JOURNALIST: - Sir, what is the reason for the State Bank to decide to lower the ceiling of deposit and lending interest rate?
Dr. NGUYEN TRI HIEU: - There are two reasons for the decision to lower the interest rate by the State Bank. Firstly, the global economy is being affected adversely by the current ongoing US-China trade war along with fears of an economic recession. Hence, central banks around the world are reducing interest rates to support economic growth as well as boost exports. Even the US banks have reduced interest rates, and Vietnam is following the general trend of support too.
However, the average interest rate in our country is too high, and although the interest rate reduction has been mentioned for many years, in the current context it must be made stronger. Accordingly, in September, the State Bank reduced the operating interest rate to 0.25%. From November 18, the State Bank continued to reduce the deposit interest rate ceiling to 5%, and also pressured banks to reduce lending rates, especially in priority sectors.
Secondly, Vietnam is in a good position to control inflation effectively as economic growth is positive, and this year it can still achieve economic growth of at least 6.8% and control inflation below 4%. Accordingly, the lowering of interest rate is also reasonable based on a stable macroeconomic foundation. In addition, lowering deposit rate for short terms of six months or less may make customers deposit more for long-term, helping banks to balance and expand medium and long-term loans to support the economy.
- Sir, will decreasing deposit rates for less than six-month term and reducing rates for short-term loans in priority areas be enough to affect the interest rate in general?
- It is necessary for the State Bank to lower this interest rate, but I think this will not have much effect on lending rates. Preferential interest rates are only given to priority industries by the State Bank. Of the total businesses in Vietnam, there are now more than 95% of small and medium enterprises but very few are in the preferential group. For common interest rates, banks with good liquidity can reduce deposit rates, thereby reducing lending rates. Thus, this can only be expected at banks with state capital or large banks that can reduce interest rates soon, but medium and small banks will still have to wait, because these banks are often weak in liquidity, they still have to mobilize high interest rates.
- In your opinion, is there any solution to realizing the goal of reducing lending interest rates for businesses?
- This is the time for the State Bank to consider removing the interest rate ceiling because liquidity in banks is relatively stable and inflation is well under control. The removal of interest rate cap will be suitable for the market economy. When there is no interest rate barrier, banks can operate according to their own capacity and business norms. However, to remove the ceiling interest rate, certain conditions and the Bankruptcy Law must be applied. Because when removing the ceiling interest rate, there will certainly be some banks pushing interest rates up to attract more capital. This will send a signal that the bank is weak. When a weak bank draws in capital with high interest rates but fails to operate effectively, it will be eliminated, closed or go bankrupt. At these banks, even lower interest rates still attract deposits because of the security of assets for customers. On the basis of low interest rate mobilization, banks will be able to reduce lending rates.
However, currently the Law on Credit Institutions edited in 2017 has a chapter on bank bankruptcy, but up to now, the Government and the State Bank are hesitant to apply that measure. Because all banks are still protected, the State Bank must maintain the ceiling interest rate mechanism. Otherwise, the banks will raise interest rates to attract money. In order to reduce lending rates, banks need to be supported by liquidity first. That is, the State Bank must pump abundant money into banks so they do not have to race to mobilize from the market with high interest rates.
Secondly, weak banks must be tackled, because these banks often push interest rates up to compete for capital mobilization. Thirdly, resolve bad debts, which is the cause of high interest rates. Bad debts are not recoverable, banks have to maintain this unprofitable asset, and only if a bank can handle the bad debt, sell mortgages to get the money back, and use that money to pay the customer, then only they can reduce the interest rate.
If banks meet such conditions as low bad debt and supplement enough capital to meet the minimum capital adequacy ratio of 8%, people will begin to trust banks. Customers will not have to chase interest rates, accept low interest rates and their property will remain secure.
- Thank you very much!