Interest rates

The pressure on lending rates increases at the end of the year

Faced with the strong growing pressure on the USD/VND exchange rate, interest rates on deposits have not yet cooled, so the pressure on interest rates on loans during the peak months of the year is still huge.

Customers transact at a bank. (Photo: SGGP)

Attract deposits, maintain liquidity

Although the interest rate on deposits in the market is no longer at the level of 11% per annum, the race is not over yet. Not only competing for term deposits with interest rates of 8% to 9% per annum, the interest rate race among commercial banks has now begun at demand deposit rates (savings account in current account).

Tight liquidity in the banking system has forced commercial banks to raise interest rates on deposits to attract money to ensure liquidity, experts say. Data from the State Bank of Vietnam (SBV) shows that capital raising in the first nine months of the year accounted for only about a third of lending (deposits grew by more than 4% , but loans jumped almost 11%). The third quarter 2022 financial statements of commercial banks also show that many banks have loan-to-deposit ratios exceeding the authorized limit of 85%.

In the past, the SBV has raised the benchmark interest rate twice in more than a month, with a total increase of 2%, to help commercial banks stimulate capital raising through lower interest rates. high interest to ensure liquidity. However, it seems that she has not yet managed to ease this tension. A commercial bank executive said that even if bank liquidity was not depleted, it still needed to raise interest rates on deposits to attract money to defend, especially when the run up on interest rates interest in the market is intensifying. Moreover, despite the rise in interest rates, it is still difficult to raise capital because the SBV attracts the Vietnamese dong through the channel of Treasury bonds. At the same time, the credit limit is limited, so that individuals and companies are forced to use their own capital for consumption, production and business activities, thereby reducing deposits in banks. In addition, recent breaches related to corporate bonds have also affected the bank’s liquidity.

Financial analysts predict that interest rates on deposits could continue to climb in the last months of 2022 due to the increase in credit demand. Market liquidity will be under pressure when deposit growth cannot keep pace with credit growth. Strong demand for cash will continue to put pressure on liquidity in the banking system.

Interest rates on loans are rising

The SBV raised the benchmark interest rate and the USD/VND exchange rate band, resulting in a simultaneous increase in the lending interest rate and a sharp rise in the USD/VND exchange rate. Input costs have risen, forcing banks to raise lending rates to secure corporate profits. Currently, interest rates on non-priority business loans have jumped 3-4% from the same period last year. Banks lend in the range of 9-11% per year, depending on customer groups and lending goals. Many companies even have to borrow money at an interest rate of almost 13% per year.

Dr. Nguyen Tri Hieu, a banking finance expert, said the US Federal Reserve (Fed) has raised interest rates six times this year to 3.75-4% per annum. Interest rates are expected to continue to rise in the final months of 2022 and 2023, so it is reasonable for the SBV to increase benchmark interest rates. Financial experts have also said that when the Fed continues to raise the US dollar interest rate, the USD/VND exchange rate will fluctuate accordingly.

To limit the devaluation of the Vietnamese dong, the management agency can use foreign exchange reserves or increase interest rates. However, benchmark interest rates have already been increased in September and October 2022, and foreign exchange reserves have reached a safe level of three weeks of imports as the SBV has sold a significant amount of foreign currency from the reserves of change to stabilize the domestic exchange rate. According to Rong Viet Securities Company’s analysis, the exchange rate and interest rates are spiraling. Therefore, the SBV could increase the operational interest rate by 0.5-1% in the last two months of the year, as this is the most likely tool to ease the pressure on the exchange rate. And then the pressure on interest rates will also increase in the near future.

Dr. Nguyen Huu Huan, head of finance department at HCMC University of Economics, said the SBV has raised interest rates to restrain foreign capital flows and ensure liquidity in the system. Because if interest rates are too low, banks will not be able to raise capital, and liquidity will be difficult. However, rising interest rates will affect economic recovery and growth. Unfortunately, in the current global environment, we cannot have both macroeconomic stability and high economic growth. Mr Nguyen Quoc Hung, secretary general of the Vietnam Bankers Association, said it is impossible to ask commercial banks to keep interest rates on loans unchanged amid rising deposit rates . However, banks must also raise lending rates to an appropriate level to share the hardship with customers.

SBV Governor Nguyen Thi Hong: SBV ready to support liquidity

Last October, the market was mainly affected by psychological factors and complicated movements in the global economy. Faced with this situation, the SBV quickly and promptly fulfilled its role as a regulator by deploying tools and solutions to provide liquidity support to the system. All banks guarantee operational security indicators in accordance with SBV regulations.

As an executive, SBV is ready to support liquidity to ensure the solvency of credit institutions, especially at the end of the year. Currency and foreign exchange markets are under pressure and fluctuating, but this is the general context of countries around the world, not just Vietnam. The important thing is that Vietnam’s economic base remains quite positive. In the coming times, the SBV will actively monitor and grasp the situation to offer appropriate solutions and management tools with the right dose and the right time.

Dr. Truong Van Phuoc – Member of the National Financial and Monetary Policy Advisory Council: Flexible Resolution of Anti-Dollarization Policy

In the current environment, with the Fed continually raising interest rates, triggering the return of the US dollar to the United States because money will flow to places where interest rates are high, we need to reconsider the idea of ​​limiting dollarization to what level is appropriate. For example, interest rates may be adjusted accordingly. It may not be advisable to raise foreign currency from the people, but for import-export business with foreign currency income, credit institutions should consider the mechanism of interest rates to maintain the amount capital in foreign currencies deposited in the bank, which leads to the rate of dollarization. increase.

To solve the stressful problems in the foreign exchange market, it is necessary to increase the supply, decrease the demand and flexibly adjust the anti-dollarization policy with interest rate tools to increase the supply. When commercial banks can mobilize foreign currency at an appropriate interest rate, the bank can balance deposits and loans.

Source: SGGP