Banks fear fresh capital crunch

Many local banks are looking after number one and are declining interbank trading

Capital shortages pushed interbank market interest rates up to 17 per cent on April 10.
According to a State Bank official, the interbank interest rate hike demonstrated banks’ serious capital shortage as the rate varied between 3-9 per cent over the last few weeks.

Le Dac Son, VP Bank’s general director, said that since mobilising interest rates were reduced from April 2 upon agreement between commercial banks after discussion at Vietnam Banking Association (VNBA) in late March, deposits at banks have fallen, partly leading to the dearth of capital. “Thus, we are considering raising mobilising rates again to a maximum level allowed by the State Bank of 12 per cent, per year within this week,” said Son.

After the discussions at the VNBA, local banks reduced interest rates to 10.5 per cent per year for deposits with terms under six months and 11 per cent per year for over six-month term deposits in a bid to lessen mobilising expenses. Earlier this year, amid banks’ frenzied race to hike mobilising interest rates for funds, the State Bank set a 12 per cent cap on banks’ interest rates for all term deposits.

A director from another joint-stock bank said that his bank was also considering raising mobilising rates to meet customers’ increasing demand. According to a State Bank official, if one or two banks raise the mobilising rate, all the rest will follow.

A Vietcombank source said the capital shortage was not as serious as the case earlier this year when the interbank interest rate was pushed to a sky-high level of over 40 per cent. However, it could become more serious with further State Bank monetary tightening measures on the table.

“Tightening makes some banks, even with ample capital, hesitate to lend to peers via the interbank market making for possible capital shortages,” said the Vietcombank source. Last week, the State Bank revealed a plan to further withdraw money from circulation in which over VND30,000 billion (around $2 billion) of the state budget currently deposited at five state-owned commercial banks, major lenders on interbank market, would be gradually transferred to the State Bank’s stack by the end of September, 2008.

“Monetary policies would be relaxed once the consumer price index (CPI) increase was brought under control,” said a State Bank official. Over the first quarter of 2008, Vietnam’s CPI has increased by 9.19 per cent against December, 2007 and 16.37 per cent against the same period last year.