VietNamNet Bridge - After almost a decade, the State Bank of Vietnam (SBV) is considering sharp cuts in banks’ reserve requirements applied to huge amounts of deposits. 

If the plan is implemented, this will be the first time in nine years that the central bank has made such a decision to pump more capital into circulation.

Nine years ago, SBV cut the compulsory reserve, or the amount of cash in Vietnam dong that banks have to hold as reserves, from 4 percent to 3 percent for demand- and fewer-than-12-month deposits, and from 2 percent to 1 percent for longer term deposits.

The compulsory reserve levels have been applied since then, except an adjustment specifically made for Agribank in 2018.

The required compulsory reserve levels applied to foreign currency deposits are higher, 8 to 6 percent.

Compulsory reserve requirements are  a tool for the watchdog agency to use to manage monetary policies. The required reserve levels are lifted or lowered depending on the banking system’s liquidity, inflation rate, and interest rates.

However, as it is a ‘heavy weapon’ which allows the management body to reach its goals quickly, the management body is always cautious when using the tool.

Compulsory reserves will not be required on some groups of banks, including ones under special control, and ones dissolving or stopping operations.

Compulsory reserve requirements are  a tool for the watchdog agency to use to manage monetary policies. The required reserve levels are lifted or lowered depending on the banking system’s liquidity, inflation rate, and interest rates.

These include Dong A Bank which has been under special control since 2015 and is undergoing restructuring, and three commercial banks taken over by the State Bank, or called ‘zero-dong banks’.

The banks to enjoy compulsory reserve cuts include those that are involved in the banking system restructuring process.

The credit institutions that support the restructuring process are understood as banks which send staff to weak banks to work in management boards and support problematic banks to recover from difficulties. 

Vietcombank, VietinBank and BIDV may enjoy the reserve cuts as they have given support in the restructuring of Dong A Bank, CB Bank, Ocean Bank and GP Bank. The decrease could be up to 50 percent as stipulated in current laws.

Some analysts believe the cut will influence the market, especially when the interest rate is on the rise, because the these banks are the most capital.

Meanwhile, Dien Dan Doanh Nghiep quoted experts as saying that the adjustment this time won’t have much significance. Banks won’t be able to increase the lending considerably because of the limits on LDR (loan to deposit ratio).

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