away from bank loans. Therefore, the demand for capital will decrease, banks will have to reduce lending and deposit interest rates.

Nguyen Dang Don, Deputy Head of the Banking Faculty under the HCM City Economics University:

The State Bank should loosen the conditions for refinancing banks in order to ensure the liquidity of banks. Interest rates must be decided by the market rather than the intervention of the Vietnam Banking Association.(PL TP HCM)