Legislators on Thursday continued to criticize the government’s plan to eliminate a benchmark used to calculate interest rates in Vietnam for years.

“The key rate has acted as a barrier or a warning sign forcing local financial institutions to adjust their activities,” Hien said at a meeting of the NA Standing Committee. “Under current conditions I don’t think the country should eliminate the key rate.”

He warned that premature efforts to create a completely free market could bring negative consequences.

Commercial banks have used the key rate for 12 years 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.

But under a proposed Central Bank Law, the government has said the key rate can be eliminated. The central bank will instead use the refinancing rate and the discount rate to indirectly control the market.

Nguyen Van Thuan, chairman of the NA Law Committee, said that in other countries where independent central banks are not executive bodies, the key rate is not necessary.

But this is not the case in Vietnam because the State Bank is both a central bank and a government body responsible for managing the monetary market, he said.

Tran The Vuong, another member of the NA Standing Committee, said if the central bank thought the key rate doesn’t reflect market reality, adjustments to the rate can be made, but the benchmark system needs to be maintained.

At a National Assembly session in November, legislators expressed their disagreement with the key rate elimination proposed by the central bank, saying such a move would just make it legitimate for lenders to break the rate cap.

Commercial lenders in Vietnam have proposed the elimination of the rate cap many times.

The State Bank of Vietnam raised the benchmark rate from 7 to 8 percent on December 1. The new cap is 12 percent for lending and 10.5 percent for deposits.

Right after the rate hike, commercial banks lifted up their dong deposit rates to as much as 10.49 percent to attract funds.

Other bans

Under another new bill for local financial institutions, the central bank wants to ban commercial banks from holding stake in other lenders, saying cross ownership would put the banking system at risk.

But at Thursday’s meeting, the NA Economics Committee said the ban would cause difficulties to small lenders that need to attract investment and expertise from larger banks. Moreover, it would be unfair to allow foreign banks to buy stakes in local lenders while banning local commercial banks from doing so, the committee said.

“It will be better if the central bank sets a limit on the stake that local banks are allowed to own in other lenders, instead of a complete ban,” the committee said.

Legislators also said yet another ban proposed on lending against stocks is too strict and would have negative impacts on the local stock market. They suggested the central bank allow the lending but issue conditions for banks to comply with.

Source: Thanh Nien, Agencies