Great interest in the money circle

Bank deposits have slid downwards since businesses have withdrawn money to put in production and trading activities. Are these signals good for the national economy?

Mobilised dong capital by local banks saw a decline of 2.75 per cent as of May 23, 2011 compared to late 2010, according to State Bank governor Nguyen Van Giau.

A reduction of VND156.7 trillion ($7.57 billion) in the mobilised amount was because scores of businesses took out money to inject into production and trading. The central bank assumes it is positive when companies withdraw money to put in business deals, proving the economy’s growing liquidity. In my view, that is inadequate.

Business deposits are often used to keep trade constantly moving.

Why has the money not flown into banks?

First, capital sources were scarce and some firms could not pay back loans. Some other firms which can pay did not pay as they feared they could not source further loans or take on loans at higher interest rates. The money then did not return to banks.

Second, escalating commodities’ and services’ prices made people’s incomes worth less, triggering a dent in their savings when the money supply was being tightened.

Third, black market credit experienced a boom on the back of restricted bank loans, which meant some idle capital from the community poured into the black market.

Were the central bank’s cautious money supply practices the core reason why banks raced to hikeddeposit rates?

The government set a 16 per cent hike in total money supply (M2) volume in 2011. However, the growth was around 1.6 per cent only in the first five months of the year.

When deposits from the business community declined, the State Bank needed to inject more capital into commercial banks to fine-tune M2 growth with the gross domestic product (GDP) growth. However, the money pumped into banks was insufficient, driving banks into capital distress. In this context, banks hiking deposit rates to lure money were inevitable.

When will the deposit hiking race cool down?

Recent successful bond yields of 12.7 per cent proved that banks have money, but they could not lend it out due to lending restrictions to non-productive sectors. Banks also could not dare to lower deposit rates because they feared losing customers. Therefore, the central bank should take on policy measures to help banks maintain liquidity and ease the refinancing rate to help cool down bank rates.