Experts have mooted an increase in the compulsory reserve ratio on foreign currency deposits, believing that the solution would help ease the foreign currency speculation and dollarization, thus making the finance market healthier.

Under the current regulations, the compulsory reserve ratio on demand deposits and deposits with fixed terms of less than 12 months in foreign currencies is four percent of the total deposits. The ratio is two percent on the deposits with fixed terms of longer than 12 months. Experts believe that the currently applied compulsory reserve ratios are too low and that it is necessary to set up higher ratios in order to stabilize the macro economy and the value of the local currency.

It is necessary to increase compulsory reserve ratio

Deputy Chair of the National Council for Finance Supervision, Dr Le Xuan Nghia, said that the increase in the compulsory reserve ratio will force banks to consider lowering deposit interest rates and raise lending interest rates to offset the higher capital mobilization costs.

Once the deposit interest rates decrease, people will find the interest they get from deposits unattractive. Therefore, they will deposit in Vietnam Dong instead of foreign currencies. Meanwhile, businesses will have to think carefully before deciding to borrow in foreign currencies, due to the higher interest rates. If so, people and enterprises will not want to keep foreign currencies any more. They will sell foreign currencies to banks, which will help improve the foreign currency supply.

Especially, this will help ease the dollarization in the national economy, because people will not find it profitable to keep foreign currencies.

Nguyen Tri Hieu, Member of the An Binh Bank’s Board of Directors, also said a higher required compulsory reserve ratio will lead to higher capital costs of banks. Therefore, Hieu said if the decision is made, banks will have to lower the deposit interest rates.

This will help the efforts to stabilize the value of the local currency, because low deposit interest rates will not encourage people to deposit foreign currencies at banks.

Dr Can Van Luc, Senior Advisor to the Bank for Investment and Development of Vietnam BIDV, also agreed that raising the compulsory reserve ratio is an advisable move for now, when the State Bank has set up a cap on the credit growth rate in 2011 at 20 percent.

But how much to raise?

Many finance experts believe that the current two and seven percent are too low and that these need to be raised to seven percent. However, if the management agency wants to see prompt and strong impact, it can raise the compulsory reserve ratio to 10 percent.

For example, if the current deposit interest rate is five percent on average, and the compulsory reserve ratio increases to 10 percent, the actual interest rate banks will have to pay to mobilize capital would be 5.5 percent. As such, banks will have to lend at 8.5-9 percent per annum in order to make a profit and cover expenses. With such high interest rates, businesses will certainly have to think carefully before deciding to take on foreign currency loans.

If so, banks will have to consider to lower the deposit interest rate to four percent in order to be able to reduce lending interest rates.

Once deposits become unattractive, while the gold and real estate market remain gloomy, people will certainly convert dollar into dong and deposit dong at banks.

Experts have described raising the compulsory reserve ratio as “one stone that can kill two birds”.

Nhue Man