Vietnam banks pushing up interest rates in hopes of luring deposits

Oct 2009

It’s generally understood that SBV wants to keep loan interest rates low. However, banks still keep raising deposit interest rates.

The Bank for Investment and Development of Vietnam (BIDV) and Agribank, which typically do not join the ‘interest rate race,’ nudged up their rates last week, following the lead of private sector banks. The two state-owned banks are now offering annual interest rates on two year Vietnamese currency deposits are now about 8.8 percent.

Banks have also raised rates on short term deposits. At many commercial banks, a depositor can earn an annual rate of 8.69 percent for a one month term deposit, 9 percent for a three month term, and 9.3 percent for six month deposits. Two or three year term deposits will return interest rates of over 10 percent per annum.

1001 reasons behind interest rate hike

Explaining the interest rate increases, bankers say that they need more capital to get ready to lend in the event that the Government announces another economic stimulus package. They argue as well that they must offer high interest rates to retain depositors, who would otherwise leave banks for the stock market or real estate market in search of more attractive profit.

Yet another reason offered is that banks are intent on mobilizing long term capital at what they consider to be a lower cost than they will have to pay in the future.

Banks may want to secure long term deposits to support long term loans, but depositors seem only willing to make short term deposits. The banks’ strategy is evidently to sell depositors short term notes now and later to offer them other incentives to persuade them to roll over these deposits at maturity.

More harm than good?

Industry experts have warned banks against engaging in a cutthroat interest rate race. Many have pointed to the central bank’s decision to hold the basic interest rate at seven percent for October 2009 as meaning that it wants commercial banks to keep low interest rates to provide low cost capital to the economy.

The deposit interest rates now being offered seem high if in fact and as predicted, price inflation will be held to seven percent or less in 2009. However, noting the attraction of the stock market and real estate ventures, Duong Thu Huong, Secretary General of the Vietnam Banking Association, said that banks are finding difficult to attract capital even when they offer deposit interest of 10.5 percent per annum.

Ho Huu Hanh, Director of the HCM City Branch of the State Bank of Vietnam, agrees. He says offering high interest rates will simply push up bank costs without securing much in the way of additional deposits, battering the banks’ presently solid ‘bottom lines.’ Hanh added that a sustained rise in loan interest rates could hobble the nation’s efforts to maintain strong economic growth and boost exports when the world economy recovers.

The Government has been spending many trillions of dong to subsidize loan interest rates in order to sustain business dynamism and improve competitiveness. It is not clear whether this economic stimulus package will be continued past the end of the year.