Is the race to reduce interest rates not for small banks?

Recently, some state-owned commercial banks plummeted deposit rates in dong by 0.3-0.5 percent/year. The State Bank said “This is a positive solution to carry out the direction on reducing lending rates”.

However, will this interest rate reduction trend develop into a general trend or only in a few banks having abundant capital? And how will it influence on Vietnam’s capital market from now till the end of the year?

*That big banks reduce deposit rates is not surprising!

According to survey, a series of major banks such as Vietcombank, BIDV, Agribank, VIB, Dong A suddenly reduced deposit rates just before the end of the year when raising interest rate has been a common trend forecasted by financial experts in recent time.

However, according to some experts, the recent deposit rate reduction by 0.3-0.5 percent/year for short terms of some large commercial banks is not too surprising at banks having capital surplus and it has been planned since the beginning of the year.

Accordingly, Dr Nguyen Tri Hieu, Finance and Banking expert noted that “In my opinion, this is an understandable move when some large banks are having capital surplus and good liquidity. They can deal with customers to reduce deposit rates for some time in order to fulfill the request and policy of the State Bank of Vietnam (SBV)”.

Vo Van Chau, CEO of Kien Long Joint Stock Bank Commercial (KienLongBank) also said, the deposit rate reduction has been included in the roadmap since the beginning of the central bank. KienLongBank itself is also studying the market situation to further reduce interest rates.

Nguyen Thanh Toai, deputy CEO of Asia Joint Stock Commercial Bank (ACB) said the reduction in deposit rates depends on the liquidity of each bank and each bank has certain behavior to each type of deposit. “In my opinion, the decision to increase or decrease interest rates of banks is normal, depending on the liquidity of each bank. Bank having excess money will decrease interest rates while those lacking of money will increase”.

*Is the race to reduce interest rates not for small banks?

Thus, is the move to reduce deposit rates of some state-owned banks enough to create a general wave of interest rate decrease for the whole capital market? And is this process long enough for businesses to “aggressively” borrow money to invest in production and business?

Continuing to comment on this issue, Dr Nguyen Tri Hieu said, hopefully, this trend can positively influence on the market, creating a general trend. “However, I think that it is really difficult for small and medium banks to reduce interest rates at this moment”.

Accordingly, Hieu analyses the reasons why the reduction in interest rates is difficult to become a general trend as follows:

First, as usual, at the end of the year, banks must race to lend, therefore, they need to increase mobilising by raising interest rates. Currently, the majority of small and medium banks still lack capital, and suffer from bad debt pressure, so it will be very difficult for them to lower interest rates.

Along with that, in the recent Circular 06/2016, the central bank forced banks to restructure capital since the beginning of 2017. The short-term capital used for medium and long term loans will have to be reduced from 60 percent to 50 percent, forcing banks to mobilise additional capital for medium and long term loans to balance the capital ratio.

Finally is the obstacle from bad debts. According to the latest statistics of the Swiss bank Credit Suisse, the non-performing loan (NPL) ratio of Vietnam banking sector is about 7-8 percent. This is an alarming figure and many experts also said that “bad debts are hidden somewhere in banks”, which is the cause that stops the flow of money. Therefore, banks are required to increase deposit to maintain liquidity.

Hieu said: lowering interest rates, particularly in small and medium banks, is very difficult at this moment, not to say “impossible”.

Representative of KienLongBank – Chau said from now till the Lunar New Year, many banks will have short-term lending rate preferential programmes for businesses but lending rates will go back to normal after the Lunar New Year. This shows that if available, the reduction in interest rates is only for short terms while long-term lending rates are unlikely to fall.

“The bank is studying to reduce interest rates following the requirement by the central bank. However, it is necessary to ensure the competitiveness because customers are always wise, they will deposit in banks with the most optimal interest rate”, said Chau.

Toai, deputy CEO of ACB said lending rates will be difficult to decrease in the near future because even if banks have excess liquidity, interest rates are unlikely to decrease as bad debts have “blocked” the door”. ACB itself has never directed to reduce deposit rates.

Reducing interest rates does not seem to be part of the contemplation of the majority of banks at this time and it is also not for small banks. However, financial market is like an interconnecting vase, water hollows, the reduction of interest rates at large banks will create pressure on reducing interest rates for the whole market.

Banks having great potential, enough prestige can still retain VIP customers though deposit rates decrease. Thus, the race to reduce interest rates is really creating pressure, causing difficulties for smaller banks.

According to experts, the NIM of banks is now very low, falling to about two percent. So, in order to compete, and reduce lending rates, banks must reduce deposit rates and vice versa to ensure profitability.


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