SCB raises funds at high interest rates, ceiling interest rate broken

05:29' 15/04/2008 (GMT+7)
VietNamNet Bridge – There have been widespread and inconclusive discussions about the fact that Saigon Commercial Bank (SCB) has issued promissory notes at an interest rate higher than the ceiling rate stipulated by the Vietnam Banking Association’s (VNBA) members. The ceiling interest rate scheme has been broken.
Deposit interest rates may go up again
Just five days after banks began applying the ceiling deposit interest rate of 11% per annum, SCB launched the programme on mobilising VND3tril worth of promissory notes at the interest rate of 1%/month, or 12%/year, higher than the ceiling rate of 0.916%/month or 11%/year. Moreover, the bank also offers attractive gifts to depositors.
Depositors need to deposit VND10mil at least to get a voucher for a lucky draw, where the lucky winners may get a gift worth 2kg of gold.
VNBA has immediately sent a letter to SCB about the issue and to the government, asking the government to stop the issuance.
Yet, it remains unclear how SCB will be ‘judged’. In fact, the ceiling interest rate of 11% per annum is just an agreement among VNBA members; it does not have a legal basis. Commercial banks say that if SCB is not repudiated, another interest rate race will break out.
Meanwhile, SCB’s leaders said that they are not in the wrong. In February 2008, the State Bank set the ceiling interest rate at 12% per annum. At that time, the bank asked for permission to issue promissory notes at the interest rate of 12%, equal to the set ceiling rate. The plan was approved by the Ministry of Industry and Trade. Meanwhile, the State Bank of Vietnam did not protest the bank’s plan, and SCB understood that its plan was accepted.
However, in an unexpected move, VNBA at the end of March came to the agreement on lowering the deposit interest rate to 11%, applied as of April 2. The agreement was reached after SCB registered the promotion promissory note plan.
SCB stated that it cannot adjust the interest rate of the promissory notes, because the rate was approved by the Ministry of Industry and Trade.
Questions have been raised about if the bank is ‘bogged down’ in investment projects and now it has to raise interest rates to raise enough funds to ensure liquidity.
Reporters tried to contact Le Quang Nhuong, Chairman of SCB, to ask him. Nhuong said that the bank is not facing any problem in liquidity, saying that the capital to be mobilised from the promotion programme will be used for operations from April 2008. Nhuong added that SCB has mobilised VND40bil from the programme.
What’s behind SCB’s promissory note issuance?
It seems that state management agencies have not cooperated well in their management work.
First, the State Bank stipulated that banks must not apply the capital mobilisation interest rate of more than 12%, while not specifying the types of capital mobilisation (bond, promissory note or deposit). Therefore, SCB is able to evade the laws to mobilise capital at high interest rates.
Second, VNBA once proposed that the Monetary Policy Department under the State Bank of Vietnam ask the Ministry of Industry and Trade (MOIT) to stop licencing promotion programmes, which are thought to cause uncertainties in the monetary market. However, no reply has been made by the department.
Third, while the State Bank is trying to withdraw money from circulation to curb inflation, the Vietnam Trade Promotion Agency (Vietrade) under MOIT still licences a lot of promotion programmes of banks.
Fourth, doubts have been raised about the State Bank of Vietnam’s report that banks’ liquidity has improved. If banks have profuse capital and they do not lack capital seriously, they will not accept paying high interest rates like SCB.
Fifth, while waiting for a final decision on how to treat SCB, the Government’s Office on April 7 released a document, announcing the Prime Minister’s opinions on the implementation of measures to curb inflation. It said the ceiling deposit interest rate scheme should be halted.
Experts have also pointed out that the ceiling interest rate scheme is a step back, diminishing the achievements in interest rate liberalisation Vietnam has made.
While the State Bank is trying its best to fight inflation, it refuses to use the most effective tool to curb inflation – the interest rate policy. High interest rates would attract more money to banks and help curb inflation. European countries, for example, have been applying high interest rates on the euro to curb inflation.