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Banks mired in deposit interest rate war   2008-02-16 - VNS

The interest rate on dong deposit accounts at commercial banks now stands at around 10 per cent per annum, much higher than pre-Tet figures.

HA NOI — The interest rate on dong deposit accounts at commercial banks now stands at around 10 per cent per annum, much higher than pre-Tet figures.

Recent rate rises were a predictable consequence of the central bank’s decision to raise three key interest rates in a bid to boost reserves.

Although good for savers, the move has raised the cost of borrowing.

Yesterday, SeABank raised the interest rate on dong deposits by 0.12-0.42 percentage points. The annual interest rate on a 24-month deposit is now 10.2 per cent, while a 12-15-month deposit will earn 9.90 per cent per annum.

Recently, OCB, Techcombank, VIB Bank, VP Bank, ACB, Sacombank, ABBank and DongA Bank all increased interest rates on dong deposits by 0.1-0.48 percentage points per month – 9.12-9.60 percent age points per annum.

Banks have also been offering deposit promotions to encourage large deposits of dong.

Short-term lending rates have risen by around 0.9-1.15 per cent per month, with mid- and long-term lending rates fluctuating around the 1.25 per cent per month mark.

"You see, the higher the interest on deposits, the heavier the loss we dare to suffer," the director of a commercial bank said on condition of anonymity.

The interest between lending and saving – which accounts for 80 per cent of banking revenue – is now so small that it is cutting into bank profits.

"However, banks must keep real interest rates on deposits positive [higher than inflation] to attract new capital or their deposits will go in the opposite direction," said the general director of an HCM City-based commercial bank.

Pham Quang Thang, deputy general director of Techcombank, said banks were increasing interest rates to hold onto market share.

"If we have abundant capital, we can lend on the inter-bank market because it holds less risk, offers higher interest and is easier to collect," a Ha Noi-based bank spokesman said.

Late last month, the overnight lending rate stood at 6.52 per cent. However, just before the start of the full-moon holiday, the interest rate leapt to a record high of 27 per cent.

Despite the reluctance by banks to lend money, fierce competition is forcing them to adopt a flexible lending policy and to tailor rates to specific consumers.

Fuelling the lending war was the strong demand for dong, which forced many commercial banks to pay dearly on the interbank market.

To stabilise interbank interest rates the central bank has had to pump VND10,000 billion into the market.

Governor Nguyen Van Giau announced at press conference earlier this year that the central bank would inject more cash into the market if it proved necessary.

Market growth in the last two months has been limited by a number of factors, including changes to policy rates, reserve requirements and bond yields. There were also official warnings concerning real-estate investment and changes to limits on securities investment (20 per cent of charter capital as opposed to 3 per cent of total outstanding loans).

On the other hand, as a consequence of the central bank’s bid to reduce dependence on the dollar, banks will look to increase capital in the US currency.

Before the lunar new year holiday, the central bank announced that it would scrutinise credit institutions running loans for security ies and property investment over 25 per cent of toal oustanding loans.

Pressure is also being put on commercial banks to take in open market operations more openly.

Some economists have advised commercial banks to buy 12-month term treasury bills at rates of 7.75 per cent per annum to cut down on the cost of increasing reserves.


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