Can banks attract capital by raising interest rates?

Banks have to raise US$ deposit interest rates in order to attract more capital. However, the move has not brought the desired effect as the capital flowing into banks remains low.

Some ten commercial banks have decided to raise the interest rates on US$ deposits by 0.05% per annum on average for short-term deposits, and 0.2% for longer-term ones. The rates offered by some banks for 12-month term deposits have soared to 5.05% per annum and for 24-month term deposits to 5.25% per annum.

With the new interest rates, the big gap between the interest rates of US$ and VND deposits has been narrowed. However, the US$ deposit interest rate increase seems to remain unattractive to depositors.

On the afternoon of June 30, a reporter learned from a bank that after receiving remitted money from abroad many people changed received dollars into VND and then made VND deposits at the bank. Despite the increased US$ deposit interest rate, the profit that the US$ deposits can bring is just equal to half of what can be brought about by VND deposits.

If you have $1,000 and deposit this sum at banks, you will get VND800,000 after one year, while if you sell this sum to get VND and deposit in VND, the profit you will get after one year is double.

That explains why the growth rate of mobilised US$ capital in HCM City in the last time was still lower than the VND capital. According to the HCM City Branch of the State Bank of Vietnam, in the first six months of the year, VND mobilised capital increased by 42% while US$ capital increased by 17.5% only. Meanwhile, US$ outstanding loans grew more (27%) than VND loans (24.7%).

An expert said that several bankers were now attempting to push US$ deposit interest rates closer to the VND deposit interest rates. He said that with the CPI growth rate of 5.2% in the first six months of the year, it was unprofitable to make deposits with the current interest rates.

Several reasons can be cited to explain the increase of US$ deposit interest rates. The central bank, in an effort to raise foreign currency reserves, has bought some $7bil worth of foreign currencies in the first six months of the year. The move has helped withdraw a big volume of foreign currencies from the market, thus making the VND revaluate by 0.15% against the greenback.

Meanwhile, the supply of foreign currencies on the inter-bank market is not sufficient to meet the demand from enterprises. Commercial banks, which want to mobilise more capital in foreign currencies, have to raise the offered interest rates.

However, the interest rate increase has put banks in a bind. As the cost of capital mobilisation increases by 0.2%, banks will have to raise lending interest rates. An official from a bank said that it was very difficult to persuade enterprises to accept higher lending interest rates.

The official said that his bank dare not impose higher interest rates on traditional and VIP clients.

Source: VNE