US$ deposit interest rates and loaning up

Since mid March 2007, many joint stock banks have raised interest rates on US$ deposits by 0.05-0.57% per annum. Outstanding loans in US$ have also grown more rapidly than VND loans with the growth rates of 19% and 13%, respectively.

The raising of US$ deposit interest rates was initiated by joint stock banks, especially banks in Hanoi like Military Bank, VIB and Techcombank. The move later was followed by HCM City-based banks like Phuong Nam and Nam A. Other banks, though they have not adjusted interest rates, have launched promotional programmes in order to attract capital in US$.

Why are Vietnamese banks still raising deposit interest rates while the US FED has decided to maintain the US$ interest rate at 5.25% (the rate is expected to remain unchanged until the year’s end) and there are no big fluctuations in the international market?

Analysts have said that local banks have to raise deposit interest rates because they lack capital in foreign currencies. In general, in Hanoi, the proportion of mobilised capital in use is not high, at 61.3%; however, the figure is high among joint stock banks, at 82%.

The liabilities in foreign currencies of eight joint stock banks in Hanoi are VND12.9tril, while the assets have reached VND13.7tril. Since the end of 2006, joint stock banks have been largely unsuccessful at raising mobilised capital. In Hanoi, the mobilised capital in foreign currencies has even decreased by 2%.

Joint stock banks have not been able to mobilise much capital in foreign currencies from the public because people prefer depositing in VND to get more interest. Meanwhile, companies which can supply big sums of foreign currencies only have relations with state owned banks. In order to raise more capital in foreign currencies, joint stock banks have no other choice than raising deposit interest rates.

The growth rate of loaning in US$ remains relatively high because of two reasons.

First, enterprises try to import more goods and it is the time for disbursement for big projects. However, many experts say that this is not the main reason behind the interest rate increases.

As for big projects, disbursement always goes in accordance with a scheduled roadmap, while it does not come in the second quarter only. Moreover, enterprises that have high demand for capital in foreign currencies contact state owned banks rather than joint stock banks.

Meanwhile, state owned banks all said that the demand for foreign currencies had not increased considerably in the last three months, and that they could still supply enough foreign currencies. In fact, state owned banks have not raised their US$ deposit interest rates.

As for the demand for foreign currencies to make payments for import deals, bankers have said that the demand always decreases to the deepest low in the second quarter and that the demand only increases at the end of the third quarter.

Bank officials have pointed out that loaning in US$ increases because enterprises prefer borrowing in foreign currencies. It is to enterprises’ advantages to borrow in foreign currencies in comparison with VND, and in the current context of the exchange rate.

The sharp increase of loaning in foreign currencies has raised doubts about loaning to the wrong subjects. Under current regulations, credit institutions can only provide loans in foreign currencies to clients which have turnovers in foreign currencies for paying debts, and clients which do not have turnovers in foreign currencies but have permission from banks to sell foreign currencies for paying debts and can show contracts on buying foreign currencies.

As for banks, they are ready to lend money, no matter in VND or foreign currencies, if they can make profit on the deals. The director of a bank even said that banks could get more profit when lending in foreign currencies as enterprises use derivative products of banks, from which banks can collect fees.

Though only joint stock banks have joined the move of raising deposit interest rates, state owned banks may get involved in the game. State owned banks are considering raising interest rates because they fear that joint stock banks will attract their traditional clients.

The escalating deposit interest rates will certainly lead to the increase of lending interest rates. This will make credit contracts signed in previous years difficult to be disbursed (medium- and long-term interest rates are never fixed, but always floating). Meanwhile, expenses for paying debts in the medium term will be higher for the credit contracts signed at this moment.

Experts have also warned that the increased interest rates would be a burden on small- and medium-size enterprises, a sector that plays a decisive role in export growth and national economic development.

Source: VNE