Higher interest rates on US dollar deposits

Banks started to increase US dollar deposit interest rate in the first days of 2011 when the official amount of overseas remittances to Vietnam was announced.

The Vietnam Thuong Tin Commercial Joint Stock Bank (VietBank) was the first to raise its interest rates on dollar deposits to 6 per cent per year for 12-month term, while the rates for other terms also increased, ranging from between 5.4-5.9 per cent.

But VietBank’s leading position was quickly overtaken by Navibank while the latter raised its annual interest rates on USD deposits to 6.24 per cent for 12-month term. It even increased its interest rates for 3 to 9-month terms to their highest ever level of 6.14 per cent, depending on the amount deposited.

The race started earlier when small joint-stock commercial banks, including WesternBank and the Kien Long Bank raised their interest rates on USD deposits to 5.3 per cent and 5.6 per cent per annum, respectively.

The participation of large-scale joint-stock commercial banks in the race, including ACB and Techcombank, has heated up the market. It also showed the attraction of capital in foreign currencies, especially at a time when interest rates on VND deposits and loans are nearly “frozen” at high levels. ACB and Techcombank have also recently raised their USD savings interest rates to 4.95 per cent and 4.8 per cent per year, respectively.

The new interest rate race is seen as a bid to attract stronger inflows of remittances in the final weeks ahead of the Tet (Lunar New Year) holiday and to meet the growing demand of borrowers for US dollars.

The “frozen” lending interest rate in VND at the high level of 17-18 per cent per year applied to production enterprises is said to be another reason for the shifting of businesses’ demands for loans.

The current lending interest rate in USD is only one third of the rate in VND, putting less pressure on borrowers.

Another reason for increasing interest rates is the liquidity of cash. Since taking effect in October, 2010, one of the most stringent regulations in Circular 13 is that the banks can only use 80 per cent of their capital for lending, which has made banks, especially small banks, face short-term liquidity problems.

Meanwhile, outside the residential market, the VND deposit rate was pushed up to 14 per cent per year, much higher compared to the US dollar deposit rate of 6 percent. Instead of focusing on VND at such competitive interest rates, some banks have begun to turn to the US dollar to find an alternative.