Lowering interest rates is precarious


Reducing interest rates is quite difficult when banks have to balance deposit rates appropriately to ensure input capital, meet capital safety regulations and also lending output.

High mobilization makes it difficult to lend at low interest rates. Photo: VIET CHUNG

High mobilization makes it difficult to lend at low interest rates. Photo: VIET CHUNG

The corporate bond channel, which was expected to relieve the burden for banks, has begun to show many risk factors and is expected to be tightened. Thus, lowering interest rates continues to be in a precarious position, even as enterprises eagerly await it.

Input reflects output

Recently some banks, such as SHB, Techcombank, and Sacombank have reduced interest rates for short terms of one to three months with adjustment of 0.1% to 0.2% per year. For a term of more than twelve months, banks have adjusted the additional reduction of 0.6% per year compared with the previous interest rate.

However, the deposit channel did not reduce this because deposit interest rates are still high, although a few banks adjusted to reduce interest rates. For a six-month term deposit it is not difficult to find savings accounts with interest rates above 7% per year. For example, a six-month term deposit at NCB earns interest at 7.9% per year, at BacABank 7.7% per year, VietBank 7.5% per year at the counter and 7.8% per year via online channels.

In this term, VPBank mobilized 7.1% to 7.5% per year depending on the deposit amount. Viet Capital Bank mobilized at counters 7.3% per year. OCB, VIB and PVcomBank are at 7.2% per year. The remaining banks apply interest rates of 6% to 6.9% per year, and very few banks mobilize less than 6% per year.

Currently, the highest interest rate being applied by banks is still very attractive. The highest interest rate at Eximbank is 8.4% per year; NCB and ABBank are at 8.3% per year; VietBank, OCB, VietCapital Bank are at 8.2% per year; Kienlongbank and BacABank are 8% per year. Even a commercial bank in Ho Chi Minh City applies an interest rate of 8.76% per year for 13, 15 and 18-month deposit terms and deposits of VND 10 bn or more, earning interest at the end of the term.

Recently, state-owned commercial banks also offer promotions with additional interest rates for online deposits, such as BIDV plus at 0.2% per year, and VietinBank plus at 0.3% per year for all terms compared to deposits at the counters, with the highest mobilizing interest rate being 7% per year.

Changes in mobilizing interest rates of commercial banks has always been a concern because among investment channels deposits are still popular, clearly shown by the annual growth rate of capital mobilization. In addition, deposit rates are also considered because the input rates reflect the output rates.

The Vietnamese economy does business on debts, and the State that wants to invest must borrow in bonds, while businesses that want to invest must borrow from banks. Meanwhile, Vietnam's monetary policy has many goals, paying much attention to controlling inflation, stabilizing the exchange rate and keeping the difference at a reasonable level to attract savings depositors.

The use of monetary policy instruments to adjust interest rates is always used with great care. Accordingly, upto now the reduction of lending interest rates still depends on whether or not banks will lower deposit rates. If the cost of capital increases, lending interest rates also increase, ensuring that banks have good profit margins and vice versa.

Therefore, in the context that deposit rates are generally still at a high level, competitive mobilization still exists, and reducing lending rates will continue to be a one-sided expectation from enterprises.

Tightening of corporate bonds

Some banks have announced reducing lending rates by 1% to 1.5% per year, with some banks even reducing upto 3% per year, on short, medium and long-term loans. However, lowering interest rates at this time requires following the guidelines of the Governor of the State Bank of Vietnam based on implementation of measures to support the recovery of damage being caused by the current Covid-19 epidemic.

For normal business activities surveyed in January 2020, some banks were assessed to have the best medium and long-term loan interest rates, applying preferential interest rates of 6.6% to 8.6% per year for the first six to twelve months, where the interest rate after preferential is 10.5-12.3% per year.

At present, some state-owned commercial banks with preferential credit packages for ordinary businesses also apply interest rates of 6.5% to 7% per year, or more for loans of less than six months from 7% to 7.5% per year, or more for loans of six to twelve months, with specific interest rate depending on individual customer.

This shows that the SBV's adjustment of executive interest rates, even the adjustment of ceiling deposit rates for less than six months and short-term lending rates for priority areas in 2019 have not yet reached the purpose of monetary policy that is transmission to the lending interest rate level in the economy.

In Vietnam's credit market of supply and demand, demand is still stronger, and when the demand for short-term, medium-term and long-term credit is based on banks, it is very difficult to reduce interest rates, especially when deposit rates are hard to lower.
In that context, another factor that is expected to reduce the burden of medium and long-term loans from banks, and help the banking sector to reduce lending interest rates, is corporate bonds which are not as expected. The total number of corporate bonds issued in the whole year of 2019 were at VND 280,141 bn, an increase of 25% compared to 2018, bringing the scale of corporate bond market increase sharply from 9.01% of GDP in 2018 to about 11.3% of GDP in 2019.

However, the corporate bond channel is still assessed to be quite small compared to other capital mobilization channels, as the economy still relies heavily on bank credit. The total credit scale at the end of 2019 was about VND 8.200 trn, equivalent to 138.4% of GDP and 12.3 times the size of the corporate bond market.

At the same time, VND 280,141 bn of corporate bonds issued in 2019, with commercial banks issuing VND 115,422 bn, account for the largest proportion of 41.2%. Conditions for this channel to promote the role of supporting the bank loan channel are forecast to be narrower, when the Ministry of Finance issues a draft revision of Decree 163/2018 on issuance of corporate bonds.

This will add conditions on the limit of the volume of bond issuance, the condition of the distance between issuances and the regulation on loan interest rates to avoid risks. The tightening of corporate bonds means the banks will continue to play a key role in funding the economy.

Translated by Hoa Nam

Thien Minh

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