Banks suffer liquidity strains as deposits fall

Local banks are eying an increase in dong deposit rates to woo customers

The State Bank’s April report stated the banking system’s Vietnamese dong deposit for residents and economic institutions as of April 21 had notched up only a 0.46 per cent against the end of last year’s figure.

Meanwhile, total deposits in April also decreased by 1.09 per cent against March. Of these, deposits in Vietnamese dong fell by 1.84 per cent while foreign currency deposits were up 1.46 per cent.

Figures from Ho Chi Minh City were also gloomy on deposit amounts over the last four months. Deposits rose in March but slid in February and April, meaning the deposit value in April was 3.3 per cent lower against January.

Total deposits in the city totalled VND791.3 trillion ($38.2 billion) in April, while this sum was VND818.5 trillion ($39.5 billion) in January.

This year’s drop in Vietnamese dong deposits caused liquidity problems for local banks. These troubles arise from the fact that ceiling deposit interest rates of 14 per cent are lower than April’s inflation rate when the year-on-year increase was 17.5 per cents.

“Most top leaders of commercial banks are crying for a change in policies because of difficulties in deposit operations,” said a Vietnam Banker Association officer.

Le Tham Duong, head of the Business Management Faculty at Ho Chi Minh City Banking University, said the small-scale, joint stock commercial banks were eager to lure deposits by increasing deposit interest rates to around 19 per cent a year. “The movements of small joint stock commercial banks are creating a virtual deposit interest rate in the market as large-scale banks have to join in the race,” said Duong.

He cited the example of state-owned commercial bank BIDV which had seen withdrawals from its deposit accounts forcing it and other large-scale banks to raise their deposit interest rates to ensure customers didn’t jump ship.

“It is not a market interest rate, the current deposit interest rate is virtual as large-scale banks do not need to raise the rates once their Vietnamese dong liquidity is still stable,” said Duong.

In a continued attempt to squeeze money supply, the State Bank rose refinancing and overnight lending rates by 1 per cent to 14 per cent in Decision No. 929//QD-NHNN released on April 29. This followed on from a similar move in March, 2011.

Accordingly, the State Bank decided to lift the seven-day lending rates to local banks via the open market operations window from 13 to 14 per cent, per year.

Cao Sy Kiem, president of Vietnam SMEs Association, said the high inflation rate and Vietnamese dong liquidity strain would continue preventing small and medium sized enterprises from accessing bank loans. “The strain in Vietnamese dong liquidity will not drag credit interest rates down in the third quarter of this year as some state-owned large-scale banks are also offering high interest rates and companies still face difficulties in obtaining loans,” said Kiem.