Govt allows non-interest based bidding

Interest-based bidding was the only form allowed before the finance ministry issued Circular No.19/2004 last week for treasury bills and government bonds in foreign currency. Now 30 per cent of bond issues will be put aside for banks that cannot set interest rates for bids.
Bonds will first be allocated according to interest rates offered by credit institutions, providing offered interest rates do not exceed the ceiling rate set by the central bank.
Then the 30 per cent of bonds in reserve will be bid for. This means the government will sell bonds to those who cannot set a certain interest rate for them.
The circular also stipulates that to enter an auction, an institution must have a legal capital of at least VND20 billion ($1.3 million). The minimum bid for treasury bills is VND100 million ($6,500) and 10,000 units of a certain foreign currency for government bonds in that currency.
The introduction of non-interest bids was to encourage joint-stock commercial banks to join the bidding market that is currently dominated by state-owned commercial banks, the head of the ministry’s Finance and Banking Department, Pham Phan Dung said.
“Many joint-stock commercial banks believe it is a waste of time and money to make a bid when only interest-based bidding is allowed, simply because they are unable to compete with state-owned commercial banks in terms of interest rates,” Dung said.
“They do not have as much idle capital as state-owned banks and so it is difficult for them to offer high interest rates.
“This explains why the only bids for treasury bills so far have come from state-owned banks, even although the treasury bills bidding market opened in Vietnam nine years ago.”
However, State Bank Deputy Governor Tran Minh Tuan wrote to the finance ministry in February that it was too early to start non-interest based bidding in Vietnam.
“The monetary market is not mature enough,” he wrote.
Tuan said although this type of bidding was very popular in many developed countries like the US, “these countries have an advanced financial and economic market with thousands of credit institutions operating in the market, whose performances are stable.”
The finance ministry issued its circular despite the opinion of the State Bank, saying it did not expect there to be any negative impact from the non-interest based bidding.
The ministry said it was better to lay out a legal framework now rather than introduce an additional rule later.
A ministry official told Vietnam Investment Review that the ministry might consider introducing the same non-interest based bidding for treasury bonds and government bonds in local dong, but was not sure when this would happen.