Banks back in love with interbank lending

Banks have forced to be creative to source funds

Vo Thi Sanh, Bank for Investment and Development of Vietnam’s (BIDV) Treasury Department deputy director, said local banks were now willing to lend to peers with larger amounts and longer terms via interbank market. “Some lenders are now offering to lend up to three months, much longer than few weeks ago,” said Sanh.

In May and July, all interbank market lending transactions carried less than one month terms as almost all local banks ran short of capital while players with ample capital were cautious over the payability of other banks.
An official from the Asia Commercial Bank (ACB), a major interbank market lender, said that commercial banks were now forecasting a base interest rate cut from the authority in September or October, 2008.

“Thus, lending at this moment could enjoy higher interest rate than in one or two months,” said the ACB source.
Financial experts said that the lending-borrowing activities became more active last week due to the State Bank’s cut in daily money supply via the open market operation (OMO) window, forcing local banks to seek alternative funding sources.

From August 15, 2008, the State Bank’s daily money supply via the OMO window was just VND2,000 billion ($120.5 million), much lower than VND4,000-5,000 billion per day previously. Thus, the move has increased the interbank market interest rate to 17.5-18 per cent per year currently, higher than 15-15.5 per cent three weeks ago.

Nguyen Dai Lai, the State Bank’s Banking Development Strategy Department vice head, said that money supply via OMO window was cut as local banks’ funds became more available with slowing credit growth. OMO is a channel via which the State Bank sells or buys bankable papers such as treasury bills, central bank bills to or from local banks in return extends loans or withdraws money.

“Thus, even when the State Bank cut the money supply via OMO window, local banks could still find sources from other peers,” “Additionally, reducing the money supply while still draws back money from banks as the amounts lent before were due would help reduce the total money supply in the economy positive for inflation fight,”
said Lai.