Central bank intensifies efforts to stabilise interest rates

The governor of SBV Nguyen Van Binh emphasised the necessity to change banks' capital structure to heighten liquidity

The governor of SBV Nguyen Van Binh held a press conference on January 11, in which he said that the deposit interest rate cap will continue to be applied through June of this year.

Recently, several banks have violated the regulation on deposit interest rate ceiling, with rates going as high as 16 per cent -18 per cent. Some banks even offered 20 per cent. How will the SBV deal with the situation?

SBV has been fully aware of the situation and kept track of these violations. In the first quarter of this year, we plan to take measures to tackle the problem. Our aim is to stabilise the financial market. Going from there, we will move to heighten the liquidity of banks, focusing especially on lending for the production sector.

We also plan to tighten the money supply so as to lower inflation rates. This can also be expected within the first quarter. This may mean that less money will be spent during Tet than in previous years.

When will the SBV lower the lending interest rate and remove the cap on deposit interest rate?

Lowering interest rate will be the most challenging task of this year. It cannot be done immediately. Normally, interest rates could be reduced by increasing the money supply to ease the demand for cash. However, in the current economic climate, this is not really feasible, due to low liquidity and high capital demand.

Both inflation and liquidity greatly affect interest rates. In order to balance things out, SBV will continue to apply the current cap through the end of 2012. Any decisions to hike, or lower the cap will be made in consideration of the economic situation.

If the cap were to be removed right now, the deposit interest rate would increase, driving up the lending interest rate, and putting a heavier burden on businesses, as well as the economy as a whole. The deposit interest rate cap must be kept for now in order to keep lending interest rates at reasonable levels.

What is your opinion about the liquidity situation in the banking system?

I have to say that the SBV has seen this coming since early summer of last year. We are aware of the challenges that banks face in this area.

Even though many have publicly wondered why we haven't done more to prevent the situation, in reality, the low liquidity stems from an unhealthy capital structure among commercial banks, which focus on short-term deposits and long-term lending.

Which measures can we expect the SBV  to take so as to increase liquidity in a climate of monetary tightening policies?

Some experts have suggested that the SBV release more capital into the market to heighten liquidity. However, the real solution would be to change the capital structure of the banks themselves. Restructuring may take five or ten years, but it is a necessity if we are to reorganise the lending system and guarantee capital for the production sector.