The recent sharp increase in deposit interest rates has pulled lending interest rates up by 3-4 percent per annum over the same period last year.
In the face of highly increasing pressure on the USD/VND exchange rate, deposit interest rates have not cooled down yet, so the pressure on lending interest rates in the peak months of the year is still huge.
Attracting deposits, maintaining liquidity
Although the deposit interest rate in the market is no longer at the level of 11 percent per annum, the race has not ended yet. Not only competing for time deposits with interest rates of 8 percent-9 percent per annum, the interest rate race among commercial banks has now started at demand deposit rates (current account savings account).
According to experts, the tense liquidity of the banking system has forced commercial banks to raise deposit interest rates to attract money to ensure liquidity. Data from the State Bank of Vietnam (SBV) shows that capital mobilization in the first nine months of the year was only about one-third of loans (deposits climbed by more than 4 percent, but loans surged by nearly 11 percent). The financial statements of the third quarter of 2022 of commercial banks also show that many banks have the loan to deposit ratios exceeding the allowed limit of 85 percent.
In the past time, the SBV has increased the benchmark interest rate twice in more than a month, with a total increase of 2 percent, in order to help commercial banks boost capital mobilization by high interest rates to ensure liquidity. However, it seems that it has not been able to relieve this tension yet. A leader of a commercial bank said that although bank liquidity was not exhausted, it still had to increase deposit interest rates to attract money to defend, especially when the interest rate race in the market is getting hot. Besides, despite raising interest rates, it is still difficult to mobilize capital because the SBV attracts Vietnamese dong through the treasury bill channel. At the same time, the credit limit is limited, so people and businesses are forced to use their own capital for consumption, production, and business activities, thereby reducing deposits in banks. In addition, recent violations related to corporate bonds have also affected the bank's liquidity.
Financial analysts forecast that deposit interest rates may continue to climb in the last months of 2022 due to increasing credit demand. Market liquidity will be under pressure when deposit growth cannot keep pace with credit growth. High demand for cash will continue to put pressure on the liquidity of the banking system.
Lending interest rates increase
The SBV raised the benchmark interest rate and the USD/VND exchange rate range, causing the lending interest rate to go up in tandem and the USD/VND exchange rate to rise sharply. Input costs increased, forcing banks to increase lending rates to ensure profits in business. Currently, lending interest rates for non-priority businesses have surged by 3-4 percent over the same period last year. Banks provide loans in the range of 9-11 percent per annum, depending on customer groups and loan objectives. Many businesses even have to borrow money at an interest rate of nearly 13 percent per annum.
Dr. Nguyen Tri Hieu, a finance-banking expert, said that the US Federal Reserve (Fed) had raised interest rates six times this year to 3.75-4 percent per annum. It is forecasted that interest rates will continue to advance further in the last months of 2022 and 2023, so it is reasonable for the SBV to increase the benchmark interest rates. Financial experts also said that when the Fed continues to raise the US dollar interest rate, the USD/VND exchange rate will fluctuate accordingly.
To curtail the devaluation of the Vietnamese dong, the management agency can use foreign exchange reserves or raise interest rates. However, the benchmark interest rates were already increased in September and October 2022, and foreign exchange reserves reached a safe level of three weeks of imports because the SBV sold a significant amount of foreign currency from foreign exchange reserves to stabilize the domestic exchange rate. According to the analysis of Rong Viet Securities Company, the exchange rate and interest rates are in a spiral. Therefore, the SBV may increase the operating interest rate by 0.5-1 percent in the last two months of the year, as it is the most likely tool to ease the exchange rate pressure. And then, interest rate pressure will also enlarge in the near future.
Dr. Nguyen Huu Huan, Head of the Finance Department of the HCMC University of Economics, said that the SBV raised interest rates to retain foreign capital flows and ensure system liquidity. Because if interest rates are too low, banks will not be able to mobilize capital, and liquidity will be difficult. However, raising interest rates will affect economic recovery and growth. Unfortunately, in the current global context, we cannot have both macroeconomic stability and high economic growth. Mr. Nguyen Quoc Hung, General Secretary of the Vietnam Bankers Association, said that it is impossible to ask commercial banks to keep lending interest rates unchanged in the context of increasing deposit rates. However, banks also need to increase lending rates at an appropriate level to share difficulties with customers.
SBV Governor Nguyen Thi Hong: SBV is ready to support liquidity
Last October, the market was mainly affected by psychological factors and complicated movements of the world economy. Faced with that situation, the SBV quickly and promptly performed its regulatory role by deploying tools and solutions to provide liquidity support for the system. All banks ensure operational safety indicators according to the regulations of the SBV.
As an executive, SBV is ready to support liquidity to ensure the solvency of credit institutions, especially at the end of the year. The monetary and foreign exchange markets are under pressure and fluctuating, but that is the general context of countries worldwide, not only Vietnam. The important thing is that Vietnam's economic foundation remains fairly positive. In the coming time, the SBV will actively follow up and grasp the situation to come up with appropriate solutions and management tools with the right dose and time.
Dr. Truong Van Phuoc - Member of the National Financial and Monetary Policy Advisory Council: Flexibly resolving anti-dollarization policy
In the current context, when the Fed continuously raises interest rates, triggering the flow of the US dollar back to the US because money will flow to places with high interest rates, we need to reconsider the view of limiting dollarization to which level is suitable. For example, interest rates can be adjusted accordingly. It may not be advisable to mobilize foreign currency from the people, but for import-export enterprises with foreign currency revenue, credit institutions need to consider the interest rate mechanism to maintain the amount of foreign currency capital deposited in the bank, causing the dollarization rate to increase.
To solve the stressful problems in the foreign exchange market, it is necessary to increase supply, decrease demand, and flexibly adjust the anti-dollarization policy with interest rate tools to increase supply. When commercial banks can mobilize foreign currency at an appropriate interest rate, the bank can balance deposits and loans.
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