It's time to remove the ceiling on deposit interest rates.
Low inflation, abundant system liquidity, and interest rates on deposits with maturities under 6 months far below the regulated ceiling... are conditions that experts believe could be considered for removing the ceiling.
During the third quarter 2016 regular meeting, Deputy Prime Minister Vuong Dinh Hue, Chairman of the Monetary Policy Advisory Council, instructed ministries and agencies to study the removal of the ceiling on deposit interest rates for terms under 6 months.
Sharing his views on this issue, Dr. Bui Quang Tin from the Ho Chi Minh City University of Banking believes that this is the time for Vietnam to follow international practice, which is to remove interest rate caps. Currently, almost no country in the world imposes deposit rate caps.
Furthermore, according to Mr. Tin, interest rates are actually only one of five tools of monetary policy, alongside tools such as reserve requirements, exchange rates, open market operations, and refinancing. Therefore, to effectively manage monetary policy, these tools must be coordinated harmoniously instead of using administrative measures like setting interest rate caps.
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Current conditions are quite favorable for removing the ceiling on deposit interest rates, but experts suggest that conditions should be included for bank bankruptcy. |
More importantly, according to Dr. Tin, Vietnam has recently managed its monetary policy flexibly, creating abundant liquidity in the interbank market (market 2) and becoming a support for market 1. Therefore, whenever banks face capital shortages, they can simply borrow from market 2, so there's no need to worry about a race for interest rates if the ceiling is removed.
Sharing the same view, Dr. Nguyen Tri Hieu, a banking and finance expert, analyzed that currently, banks are almost no longer competing with each other on interest rates, system liquidity is also more abundant, and the LDR (loan-to-deposit ratio) is now quite low, fluctuating around 80% instead of 90-100% as before. Therefore, he believes that interest rate caps are almost meaningless.
In fact, a number of banks such as Vietcombank, BIDV, Agribank, VIB, Dong A, VPBank... successively reduced deposit interest rates in the last days of September. Accordingly, interest rates for terms under 6 months were significantly lower than the ceiling of 5.5% per year.
Following the reduction, the prevailing interest rates for demand deposits and deposits under one month are announced at 0.3-0.5% per year, while for terms from one month to under six months they are at 4.2-4.8% per year.
On the other hand, Mr. Hieu argued that low inflation is also a relatively favorable factor for lifting the inflation ceiling. However, according to him, these issues are only necessary conditions; the sufficient condition is to allow banks to go bankrupt.
Dr. Hieu explained that in Vietnam today, all banks are the same; when a bank performs poorly, the State Bank of Vietnam steps in to rescue it. Therefore, removing the interest rate ceiling in this context could allow some small, illiquid banks to raise interest rates to attract capital. In that case, whichever bank offers the highest interest rate will attract deposits, easily leading to interest rate competition or market distortion.
"In the event that a bank goes bankrupt, if that bank raises interest rates, people will reconsider whether or not to deposit their money in that bank. At that time, they will be wary because a bank raising interest rates means they are facing liquidity difficulties, which is synonymous with risk," he said.
Therefore, according to Mr. Hieu, removing the deposit interest rate ceiling must be accompanied by the condition of "allowing bank bankruptcies in practice," only then will the law of supply and demand operate effectively. At that time, interest rates might increase for about 3 to 6 months. Because some banks are currently short of capital, removing the interest rate ceiling will replace competitive methods of attracting capital such as customer service, internal and external spending, and promotional programs with official interest rates. But after a while, interest rates will return to an equilibrium level according to the market supply and demand mechanism.
However, some experts argue that the ceiling on deposit interest rates for terms under 6 months should be maintained and regulated at a reasonable level. In that case, large, reputable banks with good liquidity and abundant capital could set interest rates significantly lower than the ceiling; while smaller and medium-sized banks could set higher rates but still within the permitted ceiling range.
"This short-term deposit ceiling will help create a reasonable interest rate curve, meaning that longer maturities will result in higher interest rates. This will encourage credit institutions to mobilize long-term funds and better restructure their capital sources," a specialist shared.
The most recent adjustment to the deposit interest rate ceiling took place two years ago, at the end of October 2014. At that time, the State Bank of Vietnam announced a reduction in the maximum interest rate on Vietnamese Dong deposits for organizations and individuals at credit institutions and branches of foreign banks from 6% per year to 5.5% per year for deposits with maturities from one month to less than six months. Interest rates on deposits for terms of 6 months or more are not subject to an interest rate ceiling but are determined by mutual agreement between the credit institution and the customer. |
According to VNE
