Interest rate: new ceiling, old story

16:36' 02/05/2008 (GMT+7)
Most commercial banks have been applying the new ceiling interest rate of 12% instead of 11% after the rate was agreed upon by Vietnam Banking Association members. However, bankers say that the new ceiling interest rate won’t help settle the existing problems.
Interest rates returning to previous levels
The deposit volume, which has been decreasing over the last one month, has not seen any improvement in the last few days, since banks applied the new ceiling interest rate.
The new ceiling interest rate of 12%, though representing a 1% increase over the previously applied level, proves to be nothing compared with the consumer price increase. In April, the CPI increased by another 2.2%, raising the total increase of CPI in the first four months of the year to 11.6%, not attractive enough to lure depositors.
Money escaping from banks to gold shops
Non-bank capital mobilisation and lending activities are developing rapidly, especially in the Cuu Long River Delta. People who have idle money now lend to gold shops instead of banks, and the gold shops use that money for re-lending.
While lending to gold shops, people can get higher interest rates (if they make bank deposits, they can get 12% per annum at maximum). Meanwhile, lenders can get loans from gold shops, since many banks have stopped lending, while just focusing on collecting debts.
In fact, commercial banks want more than the ceiling interest rate increase. They want the ceiling interest rate scheme to be removed. The market interest rates must be decided by the market supply and demand.
“The same interest rates will make banks alike,” the director of a joint stock bank in Hanoi said.
Borrowers seem to get no benefit with the interest rate increase. They want loans, however, as the VND is in shortage because the interest rates are not attractive enough to mobilise capital, they cannot get loans.
Lacking capital, banks cannot sit still
Banks now need capital dearly, but they cannot publicly announce they will raise deposit interest rates in order to lure more capital. However, they cannot just sit still.
Some commercial banks are reportedly trying to persuade big businesses which have a big volume of idle capital to draw money from other banks to make deposits at their banks, promising to pay additional interest rates.
Some corporations, realising that banks need capital but cannot mobilise capital from the public due to the limited interest rates, have been offering to lend to banks at interest rates higher than the ceiling rate
The Deputy General Director of a joint stock bank said that the tricks played by some banks have distressed serious banks. He complained that he is under heavy pressure to ‘do something’ to lure capital to the bank instead of respecting the regulation on the ceiling interest rate.
Some sources say that some insurance companies which have huge capital sources are offering to make deposits at banks if banks agree to pay interest rates of 3-4% higher.
Banks are wise enough to accept to pay interest rates of an additional 3-4%: i.e. they would have to pay 12-13% per annum for the capital. If they do not accept the ‘underground’ interest rates, they would have to borrow money at much higher costs on the interbank market, where the lending interest rate hovers around 20%.
Banks have a lot of methods to legalise the additional interest rates they have to pay. For example, businesses and banks sign contracts on lending authorisation: i.e. businesses give money to banks for banks to lend to clients at different interest rates.
Observers say that borrowers will not benefit from the ceiling interest rate scheme. Banks, of course, calculate all the expenses for capital mobilisation, including the additional interest rates, and require high lending interest rates from borrowers.