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Commercial banks clamour for end of deposit interest cap   2010-03-20 - Viet Nam News

Commercial banks are clamouring for an end to the voluntary cap on deposit interest rates.

Banks were trying to wiggle around the 10.5-per-cent cap on deposit interest by unlawfully adding various promotions that had brought effective interest rates to as high as 13 per cent per year, said Asia Commercial Bank deputy director Nguyen Thanh Toai.

"It's very hard to attract depositors at this time because of untransparent interest shenanigans," said Toai.

Unlike the statutory cap on lending interest rates, deposit rates are capped under a voluntary agreement between the central bank and members of the Viet Nam Banking Association executed last December.

While the cap ended the deposit interest rate war among commercial banks, it has had the effect of causing nearly all banks to offer interest at or near the 10.5-per-cent limit.

"The cap is not very likely worthy anymore, and now it's full of holes because banks are shooting it with promotions," said Vietcombank deputy director Pham Quang Dung.

Among the bonus promotions banks have offered are cash and gold. In the latest move, Ocean Bank has begun offering 10.49 per cent interest for most terms and a cash bonus of VND50,000-300,000, as well as a chance to win trips to Europe, Hong Kong, Singapore or Malaysia.

Nam A Bank also gives bonus cash equal to 0.1-0.36 per cent per year for deposits of over VND10 million, while Dai A Bank offers up to 0.3 of a tael of gold, with one tael equal to 1.2 troy ounces.

"The demand for capital is increasing and margins are quite profitable for banks," said financial analyst Do Dang Tan. "That is why they is dare to pass the deposit cap and central bank warnings to attract capital."

The central bank last week issued an order to its branches, telling them to investigate deposit promotions, as well as extra fees charged on loans.

"The market is being distorted," said Cao Sy Kiem, member of the National Consulting Council for Monetary Policy.

Prime Minister Nguyen Tan Dung has ordered the central bank to work on liberalising deposit interest structures, according to National Financial Supervision Committee chairman Le Duc Thuy.

But some economists worry that liberating deposit interest rates might ignite another interest war among banks.

"A key factor causing the interest war was illiquidity," said Vu Thanh Tu Anh, director of the Fullbright Programme in HCM City. "Therefore, liberalising deposit interest rates will require strict supervision to ensure bank liquidity."

HCM City University of Economics assistant dean Tran Hoang Ngan warned that, if fragile or poor-performing banks were able to offer high deposit interest, capital would flow into them from larger banks, causing a mess on the financial market.

"Inflation this year is expected to be 7 per cent, so deposit interest rates are still positive," said a senior central bank official who asked that his name be withheld. "Adjusting them at this time would send negative signals to the market. Plus, current law does not allow us to liberalise interest rate. The State Bank is working on draft laws regarding interest rate liberalisation."

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