Bank deposits take a hit as inflation bites

Bank deposit growth has run into road blocks

The Ho Chi Minh city State Bank branch reported last week that deposits at city banks grew by just 1.5 per cent in July against an average 2.76 per cent since January.
Though official figures are not yet out for Hanoi, an official in the State Bank’s Monetary Policy Department predicted a similar slowdown.
This follows two events happening in quick succession in July: first, as an anti-inflationary measure, the central bank announced an increase in reserve ratio by 3 per cent for short-term deposits and 1 per cent for long-term deposits.
The ratio refers to the amount of money that banks need to deposit with the central bank as a proportion of their total deposits. And, it is one of the credit control tools that central banks use to regulate liquidity in the market.
Soon after, when commercial banks were increasing deposit rates to keep up with the soaring inflation, state-owned banks held a meeting where they agreed to limit their rates until year-end.
The four – the Bank for Foreign Trade of Vietnam (Vietcombank), Bank for Investment and Development of Vietnam (BIDV), Vietnam Industrial and Commercial Bank (Incombank) and Bank for Agriculture and Rural Development of Vietnam (Agribank) – then went on to actually cut their rates by 0.02 to 0.04 per cent per month.
Tran Ngoc Minh, director of the southern hub’s State Bank branch, felt it was this cut that led to the slowdown in deposit growth.
But, Incombank deputy general director Trinh Cong Thang claimed it was a fait accompli. “This is to offset the higher costs we are suffering due to the higher reserve ratio,” he said.
General director of the Phuong Dong joint-stock commercial bank, Vo Van Chau, agreed saying, “higher reserve amount means higher cost of deposits and lower profits”.
“It is the same for all banks. For my bank, we can foresee that our input cost would increase by around 0.04 per cent each month.”
“To compensate, we have to either increase lending rates or cut deposit rates. Increasing lending rates will affect businesses [who will] in turn have to increase selling prices and as a result, the whole society suffers.”
“So we have no choice but decrease deposit interest rates though we realise it will cause losses to customers who have already lost this year due to the galloping prices.”
And, falling deposit interest rates usually mean falling deposits.
The deal between the State-owned banks did not mean much in the northern market where deposit rates were already below the agreed cap.
However, it did matter in the south where interests were, on average, 2 per cent above it and the banks’ rate cuts were merely to bring them below the ceiling.
But, it is not clear how long the pact will hold.
A top Incombank official told Vietnam Investment Review last month that if the bank’s southern branches lost too many customers due to the rate cap, it might toss the deal out of the window.
Meanwhile, it hopes, like all other banks, that the central bank would reconsider its compulsory reserve policy.