Be cautious when reducing the compulsory reserve ratio

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Reducing the compulsory reserve ratio for credit institutions will have some impact on monetary policy. Photo: ST.

Less impact on monetary policy

Compulsory reserve is the minimum amount calculated on the ratio of total deposits that credit institutions must deposit at the SBV to ensure solvency and reduce risks in savings activities. The draft Circular stipulating the implementation of compulsory reserves of credit institutions is being announced by the State Bank of Vietnam, with the content of supporting credit institutions being reduced by 50% of the required reserve ratio for all types of deposits under the approved recovery plan.

According to the Law on amending and supplementing a number of articles of the Law on Credit Institutions, supporting credit institutions are credit institutions designated to participate in the management, control, administration, and support of organization and operation of credit institutions under special strict control. Currently, supporting credit institutions include: Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) - supporting Dong A Commercial Joint Stock Bank; Vietnam Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) - supports DongA Bank, Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) – supports Ocean Commercial One Member Limited Liability Bank (Oceanbank), Global Petro Trading Limited Company (GP Bank). These are all "big ones" of the banking industry, with a total balance of customer deposits accounting for 40% of the system's total deposits.

According to the SBV's current regulations, the required reserve ratio for demand deposits for less than 12 months is 3% for VND, and 8% for foreign currencies, and for a 12 month term or longer it is VND 1%, and for foreign currency, 6%. Thus, credit institutions are entitled to a 50% reduction in compulsory reserves, which is only 1.5% and 0.5% (for VND), and 4% and 3% (for foreign currencies), respectively. Thus, the compulsory reserve ratio for banks will be reduced and enable more capital to push into the market, supporting banks to participate in restructuring. As a result, there might be more or less impact on the monetary market, including a decline of interest rates.

However, giving further analysis on this issue, according to experts of SSI Securities Joint Stock Company, in fact, this is just a suitable regulation, legalized with the Clause 7, Article 148 of Law No. 17/2017/QH14 regulating the rights and obligations of supporting credit institutions (being entitled to refinance loans with preferential interest rates to 0%, being entitled to a 50% reduction of the compulsory reserve ratio under the approved recovery plan), which is not new content.

In addition, these experts also said that the draft will not have much impact on monetary policy because from the draft to the reality will take a long time and even in the case of promulgation, the compulsory reserve reduction of each bank will depend on the actual support. The actual support will be reviewed and approved very closely and may be much lower than the 50%. Moreover, the required reserve ratio is currently very low (3% for VND deposits of less than 12 months and 1% for VND deposits of 12 months or more). In addition, the required reserve ratio is the minimum, in fact commercial banks’ deposits at SBV can exceed this number and enjoy interest on the excess, then reducing the compulsory reserve ratio. The minimum does not mean that there will be a corresponding amount of money pumped into the market.

Use many tools

Many experts also evaluated that the draft has little impact on the market and monetary policy, because it is not easy for credit institutions to meet the conditions. Moreover, the State Bank of Vietnam will apply many tools to stabilize the monetary market and support the liquidity of credit institutions.

However, assessing the impact of the draft Circular, many experts expressed disagreement, because it is unfair for credit institutions. Because, as support for credit institutions is reduced on compulsory reserves, can they still enjoy other incentives such as 0% refinancing loans? Moreover, are the conditions for all of them entitled to 50%, is it fair between the credit institutions? Because the support of credit institutions is different. Economic expert, PhD. Nguyen Tri Hieu said that the State Bank of Vietnam should have other tools to compensate for credit institutions that are supporting the weak ones, such as reducing operating interest rates, transferring State Treasury deposits at the State Bank to banks participating in support...

On the other hand, a disturbing impact that has been pointed out by many economic experts is an increase in bad debt. Because an increase of the amount of money supplied to the market by banks can decrease the interest rate level. So along with the guidelines to facilitate loans for businesses, banks will push more credit capital out, which may increase the risk of increasing bad debt. At present, although the total bad debt in the whole system has been decreasing slightly, according to SBV, by the end of December 2018, the internal bad debt ratio of the credit system is 1.89%, down from 2.46% at the end of 2016 and 1.99% at the end of 2017.

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Objectively, it is necessary to support credit institutions who support the weak ones in order to keep the operation of the system clean and healthy. But the essential issue is how to do it to create equity and ensure sustainability for the banking industry. Therefore, the State Bank must be the focal point, offering really smart policies to stabilize the money market.