The deposit interest rate at some commercial banks has significantly exceeded the State Bank of Viet Nam’s cap and has hit 19 per cent per year.

While banks are officially quoting the same 14 per cent interest rate for dong deposits, credit officials have been offering depositors between 16-19 per cent per year.

“Many depositors come here and bargain deposit interest rates up to 17-18 per cent per year, and even 20 per cent for billion dong deposits. When our bank refused, some of them simply went to credit officials from other banks standing next to our bank,” Vo Thi Sanh, head of the Treasuries Department at Ha Noi -based BIDV, told Viet Nam News.

Sanh said the interest war was ignited by small banks offering high deposits interest rates. She said they then transfer the capital to subsidiary companies.

“These actions have affected interest rates on the market,” Sanh said.

Nguyen Thanh Toai, deputy director of Asia Commercial Bank, told Viet Nam News: “Small banks which are running short of capital are leading the interest rate war.”

Small banks are looking for fast growth so they have lent money to major projects. But the tightened monetary policy has pushed those fragile banks into illiquidity. The central bank has been unable to inject money into the system to support them because the Government wants to tame soaring inflation, Toai said.

“Therefore, they are now seeking capital to remain in business,” he added.

Some market watchers said the central bank should remove the deposit interest rate cap of 14 per cent because banks are ignoring it.

However, Le Xuan Nghia, deputy head of the National Financial Supervisory Council, said: “A cap removal must be done at the proper time, at least when the inflationary pressure comes down.”

Nghia advised the State Bank of Viet Nam not to focus on capping deposits or lending interest rates. He said it should instead manage the interbank interest rate, which should be much the same as the Open Market Operation (OMO) interest rate (repo interest rate).

“These measures will help the central bank regulate the market interest rate,” Nghia said.

Meanwhile, the State Bank of Viet Nam has been tightening its monetary policy to combat inflation. The country’s broadest measure of the total money supply edged down 0.72 per cent, but was up 0.98 per cent against the figure for the end of 2010. Cash in circulation is estimated to have risen 1.45 per cent this month and 4.12 per cent against the end of 2010.

Meanwhile, economist are targeting credit growth of about 20 per cent and a money supply of 15-16 per cent at the end of this year.

Forex reserves

Given the high deposit interest rate on the market, some banks have been trying to get capital on the interbank market and the OMO, pushing the repo interest rate on Tuesday up to 15 per cent – the highest level since late in April, while the interbank interest rate is now more than 20 per cent on one-month loans.

Cao Sy Kiem, chairman of the Association of Small and Medium-Sized Enterprises (SMEs), said: “The interbank interest rate for weekly or monthly loans has not declined at all.”

To help the banking system increase dong liquidity, the central bank has bought US$1 billion from financial companies in the past month.

“The SBV will gradually buy the dollar to ensure the dollar exchange rate remains stable, while withdrawing dong on the OMO at the same time to prevent too much dong liquidity,” Thang Long Securities reported.

Viet Nam’s forex reserves were estimated at $12.4 billion, worth 1.9 months of imports, according to the Asian Development Bank’s Outlook in March. The SBV has been advised to buy $6.6 billion worth of dollar to reach a safe level of forex reserves, equivalent to 12 weeks of imports.

Source: VNS