It's time to remove the ceiling on deposit interest rates.

Low inflation, abundant system liquidity while interest rates on deposits with terms of less than 6 months are far below the prescribed ceiling... are the conditions for experts to consider removing the ceiling.

In the regular meeting of the third quarter of 2016, Deputy Prime Minister Vuong Dinh Hue, Chairman of the Monetary Policy Advisory Council, noted that ministries and branches should study removing the ceiling on interest rates for deposits under 6 months.

Sharing this issue, Dr. Bui Quang Tin - Banking University of Ho Chi Minh City said that this is the time for Vietnam to follow international practice, which is to remove the interest rate ceiling. Because currently, almost no country in the world imposes a deposit ceiling.

In addition, according to Mr. Tin, interest rates are actually only one of five tools of monetary policy, along with tools such as required reserves, exchange rates, open markets and refinancing. Therefore, to operate monetary policy well, these tools must be coordinated smoothly instead of using administrative measures such as ceilings.

Current conditions are quite favorable for removing the ceiling on deposit interest rates, but experts say there should be conditions for bank bankruptcy.

More importantly, according to Dr. Tin, in recent times, Vietnam has operated its monetary policy in a flexible manner, creating abundant liquidity in the interbank market (market 2) and becoming a support for market 1. Therefore, when banks are short of capital, they can just borrow from market 2, so they do not have to worry about competing 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 almost no longer compete with each other on interest rates, the system's liquidity is also more abundant, the LDR ratio (loan to deposit) is currently quite low, only fluctuating around 80% instead of 90-100% as before. Therefore, he believes that the interest rate ceiling is almost meaningless.

In fact, a series of banks such as Vietcombank, BIDV, Agribank, VIB, Dong A, VPBank... in the last days of September continuously reduced deposit interest rates. Accordingly, interest rates for terms of less than 6 months are much lower than the ceiling of 5.5% per year.

After the reduction, the common interest rate applied to demand deposits and deposits with terms of less than one month was announced at 0.3-0.5% per year, and for terms from one month to less than six months at 4.2-4.8% per year.

On the other hand, Mr. Hieu said that low inflation is also a relatively favorable factor for removing the ceiling. However, according to him, the above issues are only necessary conditions, while the sufficient condition is to allow the bank to go bankrupt.

Dr. Hieu explained that in Vietnam today, all banks are the same, when a bank is operating poorly, the State Bank will come to its rescue. Therefore, if the ceiling is removed in this context, some small banks with weak liquidity can increase interest rates to attract capital. At that time, whichever bank has high interest rates, people will deposit money, which can easily lead to interest rate competition or market distortion.

"In case a bank goes bankrupt, people will consider whether to deposit money in that bank or not. At that time, they will be cautious because if a bank pushes interest rates up, it means they are having liquidity difficulties, which means risk," he said.

Therefore, according to Mr. Hieu, removing the ceiling on deposit interest rates must be accompanied by the condition of "allowing banks to go bankrupt in reality", only then will the law of supply and demand operate well. At that time, interest rates may increase in the range of 3 to 6 months. Because currently some banks are thirsty for capital, when removing the ceiling on deposit interest rates, forms of capital mobilization competition such as customer care, external and internal spending, and promotional programs will be replaced by official interest rates. But after a while, interest rates will return to the equilibrium level according to the market supply and demand mechanism.

However, some experts also believe that the ceiling on interest rates for deposits with terms of less than 6 months should continue to be maintained and regulated at a reasonable level. At that time, large banks with high reputation, good liquidity, and abundant capital can set their own interest rates far below the ceiling; while small and medium-sized banks can set a higher interest rate but still within the permitted ceiling range.

"This short-term mobilization ceiling will help form a reasonable interest rate curve, meaning the longer the term, the higher the interest rate. This will encourage credit institutions to mobilize long-term money and better restructure their capital sources," an expert shared.

According to VNE