HANOI, June 14 (Xinhua) -- The Vietnamese central bank's decision to lower the interest rate from 11 percent to 9 percent applied to the less than 12-month deposits, while floating the non- term ones, in an attempt to bring down loan interest rates and boost economic growth, is triggering a "rate war" among banks, some local media and analysts feared.
The move has become a hurdle to commercial banks' efforts in retaining their existing depositors and attracting the new ones, and has triggered a "rate war" among banks, claimed a local business news newspaper Vietnam Economic Times (VET) on Thursday.
Following the decision effective from June 11 but actually announced by Governor Nguyen Van Binh of the State Bank of Vietnam (SBV the Vietnamese central bank, on June 7 at the on-going National Assembly meeting, a fierce battle has broken out among commercial banks to retain deposits, with many illegally offering higher rates. Since the rate was officially cut on June 11, people rushed to the banks to withdraw their money and invest in other channels, such as property and foreign currencies, causing difficulties for many small banks in retaining their depositors, and forcing them breach the rate cap, reported VET.
In the last four days till June 14, some small banks had offered a rate of between 11-12 percent for deposits of over one billion Vietnamese dong (roughly 47,000 U.S. dollars), while others presented gifts and incentives as additives to the official rate cap of 9 percent. Besides, they offered attractive interest rates for non-term deposits, like the Saigon Commercial Joint Stock Bank, for instance, which has applied a rate of 3 percent per annum compared with the normal rate of less than two percent.
Cao Sy Kiem, member of the National Advisory Council for Financial and Monetary Policies, said on Thursday that there must be a need for cracking down on this illegal practice, adding that the central bank's drastic cut in interest rates would greatly benefit businesses and the economy by providing access to cheap funds and spurring growth.
Meanwhile, analysts pointed out that the banks' move to top the central bank's cap showed that their liquidity remains volatile.
The interest cut is necessary, but not sufficient. Currently, it is more important to deal with bad debts as the ratio at some banks had reached up to 10 percent, a very high level. With such a high bad debt ratio, banks will be certainly cautious about lending, said banking expert Nguyen Tri Hieu on SBV's decision.
Hieu added that restructuring the banking system and cleaning the balance sheets through debt purchases should be taken as soon as possible. After that, businesses can be access to low-rate loans since banks will be more secure about their lending. To date, nine banks are listed to be restructured.
According to economist Bui Kien Thanh, in the context that the "health" of the banks is not the same, the lifting of the interest rate cap for more than 12-month deposits will probably force those banks to join in the race" of increasing rates for long-term deposits.
The lending sources for businesses' long-term production will be then more expensive.
The risk for an expanded "rate war" will be curbed if the central bank implements some tough measures to handle with the nine weak banks, who are considered as excellent "runners" in the rate race, said the expert.
Seven years ago, in 2005, a commercial bank in Vietnam offered an interest rate over the cap of 9 percent for deposits of the 12- month term, starting a race among banks in raising the rates, up to 14 percent, and even to 27 percent per year for an over-night inter-bank interest rate.
On June 11, 2009 the SeABank offered a record interest rate of 19.2 percent, although it lasted for only one day before being forced by the central bank to reduce to the cap of 14 percent.
On March 13 this year, the central bank governor decided to cut the interest rate from 14 percent down to 13 percent, the first step in the bank's plan to reduce the rate cap for 3 percent this year. Then in less than three months, as of June 11, the SBV adjusted the rate three times down to 9 percent, closing a circle of interest rate increase for at least seven consecutive years ( 2005-2012).
In May 2012, an expert from the World Bank in Vietnam commented that the decrease of the interest rates is imperative to help the country's economy in general, and its businesses in particular, to access more to credits. However, the too fast decrease will impact the pace of the country's economic growth.