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Commercial banks need deposit capital   2009-05-02 - VEN

The interest rate being paid on VND deposits at commercial banks just went up, while the interest rate being charged for short-term VND loans at these same banks is unchanged at 8.0-10.5 percent per annum. That banks are paying more to get their hands on cash (while not increasing the interest rate on loans) indicates that cash is what they now need most. Some people do worry about the meaning of this as they watch commercial banks vie against each another for new deposit capital.


Before April 4, commercial banks competed against each other by offering 'lower' interest rates on loans. No more. Prime Ministerial Decision No.443/QD-TTg just recently mandated that the government would subsidize the interest rates for medium and long-term loans, and these banks very quickly realized that they need more capital to make these loans. Hence, on April 7, Eximbank, ACB bank, OCB bank and VIBank all announced promotions ('a giveaway' of a total of VND2.7 billion) that they hoped would convince people to deposit their dong in the bank now.


One day later (on April 8), Military Bank (MB) raised the interest rate it was paying on VND personal deposits from 0.2 to 0.4 percent for 12-month to 60-month period. This means that it is now paying 8.6 percent per year on 60-month deposits. Floating interest rate of 12-month deposits at MB remain the same at 7.6 percent per annum. Sai Gon - Hanoi Bank (SHB) is in April and May offering 8.8 percent on 12-month savings deposits - plus a 'bonus' of another 0.25 percent per year.


ACB Bank has a loan program that it says is meant to stimulate consumption. It provides loans to exporters at two percent. VIB Bank and Techcombank are offering the same kind of loan but are getting just one percent/year. The total cost of a subsidized loan is only four percent through LienVietBank, five to 5.5 percent at ACB and 4.5 percent at Vietinbank.


Commercial banks are saying that they will set aside a large amount of capital that will be used for government subsidized loans. ACB plans to loan out VND35 trillion, Techcombank says that it will loan out VND50 trillion and VietinBank says that it intends to loan out VND200 trillion. LienVietBank says that it expects to have an outstanding loan balance that will be VND5-6 trillion higher by the time the subsidized loan program is terminated.


Commercial banks say that they increased the interest rate they're paying on deposits to attract capital which can then be used to provide subsidized loans to businesses. When the bigger banks raise the interest rate that they're paying on deposits, this makes it more difficult for the smaller banks. Banks always say that they try to keep loan interest rates as low as they can but, after all, banks are businesses and, as businesses, they do wish to make money. Just now banks are particularly interested in attracting deposit capital and therefore they raised the interest rate that they would pay on dong deposits.


On April 10, the State Bank of Vietnam lowered the prime interest rate to seven percent and the refinancing interest rate, rediscount interest rate and overnight loan interest rate for interbank electronic payments were all reduced one percent. The refinancing interest rate is now seven percent, the rediscount interest rate was lowered from six to five percent and the overnight loan interest rate was reduced from eight to seven percent.


There are several reasons why commercial banks at this time wanted to raise their deposit interest rates: 1) Commercial banks want additional capital so that they can make subsidized loans to businesses between now and the end of the year, and 2) There is a perception that the stock market may improve which could divert money from the banks into the stock market.

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