State Bank analysis of interest rate level

This is one of the State Bank's analyses of current deposit and lending interest rates.

The State Bank affirmed: The banking system is the main channel of capital supply for the economy. However, Vietnam's economy depends mainly on bank credit capital (credit/GDP ratio at the end of 2022 was at 125.34%), while capital demand for economic development is always high, creating pressure on lending interest rates.

Pressure on interest rates remains high

After the COVID-19 pandemic, the economy recovered, so the demand for capital for production and business increased, the banking system used the maximum amount of mobilized capital to meet capital needs for the economy.

Currently, the gap between deposits and credit in VND is at VND 167,000 billion; the capital utilization ratio in market 1 (credit ratio/capital mobilization in market 1) in VND is at 101.45%, down from 102.28% at the end of 2022 but still at a very high level. The banking system mainly mobilizes short-term capital but still has to meet medium and long-term lending needs. At the same time, the pressure to increase interest rates always exists because Vietnam has a large economic openness, fluctuations in the world financial and monetary markets have a rapid and strong impact on domestic interest rates and exchange rates.

Regarding external pressure, the State Bank said that the world interest rate level will increase in 2022 and remain high in the first months of 2023. Major central banks in the world continue to implement the roadmap of tightening monetary policy and maintaining high interest rates.

The State Bank affirms: The banking system is the main capital supply channel for the economy.

The US Federal Reserve (Fed) has raised interest rates 10 times (currently the Fed Fund target interest rate is 5.0-5.25%/year; ECB: refinancing rate is 3.5%/year, deposit interest rate is 3.0%/year). Domestic inflationary pressure (average inflation in the first 4 months of 2023 was 3.84%; core inflation increased by 4.9%; inflation target for 2023 is 4.5%). Existing and latent inflationary pressure makes people expect positive real interest rates, so credit institutions (CIs) find it difficult to reduce interest rates to attract deposits, making input costs of CIs high. Capital mobilization up to April 27, 2023 increased by 1.78%, only nearly 50% compared to the credit growth rate of 3.04%.

Circular No. 02/2023/TT-NHNN, newly issued on April 23, 2023, allows restructuring of debt repayment terms and maintaining the debt group of customers facing difficulties, meaning that credit institutions have not yet collected debts when due while credit institutions still have to ensure payment of deposits, reducing loan sales and slowing down capital turnover in the economy, thus putting pressure on the ability to balance capital and room for interest rate reduction. At the same time, the banking system is still in the process of restructuring and handling bad debts of credit institutions, upgrading governance standards according to international practices..., some small-scale commercial banks maintain high deposit interest rates to retain customers, making it more difficult to reduce lending interest rates.

According to current regulations, the decision on lending interest rates is agreed upon by the credit institution and the customer according to the supply and demand of capital in the market and the customer's creditworthiness.

In case market interest rates fluctuate or the State Bank adjusts operating interest rates, leading to credit institutions adjusting deposit interest rates up or down or credit institutions proactively adjusting lending interest rates down, for loans for which credit institutions and customers have agreed on interest rates, credit institutions shall continue to apply the agreed interest rates until the end of the loan term or until the end of the interest payment period according to the loan agreement between credit institutions and customers.

In addition, the State Bank also regulates the maximum short-term lending interest rate in VND (currently at 4.5%/year) of credit institutions for customers to meet some capital needs to reduce loan costs and increase access to loans according to the Government's direction.

According to the report, up to now, the market interest rate level has gradually stabilized, many commercial banks have reduced lending interest rates. Currently, the new VND lending interest rate of commercial banks is about 9.3%/year (down 0.65%/year compared to the end of 2022).

The State Bank affirmed: In the coming time, based on the developments of the macro economy and the domestic and foreign currency markets, the State Bank will study and manage interest rates in accordance with the macro balance, inflation and monetary policy targets; at the same time, continue to encourage credit institutions to implement cost-saving solutions to reduce lending interest rates, in order to support businesses and people to recover and develop production and business.

The State Bank has bought over 6 billion USD of foreign currency to supplement foreign exchange reserves.

The State Bank has implemented many synchronous measures to strive to reduce lending interest rates to remove difficulties for businesses and people in accordance with the direction of the National Assembly and the Government in Resolution 43 and Resolution 11 such as: Directing credit institutions to maintain a stable and reasonable mobilization interest rate level, consistent with the ability to balance capital, the ability to expand healthy credit and the capacity to manage risks; not affecting the stability of the monetary market and the market interest rate level. Directing credit institutions to strictly control deposit interest rates to maintain the stability of the market interest rate level; encouraging credit institutions to reduce costs to stabilize the lending interest rate level to support businesses to recover and develop production and business...

Since the beginning of 2023, the State Bank has flexibly operated open market operations to stabilize the monetary market. Accordingly, the State Bank has continuously maintained sessions of buying valuable papers with volumes and terms consistent with the monetary policy management objectives, ensuring liquidity for credit institutions is always in a surplus state. The State Bank has also adjusted the interest rate of buying valuable papers down from 6.0%/year to 5.5%/year (from March 15, 2023) and down to 5.0%/year (from April 3, 2023), the available capital of credit institutions is guaranteed and often in a surplus state (the deposit balance of the credit institution system at the State Bank continuously exceeds the required reserve balance).

Regarding exchange rate management, the State Bank said that, in parallel with the flexible management of open market operations, since the beginning of 2023, the State Bank has purchased a large amount of foreign currency to supplement foreign exchange reserves (over 6 billion USD). In addition, for transactions of credit institutions purchasing foreign currency on term terms with the State Bank, the State Bank and credit institutions have also extended these transactions with a total value of 3.99 billion USD, at the same time, credit institutions have canceled the purchase of 1.74 billion USD from the State Bank, thereby contributing to the release and circulation of a large amount of VND.

In addition, for the transactions of credit institutions buying foreign currency on a term basis with the State Bank, the State Bank and credit institutions have also extended these transactions, thereby the State Bank does not withdraw/delay the withdrawal of VND from circulation. The above solutions have significantly contributed to creating excess liquidity in the market, thereby stabilizing the interbank market interest rate level, supporting credit institutions to reduce deposit interest rates and reduce lending interest rates for the economy.