VietNamNet Bridge – The liquidity surplus of the whole banking system has become alarmingly high. While the capital supply has been profuse, the demand remains very weak, which has made bankers worried stiff.

Capital flow gets stuck

Commercial banks have rushed to lower the dong lending interest rates, not because of the State Bank’s request to do that, but because of the weak recovery of the national economy. Businesses need low cost capital in the context of the controllable inflation, the banking system’s strong liquidity and the slow credit growth.

In the latest news, Techcombank has made a shocking decision when slashing the lending interest rate applied to small and medium enterprises to 8.5 percent.

In the interbank market, the interest rate has been going the cross-line after it tumbled some months ago. The overnight and one-week interest rates plummeted from 6 percent per annum in January 2013 to 2-2.5 percent in February, and then has been stabilizing at the low rates.

In March and April, the interest rate hovered around 2.5-4 percent, but then dropped to the deepest low of 1-1.5 percent in the second half of the second quarter.

The liquidity surplus has become alarmingly high. Due to the profuse capital supply and the weak capital demand, the trading volume has reduced sharply by 80 percent from the same period of the last year to VND15 trillion a day.

It is estimated that the capital to be mobilized by the end of June 2013 had increased by 8.5 percent, while the lending had grown by 4.5 percent only.

The 4.5 percent figure includes the money banks have poured into government bonds. This means that if not counting on the sum of money spent on bonds, the actual amount of capital lent to businesses to fund their production projects would be much lower.

What will central bank do?

According to Dr Le Xuan Nghia, Head of BDI, a business development institute, as per the instruction of the National Assembly and the government, the State Bank has requested commercial banks to slash the interest rates.

In order to slash interest rates, the central bank would have to increase the money supply. And in principle, once the dong interest rate goes down, the foreign currency price will increase.

“No one can drive the market as per his will without having to pay any price,” Nghia commented.

Therefore, the dollar price has increased two times so far this year, mainly because of the sharp decrease of the dong interest rate.

Meanwhile, the capital in foreign currencies has become redundant, which has forced commercial banks to increase the balance of the deposit compulsory reserves at the central bank. The reserves reportedly were $350 million, which soared to $450 million by June 2013.

Also according to Nghia, the foreign currency deposits from the public had increased by 15 percent by June 2013 in comparison with the end of 2012. The foreign currency deposit from businesses had also increased by 9 percent. Some businesses have paid debts before due for the fear about the dollar price increase.

As such, how to manage the dong/dollar exchange rate and how the dong interest rates can fluctuate would remain the questions the central bank has to think about in the time to come.

TBKTVN