Mar 31, 2013

Vietnam - Interest rates down, cash flow gets stuck

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VietNamNet Bridge – Commercial banks have quietly reduced the deposit interest rates because of the low demand for loans. Investors have been in a divided mind as to where to pour money to since all the investment channels remain unattractive.

Cash flow gets stuck

Big changes have been occurring in the monetary market when commercial banks have unexpectedly slashed the deposit interest rate sharply by one percent.

A banker said the liquidity is now strong, while the capital keeps flowing into banks, the demand for loans of the national economy does not increase accordingly. The slow lending has forced banks to lower the deposit interest rate to prevent the capital abundance and help push up lending, once the lending interest rate goes down.

The banker said he does not think that the lower interest rates would be a threat to the banking system’s liquidity. He believes that the deposit would keep flowing into banks, because depositing remains the better choice than other investment channels like securities, real estate, gold or dollars.

Most banks have reported the steady increase of short term deposits (less than 12 month term).

A report by the State Bank of Vietnam showed that the mobilized capital has increased again since late January 2013. The total capital mobilized by February 28, 2013 had increased by 2 percent over the end of 2012, which was two folds higher than the same period of the last year.

Meanwhile, the outstanding loans in February had increased by 0.26 percent after it reduced by 1.23 percent in January. By the end of February, the outstanding loans had decreased by 0.28 percent over the end of 2012, or lower than the 1.88 percent decrease in the first two months of 2012.

Not only the people, who want to invest in safe investment channels, but venture investors also decide to deposit money at banks at this moment. As the real estate market remains frozen, they would rather leave their money at banks and wait for their opportunities.

The short term interest rates offered by commercial banks now hover around 7.8-8 percent per annum, while longer term10-11 percent. If the inflation rate is curbed at less than 7 percent this year as targeted by the State Bank, depositors can be sure that they would get real profits and preserve their capital.

Interest rates go down further?

Experts admitted that the interest rate has gone down, but have warned bankers that if the interest rates reduce further, the cash flow to banks would stop because the lower interest rates would not attract investors.

An official of the State Bank of Vietnam also said that with the inflation rate expected to be between 6-8 percent and the current short term deposit interest rate of 8 percent, there is no high possibility of slashing the interest rates further.

Dr. Vu Dinh Anh, a well-known economist, believes that banks still can reduce the lending interest rates further while no need to slash the deposit interest rate. He said that with the current deposit interest rate of 8 percent per annum, the lending rate should be reduced to 11-12 percent per annum, believing that the rate would be bearable for businesses.

According to the HCM City Business Association, small and medium enterprises now have to pay the sky high interest rates of over 15 percent for short term loans. Only a few big businesses can access bank loans at 10-12 percent per annum.

Minh Linh

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