Pressures on banks' interest rate levels

Dr. Nguyen Quoc Hung, General Secretary of the Vietnam Bankers Association (VNBA), said, in the past two months, with flexible and timely monetary policy management solutions adopted by the State Bank of Vietnam (SBV), the foreign currency market and forex market were less stressed and the liquidity of the banking system picked up. However, deposit interest rates on the primary market remain very high, ranging from 9% to 10% per annum for maturity terms of over 12 months, in which some banks have interest rates up to 11.5% per annum. The continuous rise in interest rates caused fierce competition for deposits and fueled instability for both depositors and borrowers.

Small and medium banks were forced to raise deposit interest rates higher than the market average to retain customers, while unsecured transactions on the interbank market were limited and almost all transactions were required to have collaterals and imposed a higher risk-hedging ratio than before. In addition, credit institutions were under pressure to comply with regulations on the ratio of short-term capital sources used for medium and long-term loans which were slashed from 37% to 34% in October 2022 and expectedly to 30% in October 2023. Thus, commercial banks had to push interest rates for medium and long-term loans higher to comply with regulations.

Rate hikes have raised input costs of all commercial banks to date, much higher than in the first nine months of 2022, while lending rates hardly increased in proportion to deposit rates. That has affected policy enforcement to support businesses to reduce lending rates as directed by the Government and the State Bank of Vietnam and heightened risks of growing bad debts.

Removing obstacles and funding the economy

Before market developments, Prime Minister Pham Minh Chinh signed Official Dispatch 1156/CD-TTg dated December 12, 2022 on removing obstacles and providing credit capital in a timely and proper manner to meet objectives and requirements of the Government and satisfy needs of businesses and people to help promote high growth, rapid recovery, sustainable socioeconomic development and safe, sound and sustainable banking activities. He requested the SBV Governor to consider and speed up implementation of interest rate support program, sourced from the State Budget to fund enterprises, cooperatives and business households; proactively propose solutions to improve program performance; focus credit for priority areas and economic growth drivers (consumption, investment, export, industrial park, social housing and worker housing); improve credit quality and ensure the safety of credit institutions, and national financial and monetary security.

The SBV decided to expand credit room by 1.5-2% on December 5 to provide credit institutions with more resources and increase credit for businesses and essential sectors for the economy. This expansion is equivalent to VND240 trillion added to the economy. By early December, credit growth was 12.2%, 1.8% higher than the preset target of 14%. Plus nearly 2% added, there is 3.8% more credit for the rest of the year, even extended to the upcoming Lunar New Year.

According to Mr. Dao Minh Tu, Standing Deputy Governor of the SBV, the added credit room can be considered one of policies to encourage commercial banks to focus on mobilizing capital and reducing interest rates to facilitate companies, projects and programs to access loans with softer interest rates.

In addition, the Prime Minister directed to remove difficulties for the real estate market. He asked the SBV to direct credit institutions to consider prioritizing loans for social housing projects to really serve people's living needs. So far, the SBV has always regarded this as one of areas of interest and directed commercial banks to facilitate social housing purchases. Therefore, it is necessary to manage cash flows and monitor operations of commercial banks.

Notably, before decisions of the Government and the SBV, commercial banks have now agreed to lower interest rates to support businesses. According to Dr. Nguyen Quoc Hung, as of December 15, 2022, as many as 16 banks pledged to slash interests by 0.5-3% for VND3,500 billion of loans. Accordingly, credit institutions agreed to cap the deposit interest rate of 9.5% per annum, inclusive of all promotions and bonuses.

Speeding up 2% interest support package

According to experts, slashing lending rates by banks, either much or little, is also a valuable support for enterprises in the current context, showing lenders’ efforts to balance their expenses and business targets to provide more loans for enterprises.

Dr. Dinh Trong Thinh, an economic expert, said that it is very hard to keep lending rates stable, as they are now. As deposit interest rates have tended to look up in the last two months, meaning that banks’ input costs have gone up as a result. Therefore, the reduction of lending rates shows that commercial banks are making great efforts to share with businesses, especially during the year-end peak production season and ahead of new-year business planning.

According to experts, to supply soft loans for manufacturers and traders in the coming time, it is necessary to speedily launch the 2% interest rate support package according to Decree 31 of the Government. If this support package is quickly disbursed, it will help ease pressures on capital costs, provide businesses with more access to more resources for year-end production and new year business plans.

Deputy Governor Dao Minh Tu said that the SBV has asked commercial banks to consider cutting interest rates to support businesses and the economy as a responsibility. “Banks reduce interest rates but they cannot increase fees; disburse funds for prioritized areas such as agriculture, rural development, export, manufacturing and driving sectors of the economy,” he noted.

Strictly complying with rate cut commitments is also one of the important factors for the SBV to give credit room to banks in 2023 besides other factors. The SBV will provide the best policy support for banks while ensuring monetary objectives and other objectives assigned by the Government and the National Assembly.