Safety net laid out for small banks

illustration photo

According to State Bank data, over the first six months of 2011, it had withdrawn a net sum of VND54 trillion ($2.62 billion) via the open market operations (OMO) window.

However, State Bank Monetary Policy Department head Nguyen Ngoc Bao said money injections or withdrawals could still support liquidity starved small-scale banks.

From last week, the authority started again extending two-weeks loans via OMOs. Over the first six months of the year, the authority only extended one-week loans via this channel.

Le Xuan Nghia, deputy chairman of the National Financial Supervisory Committee, said the move was designed to better assist some struggling small banks.

Two weeks ago, the State Bank also cut its one-week lending rate via OMO from 15 to 14 per cent, per year after continuous hikes since last November from 8 to 15 per cent, per year.

Bao said the cut was not a sign of monetary policy loosening, as OMO was traditionally a channel to support banks in urgent need of liquidity.

Since November 2010, the State Bank has tightened monetary conditions resulting in higher dong interest rates, with negotiable dong deposit rates up to 19-20 per cent, per year and lending rates climbing to 23-24 per cent, per year in May.

As a result, total credit growth slowed to 7.13 per cent by June 20. On the fiscal side, in the first five months, only $270 million was trimmed from public investments accounting for 1.6 per cent of the full year’s investment plan.

The OMO rate cut was the first move of its kind since the beginning of 2011.

By the end of June, year-on-year consumer price index (CPI) growth has hit 20.8 per cent.

The State Bank has pumped around VND70 trillion ($3.4 billion), through refinancing channels, to small banks since May.

Nguyen Thi Kim Thanh, head of the Banking Strategy Institute, said that this was a wise move to net withdraw money from OMO channels which mainly affected large-scale banks and pumped money to small ones with liquidity troubles.

“Focusing on assistance to small banks helps keep the system stable. Pumping too much money into the system could create inflationary pressures, so injecting money in one side requires withdrawing on the other side,” said Thanh.