Banks hike interest rates on US dollars

Customers making transactions at VIBank. Small banks are offering medium- and long-term dollar deposits at around 6 per cent compared to the 14 per cent on dong deposits.

Commercial banks in Ho Chi Minh City are actively to trying to attract dollar deposits in the first days of 2011, especially in the run up to Tet when remittances to Vietnam increase significantly.

On January 12, Vietnam Thuong Tin Commercial Joint Stock Bank (VietBank) raised its interest rates on dollar deposits by 0.9-1.3 per cent per year for one to 36-month terms.

VietBank now offers 5.9 per cent interest on six-month greenback deposits and 6 per cent interest rate on 12-month deposits, apart from other incentives.

On January 8, Western Bank announced its new short-term dollar deposit rates, increasing it to 5, 5.1 and 5.3 per cent on one, two and three-month deposits, respectively.

At some other small commercial joint stock banks including the Kien Long Bank, Orient Commercial Bank, Sai Gon Commercial Bank and An Binh Bank, dollar deposit rates have been increased to between 5.1 and 5.6 per cent per year.

Southeast Asia Commercial Bank offered the highest dollar deposit rate of 6.23 per cent for short-term deposits.

The new interest rate war is seen as a bid to attract strong remittance inflows in the final weeks ahead of the Tet  holiday, and to meet growing demand of borrowers for US dollars.

Some banks explained the move by noting they needed extra dollars to repay depositors withdrawing funds more heavily ahead of the holiday.

Western Bank deputy director Le Dang Khoa said commercial banks were also trying to absorb more dollars to meet the growing demand of importers, many of whom had rushed to borrow dollars at low rates averaging 8 per cent per year – far lower than prevailing interest rates charged on loans made in Vietnamese dong, which were currently as high as 18 per cent.

Treasury director of one commercial bank who asked to remain unnamed said regulations currently allowed banks to lend out no more than 80 per cent of total deposits, a limit had caused some liquidity problems for small banks.

"So they have to raise interest rate to attract more dollars and ensure liquidity," he said.

Cao Sy Kiem, former governor of the State Bank of Vietnam, said the rise in interest rates paid on dollar deposits suggested not only a liquidity crunch but also an imbalance in supply and demand for foreign currency.

However, he did not feel the imbalance was prevalent across the banking sector.

Only a few big banks which have sufficient reserves or stable sources for the greenback, like Eximbank, Asia Commercial Bank, Sacombank and Military Bank have kept their deposit interest rates unchanged at below 5 per cent.

Military Bank deputy director Cao Thi Thuy Nga said foreign currency supplies at her bank were stable and sufficient to meet customer demand, so there was no need to attract additional dollars by offering higher interest rates.

Higher dollar interest rates could prompt more people to save dollars instead of dong, which could lower the level of dong deposits in commercial banks, setting on a new interest rate war for the domestic currency and forcing commercial banks to exceed the 14-per-cent mandatory cap on dong interest rates currently in effect.

Nga said it would become increasing difficult to keep a lid on either dollar or dong interest rates now that the government had called for tighter credit as of the beginning of this year – which would have un upward pressure on loan interest rates.

"Therefore, if the State Bank does not take timely measures to how, a decrease in deposit rates this year will be difficult to bring about," Nga said.

However, Kiem predicted that the higher rates were only seasonal and would be short-lived. "The foreign exchange market should stabilise after the lunar new year," Kiem said.