Difficult to reduce interest rates in 2020


In 2019, interest rates were adjusted by several measures taken by the State Bank of Vietnam (SBV), and interest rates have fallen in certain segments. In 2020, interest rate reduction is forecast to happen only if commercial banks show healthy operations by reducing capital costs.

Illustrative photo.

Illustrative photo.

SBV adjusted interest rates in 2019

In 2019, about 64 central banks across the globe reduced interest rates by an average of 0.63% to support their national economy, especially after intense pressure was felt from the ongoing and seemingly unending trade war between the US and China. Vietnam also followed suit, and the State Bank adjusted a reduction of 0.25% per year to support the economy from 16 September 2019.

Specifically, the refinanced interest rate decreased from 6.25% per year to 6% per year, the discount rate decreased from 4.25% per year to 4% per year, and overnight lending interest rate in inter-bank electronic payment decreased from 7.25% per year to 7% per year. Interest rates in open market operations decreased twice, from 4.75% per year to 4% per year, a total reduction of 0.75% per year.

The operating interest rate is the operating tool of central banks in the world in general and also a tool of Vietnam's monetary policy in particular. Normally, if central banks want to support the economy and businesses, they will reduce operating interest rates, so that it encourages banks to lend more and enterprises to borrow cheap, which then leads to more contributions to the national economy.

However, in Vietnam, the SBV operating interest rate has only affected interest rates in the inter-bank market (Market 2). Because Market 2 and Market 1 have no connection, the SBV adjustment did not lead to savings and lending interest rates of the economy, and it did not achieve the purpose of amending monetary policy.

This clearly shows that the State Bank of Vietnam must continue to adjust interest rates in Market 1. Specifically, SBV had required credit institutions to reduce by 0.2-0.5% the deposit rate cap for terms of less than six months and reduce 0.5% interest rate ceiling for short-term priority areas of credit institutions to customers from 19 November 2019.

Accordingly, the ceiling deposit interest rate for demand deposits and term deposits with less than one month decreased from 1% to 0.8% per year, and the deposit rate cap for term deposits from one month to less than six months decreased from 5.5% per year to 5% per year. The ceiling of short-term lending interest rates in VND for capital needs for agriculture, rural development, export, supporting industries, small and medium-sized enterprises, and high-tech enterprises decreased from 6.5% per year to 6% per year.

The State Bank also directed credit institutions to proactively financially balance to apply reasonable lending interest rates and ensure financial security. The State Bank also combined regulation, meeting liquidity requirements for credit institutions, and maintaining interbank interest rates at an appropriate level to support capital sources with reasonable costs for credit institutions.

But according to many experts, the interest rate reduction measures of the State Bank have not really had a strong impact on the common ground. Because the reduction of interest rates only occurred in certain segments that the State Bank adjusted, such as lowering the ceiling interest rate only related to short-term, while the medium and long-term remains under agreement mechanism. Meanwhile, the reduction of output interest rates is mainly a priority area and development oriented area and the remaining is still under the agreement mechanism.

Interest rate reduction unsure in 2020

In 2020, world interest rates are not expected to decrease as much as in 2019, because countries will gradually reduce the monetary easing roadmap towards reducing interest rates. Therefore, this year, the possibility of interest rate reduction in Vietnam is unsure, and will depend on international fluctuation. This, coupled with pressure of SBV centralized credit increase of about 14% will keep the capital mobilization demand of Vietnam relatively large.

According to Dr. Le Xuan Nghia, an economist, challenges for mobilizing deposits and maintaining liquidity have always been a problem of commercial banks for many years. Although this challenge has been mitigated by relatively cautious credit policy of SBV in controlling real estate credit and adjusting the ratio of short-term capital to medium and long-term loans, there are still other big problems such as bad debt, which is still quite high in some small commercial banks, along with high demand for government bonds and corporate bonds. Hence, the reduction of interest rates this year will be affected.

Dr. Can Van Luc, a banking finance expert, added that in 2020 other investment channels may change and become more attractive, leading people to think about redirecting investment. Accordingly, credit institutions must maintain deposit interest rates at an attractive enough level to guide people to deposit more money into banks. Therefore, the ability to reduce interest rates on deposit mobilization will be relatively difficult, and more challenging than in 2019, and also have a sideways trend.

Faced with these challenges, experts believe that the problem of reducing deposit and lending interest rates in 2020 will only be solved if banks handle bad debts and make their business healthy. Banks still have many bad debts, including bad debts on the balance sheet and bad debts sold to Vietnam Asset Management Company. It is an unprofitable asset that banks are raising by mobilized capital to pay capital to depositors. Raising an unprofitable asset will push bank capital costs higher, because banks have to raise interest rates to ensure capital mobilization. If all of these terms are handled well, the bank's cost of capital will decrease.

Translated by Kristine

Yen Lam

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