Inter-bank lending rate jumps

(04-04-2008)

HA NOI — Interest rates on the dong that Viet Nam’s commercial banks lend each other have risen since last Wednesday when the banks introduced their agreed upon 11 per cent ceiling for deposits in the domestic currency.

The banks reported business as usual with deposits and withdrawals after the ceiling - accepted as a way to end an interest-rate war for dong deposits - was introduced.

In contrast, the inter-bank rate has jumped significantly.

Incombank investment managing director Le Duc Tho said the overnight rate reached between 10 and 13 per cent, against roughly 5 per cent last month.

The banker attributed the increases to growing commercial-bank demand for liquidity to meet the higher compulsory reserves set by the State Bank of Viet Nam (SBV) for the beginning of every month.

The banks also needed extra dong in the beginning days of every month to honour interest payments for maturing short-term saving accounts.

The banker said that before the Government tightened its monetary policy to dampen inflation, the hike in overnight rates had been insignificant.

"However, the tighter policies were expected to last at least until the end of the year and this promoted the overnight rates to surge."

All the commercial banks agreed with a VNBA recommendation to cut the interest ceiling for dong deposits to 11 per cent rather than the SBV-set 12 per cent.

The banks were using the interest rates to attract dong deposits so as to have enough money to meet compulsory reserves and buy Treasury Bills as instructed.

VNBA general secretary Duong Thu Huong expects the flow of dong deposits to continue because of their security as an investment.

The VNBA will review the 11 per cent ceiling for dong and 6 per cent ceiling for the US dollar at the end of the month.

Prime Minister Nguyen Tan Dung has instructed the SBV to lend to commercial banks struggling with liquidity at a yearly rate of 9 per cent if they cannot borrow elsewhere at the same preferential rate.

The VNBA has asked the SBV to streamline the working of the open market to help commercial banks ensure liquidity in addition to punishing those who charge unreasonably high interest for inter-bank borrowings.

Commercial banks are unlikely to lower their interest rates for borrowers for another month despite the lower ceiling for interest rates on dong deposits.

Incombank’s Tho explained: "When banks pay high interest for their capital, they charge their borrowers high interest rates to ensure a profit." — VNS