Though earlier this year the government conveyed a message that it will tighten monetary policies to curb inflation, commercial banks were still shocked when they were told to implement tightened policies.

Interest rates forced down

On March 3 the State Bank of Vietnam organized a conference to discuss the implementation of the Government Resolution No 11 dated February 24 on measures to curb inflation and stabilize the macro economy, and the Instruction No 1 by the Governor of the State Bank’s.

However, many banks kicked off their own plans to tighten credit right before the conference took place. The Bank for Investment and Development of Vietnam BIDV, for example, started the plan early and asked its subsidiaries to submit detailed reports on the plan prior to March 10.

The government has assigned two tasks to the State Bank of Vietnam: 1/ curbing the credit growth rate at less than 20 percent in 2011 and restraining the money supply (M2) at 15-16 percent. Duong Thu Huong, Secretary General of the Vietnam Banking Association, said that it is really difficult to obtain the two goals, but it is time for banks to sacrifice short term benefits for long term benefits.

A representative from BIDV said the bank has decided to curb the credit growth rate at no more than 19 percent. BIDV will only increase the credit growth rate if it can mobilize capital and ensure safe ratios. The bank will prioritize funneling capital into the production sector, agriculture and rural development, export companies and supporting industries. Especially, it will strictly control loans to non-production sectors: the outstanding loans to the real estate sector must not be higher than nine percent of the number of total outstanding loans, while the outstanding loans to securities investors must be less than 0.5 percent.

Meanwhile, ACB Bank said right at the beginning of the year that ACB’s leadership set a low credit growth rate at less than 20 percent per annum.

The lowered credit growth rate target has put pressure on the interest rates. Though the State Bank instructs commercial banks not to offer deposit interest rates at higher than 14 percent per annum, banks still have “ignored” the instructions. Managers of two commercial banks have been reportedly disciplined for raising the deposit interest rates to overly high levels of 17 percent per annum.

Commercial banks complain that though they know of the instructions by the State Bank not to offer overly high interest rates, they still have to mobilize capital to ensure liquidity and retain depositors, and in order to do that, they have to raise interest rates. The banks have said the instruction has put presented challenges for the whole banking system.

While banks cannot offer high interest rates for dong deposits at this moment, they can raise interest rates for dollar deposits, because no ceiling interest rate has been set for dollar deposits. On March 2, ACB released a decision to raise the interest rates for dollar deposits by 0.5 percent on average.

Stocks will plunge

The clear message on restricting loans to securities and real estate sectors has worsened conditions in the already lackluster stock market. The VN Index has been decreasing sharply in recent trading sessions. There have been signs showing that investors are fleeing from the stock market.

Securities companies have raised lending interest rates for securities investors to 20-23 percent, sky high interest rates that are unaffordable for most stock investors. Meanwhile, the interest rates are thought to increase further in the future, since securities companies themselves have got less capital from parent banks.

ACB Securities Company said stock investors are trying to sell stocks out on the information about the tightened monetary policies. The State Bank has clearly stipulated that the outstanding loans for non-production sectors must not be higher than 22 percent of total number of outstanding loans by June 30 and must not be higher than 16 percent by December 31.

Bao Viet Securities Company has also affirmed that the cash flow to the stock market will be weak in 2011 due to tightened monetary policies. If so, the stock market will have another gloomy year in 2011.

Le Khac