Many banks were actively seeking capital on the interbank market to meet business demands, driving up interest rates on short-term interbank loans to as high as 14-15% in recent days.

The State Bank of Viet Nam has announced its intention to keep the prime rate at 8 per cent at least through February, frustrating the hopes of banks that they might in turn be able to increase the interest rates they charge borrowers and enjoy a healthier stream of income from this source.

Under law, the prime rate determines maximum deposit and lending interest rates. With an 8-per-cent prime rate, deposit interest rates are capped at 10.5 per cent and lending rates at 12 per cent.

The State Bank’s decision to hold the line on the prime rate, while signalling the priority that policymakers have placed on controlling inflation, also came as a surprise to many banks which had counted on rumours that central bankers intended to increase the rate by at least half a percentage point.

Meanwhile, many commercial banks continue to report problems with liquidity. Statistics from the central bank’s Ha Noi branch have demonstrated that total credit growth in the commercial banking sector in January reached 1.98 per cent, while deposits grew just 1.77 per cent in the same period, figures that reflect an unbalanced capital structure.

Viet Nam Thuong Tin Commercial Bank (VietBank) is now offering interest rates of 10.45-10.499 per cent for one- to 36-month term deposits, coupled with cash and gift bonuses, in order to attract capital. Normally, interest rates would vary much more for short-, medium- and long-term deposits.

A deputy director of a HCM City-based bank, who requested that her name be withheld, also said that limited capital resources were forcing banks to lend only to their traditional customers.

Many banks were actively seeking capital on the interbank market to meet business demands, driving up interest rates on short-term interbank loans to as high as 14-15 per cent in recent days, sources told Viet Nam News.

"Several banks have had to raise capital at rather high costs, while lending rates are still capped," said Asia Commercial Bank deputy director Nguyen Thanh Toai. "They are stuck in wet shoes."

To get around the interest caps and create a profit margin, banks have been rumoured to be charging additional fees, a move of questionable legality that raises lending costs while complying nominally with the lending cap.

"Some big banks with plenty of capital are taking advantage of this situation to charge higher fees," said an official from another bank who asked to remain anonymous because his institution had not authorised him to talk to the media.

Commenting on a series of issues related to the prime rate, Vu Thanh Tu Anh, director of research at the Fulbright School in HCM City, said, "Not only prime rate regulation, but with every regulation, when too many people try to get around the barriers, we need to review the reasonability of the regulations."

While keeping the prime rate unchanged, the central bank has been supporting liquidity for banks by extending the terms of loans available through Open Market Operations (OMO) to two weeks. Banks have also been allowed to use valuable papers to secure loans through OMO, and the number of trading sessions has been increased to two per day to facilitate refinancing for commercial banks, according to State Bank of Viet Nam deputy governor Nguyen Dong Tien.

"The State Bank has been observing very closely the happenings on the bank market to solve any tension via OMO," said Tien.

Total value of trades via OMO has been estimated at about VND15 trillion (US$810.81 million) per day.

Source: Vietnam News