Lowering interest rates poses challenges ahead

March 06, 2024 | 08:00
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Savers are increasingly concerned about the prospect of lower deposit interest rates. Economic expert Le Xuan Nghia talked to VIR’s Hong Dung about the challenges of reducing such rates in the near future due to uncertainties in adhering to positive principles.

Deposit interest rates could potentially diminish even further. Is there room to reduce them in the current context?

Lowering interest rates poses challenges ahead
Economic expert Le Xuan Nghia

Deposit interest rates must meet three criteria: inflation, risk, and term. The interest rate should be calculated in the medium term, not the short term. With Vietnam’s forecasted inflation in the coming years at 3-4 per cent, the real interest rate for savings deposits should be at least 4 per cent or higher.

While short-term savings carry lower interest, long-term savings enjoy higher rates. However, short-term savings must still offer positive returns to attract depositors.

Considering the aforementioned inflation forecast, it is challenging to lower deposit interest rates in the near future due to uncertainties in adhering to positive principles.

It’s essential to emphasise that lowering deposit interest rates too low may lead to liquidity traps, as people might invest in other areas such as real estate, gold, foreign exchange, or stocks due to insufficient returns to compensate for inflation costs. This, in turn, could restrict banks’ capital mobilisation and, consequently, lending capacity.

This is a liquidity trap, and the banking system may face difficulties in liquidity when the economy recovers, and investments in production and business increase. In summary, reducing deposit interest rates further seems impractical.

What about the possibility of further reduction in lending rates?

Lending rates are still relatively high. For example, medium to long-term loans at state-owned banks have relatively low-interest rates, but at joint-stock banks, rates range from 9-12 per cent per year. The reason for high lending rates is the gradual reduction in high deposit interest rates over the past year, providing an opportunity for banks to gradually reduce lending rates.

I believe that it is not possible to further reduce deposit interest rates, but it is possible to reduce lending rates due to two main factors. Firstly, lending rates depend on the capital needs of enterprises and individuals. Currently, the low absorption of capital, limited by output and consumption difficulties, affects enterprise and individual credit. This compels banks to consider reducing lending rates to support businesses.

Second is related to digitisation trends in banking. Digitisation helps reduce human resources, transaction offices, and branches. This is a crucial aspect that helped banks cut operational costs globally over the past decade. In Vietnam, digitalisation in banking is progressing slower than in other sectors worldwide. The failure to digitise extensively results in high administrative, management, and mobilisation costs.

There are forecasts that lending rates might not only remain unchanged but could even increase. Is this a valid concern?

Indeed. Notably, it is related to the real estate market. This sector significantly influences the average lending rates in the market. If the real estate market becomes active again, both deposit and lending rates may be challenging to further reduce.

Currently, the real estate market is in a situation where prices of condominiums are rising rapidly, even faster than before the real estate market crisis, due to scarce supply and significant demand for large-scale condominiums.

Meanwhile, other segments such as villas, resorts, and office rentals are sluggish, especially low-cost housing and social housing facing difficulties in legal matters and land sources despite substantial demand. This is gradually creating a risk, with the high-end condominium segment potentially recovering while other segments stagnate.

When the condo segment resumes its growth, it means that homebuyers are speculating rather than living in the properties, and they become unaffordable for ordinary workers. Thus, it will push up lending rates, and simultaneously, restructuring the real estate market according to the set segmentation mechanism will fail.

Credit growth by the end of January decreased compared to the end of 2023. One of the solutions proposed by regulatory authorities to boost credit is to require listed banks to disclose lending interest rates. What is your opinion on this issue?

Disclosing interest rates for loans to individuals is feasible. Still, for loans to enterprises, specific rates cannot be disclosed because they depend on various factors such as whether there is collateral or not and the credit rating of the enterprise.

The main reason for the credit reduction is the lack of output. However, high-interest rates also contribute to businesses’ hesitancy to invest in the medium and long term. Despite many businesses having visions and wanting to make significant investments in applying emission reduction technologies in steel, cement, and leather footwear production, the high-interest rates make businesses hesitant to invest and change their tech to meet export criteria to Europe.

The average deposit interest rate compared to the average lending rate in other countries may be high, but in Vietnam, with an average deposit interest rate of about 4-4.5 per cent per year, the difference of 2.7-3 per cent is reasonable and does not pose a risk.

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