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Interest rates down, banks in a dilemma   2008-11-19 - VNE

The decreasing interest rates have put commercial banks in an awkward position. Some clients have decided to mortgage their deposits and borrow money at lower interest rates. Businesses, meanwhile, want to pay existing loans off early to get cheaper loans.


Ngoc Ha who lives on Hai Ba Trung street in district 1, HCM City, related that in mid July, when bank deposit interest rates were at their peak, she decided to deposit VND500mil in a bank for six months at the interest rate of 19% per annum, delaying her plan to buy an apartment.


Now Ha wants a sum of money for personal affairs. If she had withdrawn the deposit before the maturity date (which will come in two months), she would only have gotten the modest interest rate of 3% per annum.


However, Ha decided to mortgage her deposit to borrow money from the same bank, believing that this is a wise move, as she can borrow money now at 18% per annum only, while she can get 19% interest on the deposited VND500mil.


In June-July, the interest rates escalated every day as banks tried to mobilise capital to improve their liquidity. Some banks offered the very attractive interest rate of 19% per annum, namely Kien Long Bank and Oceanbank. At that moment, banks could lend at the ceiling interest rate of 21% as the basic interest rate announced by the central bank was 14% per annum.


However, as the basic interest rate has been slashed to 12% per annum, the maximum lending interest rate has fallen to 18%.


The leader of the bank where Ha deposited money complained that the decreasing interest rates have caused difficulties for the bank. “We are suffering because we still have to pay 19% interest to depositors, while we have to lend at 18% at maximum,” he said.


However, the deputy general director of a commercial bank in district 1 does not think that the situation is quite so serious. He said that banks would not suffer heavy losses even with clients like Ha. It is true that banks have to pay more for the capital they mobilised before, but banks have lent the high-cost capital at 21% already.


Meanwhile, some businesses, who had to borrow money at high interest rates of 21% before, are trying to pay debts before the maturity date to get new loans at 18% per annum at maximum.


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