Will the increase in the deposit rate of commercial banks cause the lending interest rate to rise? Sai Gon Investment had a discussion with Dr. Bui Quang Tin (picture), lecturer at Banking University, Ho Chi Minh City to further clarify this issue.
JOURNALIST: - Recently, many banks has pushed up the deposit rate, what do you think about this issue?
Dr. BUI QUANG TIN: - Most banks that increase their deposit rates significantly are mainly smaller banks. The target for them is to raise the mid and long term fund to meet the required ratio of short term deposits to mid-and-long term loans which are currently set at 40%. Furthermore, the Draft Circular which will be issued to replace Circular 36/2014 will require commercial banks to reduce this ratio to 30%.
When seeing this requirement in the Draft Circular, the commercial banks have been in a rush to prepare the long term funds. I think it will not take a long time for the banks to reduce this ratio.
- The input cost has increased, will the lending interest rate increase?
- If the increase of deposit rate lasts long, the lending interest rate will rise. However, this risk is smaller than the risk if the banks are not able to meet the requirement. The purpose of the Draft Circulation is to adjust the ratio of short term deposits to mid-and-long term loans and other risk-adjusting ratios of the economy, and restructuring the capital structure of the market.
Hence, most banks have to prepare funds to meet these requirements. They have to increase the interest rate to raise the long term deposit.
Furthermore, different clients will get different lending interest rates. The enterprises which have good business will get lower interest rate, while the higher risk companies will be offered higher interest rate. This will also help to explain why banks still post big profits even if the input interest cost has increased. The way that banks manage their operations to meet the requirement of Basel II on risk control and lending activities has helped them in improving their profits.
When banks are able to control the risk, they will choose good companies to lend at reasonable interest rate. Reversely, the enterprise which carries more risks will incurve higher interest rate. Banks now also focus to open more credit cards for individuals to get higher lending interest rate. Based on this method, although the State Bank required to tighten ratios and commercial banks have to raise the deposit rates, they still get big profits.
- Currently, several central banks such as central bank of Australia, Russia and India have reduced their interest rates. However, Vietnam interest rate has increased. Is it reasonable?
- The increase of interest rate in Vietnam is because of some internal issues and the interest rate increase is not the trend of the whole system.
Look at the interbank market you can see it clearly. There liquidity is redundant. However, banks have to raise the deposit rate in the primary market to lend out because most enterprises are dependent on banks in raising capital for their investment. When enterprises need capital, they immediately think about banks. They should think about the stock market first. Hence, it is reasonable when banks have to compete with each other to raise funds to meet these demands.
To conclude, the big jump in deposit rate mostly happens in the smaller banks and are offered in some deposit terms only. The interest rate of four state owned banks has remained unchanged. Furthermore, there are many conditions for clients to get a high deposit rate. For example, to get the deposit rate of 8.8%, clients have to deposit online at least VND 100bn for a period of 24-36 months. Currently, most people tend to deposit at physical branches and for a short term. Moreover, although banks increase the deposit rate, the average interest rate of the whole system is still unchanged.
- What do you think about the impact of the expectation that FED will decrease the interest rate in second half of 2019 on the monetary policies in Vietnam?
- Some people think that the loosening of monetary policy or the decrease of FED rate will create good conditions for Vietnam. However, I think there will be more challenges.
I agree that when FED cuts its rate, the US stock market will grow and USD value will be weakened. This will create good conditions for Vietnam to adjust the monetary policies and to keep USD/VND exchange rate stable.
However, there is a challenge that there will be more central banks who will follow FED to ease their monetary policies. This will create difficulties for Vietnam’s policy. Furthermore, there is also another way to think that the interest rate cut of FED means that the economic conditions are going worse.
Currently, the Central Bank of EU (ECB) applies the interest rate of 0%. ECB said that if FED cuts its interest rate, ECB will dump its interest rate to negative rate. Moreover, if recession happens, there will not be more room for interest rate cut. This will create difficulties for monetary policies of many countries, while the recession is still unforeseeable.
- Thank you very much.