Ways to offer depositors high interest rates

Although the State Bank has warned commercial banks of their high deposit interest rates, these deposit rates have been getting even higher recently due to fierce competition between banks.

VietCapital Bank is one of the banks which offer high interest rates for depositors.

VietCapital Bank is one of the banks which offer high interest rates for depositors.

The target of banks now is to raise mid and long term capital to meet the requirement of the State Bank, on the ratio of long term loans to short term deposits.

State Bank warns commercial banks 

According to the National Financial Supervisory Commission, there have been 19 central banks across the globe that have cut their interest rates since beginning of the year. The interest rate cut of these banks is in response to the negative impact of the on-going US-China trade war and the trend to follow the interest rate cut of FED. The list of central banks which cut their interest rate is expected to be longer in coming times. The magnitude of interest rate cut is forecast to be stronger as well.

However, in Vietnam, the moving trend of interest rate is opposed. Currently, Vietnam ranks 15th out of 65 countries, which have GDP above USD 100bn, for the high interest rate; and ranks 10th for the high real interest rate (difference between nominal interest rate and inflation).

The policy interest rate of Vietnam has been unchanged even after FED cut its interest rate. Some state owned commercial banks have reduced their short term lending interest rates by 0.5-1% for loans in some special sectors. However, the general interest rate level has remained unchanged.

While banks have not reduced their lending interest rates, they have competed strongly to raise deposits. According to the National Financial Supervisory Commission, the deposit rate has been creasing gradually, and the banks which offer clients at 8-8.5%/year for 12-month deposit, have steadily risen.

After Viet Capital Bank raised its interest rate on Certificate of Deposit to 10.2% in August, the State Bank has warned commercial banks to stop the competition to push up the deposit rate.

In documents sent to commercial banks, the State Bank said that the interest rate increase will create risks, impact the stability and the development of the banking system, cause negative sentiment in the market, create fierce competition between banks to raise interest rate and cause much turbulence in the money market.

The State Bank will penalize heavily those banks which violate the direction of the State Bank on interest rate and lending activities. The State Bank may even tighten the credit growth of violating banks.

Banks sidetrack State Bank warning

After the State Bank issued its warning, the deposit rate level has still remained unchanged. Currently, there are 14 out of 30 banks offering a deposit rate of 8%/year. While banks have kept the deposit rates unchanged for traditional deposits, they simultaneously have created many new deposit products which offer clients higher interest rates.

According to Bui Quang Tin, Banking University, the purpose of pushing deposit interest rate of banks is to raise more mid and long term funds. The deposit interest rate is expected to remain high until banks complete this target.
For example, VietABank lists 8.1% for a 13-month traditional deposit, however, this bank offers 8.3%/year for a 7-month deposit and 8.7%/year for a 12-month deposit. Some clients even receive 8.95%/year for their 15-month deposit.

Some other banks created promotional campaigns as a way to increase deposit rates. Such as, banks will add-on some interest rate percentage for clients who have higher deposit amounts, or higher age or make first time deposit in their banks.

Practically speaking, banks need more mid and long term funds to improve the ratio of long term loans to short term deposits. Hence, banks find it hard to decrease the deposit interest rate.

Some experts say that Decision 2713/2014 of the State Bank and Circular 07/2014 only govern the maximum interest rate of 1% for the demand deposits and the term deposits which have less than one-month maturity left; and 5.5% for term deposits which have maturity between 1-6 months, but do not govern the interest rate of other terms.

Currently, Banks only offer high interest rate for long term deposits, hence, they do not violate this regulation.

According to Nguyen Tri Hieu, a banking expert, the Clause 2 in Article 9 of Credit Institution Law prohibits unhealthy competition which creates risks, for the safety of the national monetary policy, the banking system, and the benefit of the government, institutions as well as individuals. However, we do not have detailed regulations for governing the interest rate from unhealthy competition activities.

Do Linh

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