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More pressure on bank interest rates   2009-01-20 - Tuoi tre

The Government has approved the plan to use VND 17 trillion worth of demand stimulus package, and experts believe that the package will bring positive impacts to the monetary market as the interest rate is now under pressure to decrease further.


The Government has announced the prop-up of 4% in lending interest rates for businesses. The prop-up ratio has been fixed at 4%, while it does not change, depending on the market interest rates. This spells that no matter if the market interest rates are high or low, businesses will still be propped up by 4% in interest rates.


The currently applied basic interest rate is 8.5%, which means that the ceiling lending interest rate is 12.75% (under the current laws, the maximum lending interest rate must not be higher than 150% of the basic interest rate announced by the State Bank of Vietnam). This means that businesses have to pay 8.75% in interest rates (the other 4% is paid by the state). The interest rate proves to remain unattractive to investors.


According to Associate Professor, Dr. Tran Hoang Ngan from the HCM City Economics University, if the basic interest rate is lowered to 6%, and the ceiling lending interest rate to 9%, businesses will have to bear an interest rate of only 5% (9% - 4% = 5%), which is low enough to encourage investment.


Deputy Governor of the State Bank of Vietnam, Nguyen Van Binh has recently advised commercial banks to reconsider the deposit interest rates in anticipation of further decrease of the basic interest rate. If banks keep mobilizing capital at high interest rates, but have to lend at lower interest rates later as the result of the basic interest rate decrease, they will suffer losses.


Sources said that the central bank planned a 3% decrease in a basic interest rate decrease in the latest move, from 10% to 7%. However, the central bank then decided to make a slighter decrease to 8.5% in order to avoid a shock to banks. Binh has also called on commercial banks to slash US$ deposit interest rates further in order to prevent people from shifting to deposits in US$.


As such, the signs of further interest rate decreases have become clearer. In the latest moves, some banks have slashed the VND deposit interest rate to 7% per annum only, and the rate is expected to be further lowered after Tet.


Some bankers believe that the basic interest rate will go down to 6-7%, while some others believe that the rate may be lower and the interest rate decrease process will be prolonged.


Some experts believe that when the demand stimulus measures are implemented, the demand for loans will increase. This will help prevent interest rates from going down continuously, as overly low interest rates will keep capital away from banks.


Meanwhile, others argue that the State Bank of Vietnam will back commercial banks as the capital source. Besides, the interest rates will not go up and down in accordance with the inflation rate as it did in 2008, but will depend on the capital supply and demand.


Ngan from the HCM City Economics University said that it is unlikely to see interest rates higher than the inflation rate.


Banking experts have advised people to make deposits now, in anticipation of the interest rate decreases. Ly Xuan Hai, General Director of Asia Commercial Bank, said that the basic interest rate may drop to below 8% in 2009 as the Government prioritizes helping businesses reduce expenses in order to help stop the economic growth slowdown.


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