A man walks past a panel showing deposit rates outside a VietABank office in Ho Chi Minh City

Legislators have criticized a plan to eliminate the key rate used to calculate interest in Vietnam’s banking system, saying the financial market would spin out of control without the benchmark.

Commercial banks use this benchmark to set their rates, which are not allowed to exceed 150 percent of the base rate regulated by the central bank. Only rates on consumer loans can go beyond the cap.

However, the State Bank of Vietnam has asked the National Assembly’s Standing Committee four times since 2006 to either abolish the rate cap completely or raise the ceiling rate to give banks more freedom, Nga said.

After all the proposals have been rejected, the state bank is trying to eliminate the regulation on the benchmark rate via a bill to amend to the Central Bank Law, she said.

“Whose interest is the central bank trying to protect after its consistent efforts to change the law? Is it for the government, the people and the market, or just to protect financial institutions and their profits?”

Competition control

Representative Nguyen Van Luat from Kien Giang Province was quoted by the Vietnam Economic Times as saying he wasn’t convinced by the central bank’s justification for wanting to abolish the key rate.

The central bank has argued that the ceiling rate prevents lenders from setting a large enough gap between lending and deposit rates to ensure profitability. However, the bank did not say how many banks were affected and to what extent, Luan said.

He also disagreed with the argument that even without a lending rate cap, the competition between 120 financial institutions would be enough to keep lending rates under control.

“What we’ve seen so far is that the competition among lenders can’t be controlled,” Luan said.

Many lenders have broken the key rate regulation since 2006, Nga said. “But instead of imposing penalties on violators and stabilizing the market, the central bank decided to try to save them by proposing the lifting of the rate cap.”

‘Necessary’

Lawmakers said without the benchmark rate, the government would lose its control over lending rates and loan sharks.

Representative Nguyen Dinh Quyen from Hanoi said the key rate “was necessary” to help stabilize the economy.

Many other countries also use key rates to manage their currency markets and Vietnam should keep its rate too and define the role of the benchmark clearly, said Phan Trung Ly from Nghe An Province.

Representative Tran The Vuong of Hai Duong Province said it was illegal to lend money at excessively high rates in Vietnam and the key rate was the necessary basis for imposing penalties.

Moreover it would be unfair to lift the rate cap for financial institutions while charging other unofficial lenders for lending at high rates, he said.

The central bank has held its key interest rate at 7 percent since February and planned to maintain it until early 2010. With the benchmark, the maximum rate that lenders can charge on dong loans is 10.5 percent, except for consumer loans.

Commercial lenders in Vietnam have proposed the elimination of the rate cap many times, saying that the margin between lending and deposit rates isn’t sufficient. Banks also said they found it difficult to attract funds despite offering up to 10.3 percent a year on deposits, hardly having any room to hike the rate further due to the ceiling.

Lawmakers will decide whether to keep the key rate at the National Assembly session in May next year, when the amended central bank law is set to be passed.

Source: Thanh Nien, Agencies