Rise in deposit interest rates a cause for concern

Interest rates for three-month deposits have climbed by 0.3-0.4 percentage points to 5.5 per cent at many banks.

For 13-month terms the rate averages 7.3 per cent, a 0.3 percentage point rise.

Le Xuan Nghia, former vice chairman of the National Financial Supervision Committee, said, "This trend would likely be clearer in October when it would be possible for the deposit interest rates to be raised to a new level."

Some analysts said the banks had persuasive reasons to increase deposit interest rates.

Inflation, interest rates and exchange rates are a trio of economic factors that cannot be separated and always influence each other.

So far this year the State Bank of Viet Nam (SBV) has devalued the dong three times by 1 per cent each and tripled the trading band from 1 to 3 per cent, sending the currency down to VND22,547 per US dollar. It had been trading at VND21,440 in early January.

The higher interest rates will attract investment from abroad, which will put upward pressure on the dong.

Some banks said they needed to increase deposit interest rates to improve their liquidity.

By early August loans outstanding at HCM City banks were up 6 per cent, and are predicted to rise strongly in the remaining months of the year.

Deposit mobilisation has slowed down, especially after the central bank's devaluation of the currency in August.

Some analysts also blamed government bonds for draining banks' liquidity and creating pressure on interest rates. The government has issued so many bonds at 5 per cent coupon rate, and their complete lack of risk means banks are ready to invest large sums in them, they explained.

The coupon rates have now risen and range from 6.25 per cent to 8 per cent depending on the maturity period.

Yet another reason given is that banks have to been left to carry the ball in Government credit programmes like the VND30 trillion housing stimulus and loans to fishermen for building powerful steel-hull boats for deep sea fishing.

While agreeing with banks about the need for hiking the interest rates, analysts however wanted them to increase the rates slightly to ensure lending interest rates do not also have to be raised.

Can Van Luc, director of the BIDV Staff Training School, was among those who opposed the rate hike. He told Dau Tu newspaper: "It is not necessary for the banks to increase their deposit interest rates at this time since public savings remain rather stable."

To ease the upward pressure on deposit interest rates, he said the Government use monetary and fiscal policies and reduce the issue of bonds. "With the current interest rates on government bonds and the volumes [they purchase], banks have no way to lower their long- and medium-term deposit interest rates."