Interest rate a rampaging bull as market forces ruling

November 15, 2010 | 17:33
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The market rate went on the rampage last week after authorities allowed the banking system to use market forces to set interest rates.

By the end of last week, most banks had lifted their deposit rates to 12 per cent, per year.

Especially, with short-term deposit of less than four weeks, some banks even hiked the rate to 13 per cent, per year.

“The State Bank has delivered money tightening signals and thus market interest rate has gone up quite quickly,” said Nguyen Thanh Toai, deputy general director of Asia Commercial Bank (ACB).

By the end of last week, local lenders borrowed from each other via the interbank market at 14-16 per cent per year for overnight, one-week and one-month terms, almost double previous weeks’ rates.

“Short-term borrowing rates shot up last week demonstrating a shortage of funds in the banking system,” said Nguyen Thi Kim Thanh, head of the Banking Development Institute.

During the last three days of last week, the State Bank again offered 14-day loans to local lenders via open market operations (OMO) with total volumes of VND50 trillion ($2.5 billion).

 “The authority is looking to pump more money into the banking system at longer terms. This will help stabilise the market in coming weeks,” said a Vietnam Bank for Foreign Trade (Vietcombank) official.

OMO is a window which the State Bank extends short-term loans to local lenders with collateral being valuable papers such as treasury notes.

Meanwhile, interbank market is where local lenders borrowing each other short-term funds.

At the moment, the State Bank is lending to commercial banks at 9 per cent, per year via OMOs.

Toai said a tightening monetary policy could jeopardise the banking system.

“Banks are racing in all ways to mobilise money to ensure their liquidity. On the other hand, higher rates will discourage enterprises borrowing from banks. How can we make a profit?” said Toai.

Two weeks ago the State Bank, in an effort to curb inflation, signaled monetary tightening by lifting the base rate from 8 to 9 per cent for the first time since last December.

However, the authority no longer pushed local banks to further cut market interest rates to 10 per cent, per year for deposits and 12 per cent, per year for lending as requested by the government earlier this year.

State Bank governor Nguyen Van Giau said the authority would provide needed liquidity assistance to the banking system towards the year’s end.

A Bank for Investment and Development of Vietnam (BIDV) source told VIR that last week was a headache for the banking system due to liquitidy shortage problems.

“Interest rates on the interbank market went up to 18 per cent, per year due to fund shortages,” the BIDV official said.

“However, the increased money pumped via OMOs from the State Bank to some extent, stabilised the market,” said the official.

By Thai Thao

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