"Excess capital", interest rates decrease widely

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Banks have reduced both deposit and lending rates. Photo: Internet

"Excess capital" in banks

A survey showed a series of large banks not only lowered deposit rates but also sharply reduced lending rates. For example, BIDV’s interest rate applied from July 1 also dropped by 0.3% per year for 1-2 month terms, reached 3.7% per year. The interest rate for a 3-5 month term decreased from 4.25% per year to 4% per year. The interest rate for the terms of six and nine months was 4.4% and 4.6% per year, respectively. The bank’s highest interest rate was for terms of more than 364 days was 6% per year, down sharply compared to 6.8% per year earlier. BIDV also announced a reduction of lending interest rates by 0.5% per year. Thus, from the beginning of the year, BIDV has cut interest rates for customers three times, with a reduction of 2.5-3% per year compared to before the Covid-19 pandemic.

Similarly, Vietcombank, VietinBank, Agribank, VPBank, Techcombank and Eximbank also reduced 0.1-0.5% per year of deposit rates depending on term. These banks also have more times to reduce lending rates, Agribank, for instance, reduced lending rates by 0.2% per year to remove difficulties, promote production - business, and support customers in five priority areas that need to pay the maximum short-term loan interest rate of 4.8% per year; medium and long-term loan interest is at least 7.5% per year, the lowest level in the market. Meanwhile, Vietcombank has a programme to reduce interest payable to customers in phase three, from May 15 to July 31, for about 85,000 customers with loan balance of VND64,000 billion.

All banks are sharply reducing interest rates even though there is no new instruction of the State Bank (SBV) on operating rates. According to KBSV Securities Company’s report, the reason for lower interest rates is liquidity has maintained a strong surplus, with low credit growth, while a large number of SBV bills have matured since April (meaning the SBV has pumped the system about VND150 trillion). As a result, interbank interest rates in June approached 0% while cash flow shifted to Government bond investment. This made Government bond issuance volume of the State Treasury in June hit the largest level in recent years.

According to a recent report at the Conference with the Government, SBV Governor Le Minh Hung said as of June 29, credit just increased by 3.26%. Although this is a low increase compared to the same period last year, it increased sharply again compared to each month. Meanwhile, according to the General Statistics Office, as of June 19, capital mobilisation of credit institutions increased by 4.35% (reached 6.09% at the same time in 2019). This showed the growth rate of capital mobilisation was higher than the growth rate of credit, leading to overcapacity of banks.

Promote credit growth

According to the SBV Governor, the goal of the banking industry is to support economic growth by the end of the year, so it is committed to providing sufficient and timely capital to the economy. Therefore, the SBV will direct credit institutions to thoroughly reduce costs, reduce profits to decrease lending rates, ensuring credit quality. The interest rate reduction is expected to support businesses recovering from the pandemic. Moreover, the State bank said it has adjusted credit targets for many banks, especially for healthy units and strong credit flow into areas serving economic growth, it can be adjusted higher than their demand. Lowering lending interest rates is expected to attract customers and boost credit growth.

For businesses, lowering interest rates is always the desire to support their difficult business activities. Le Thi Hong Minh, General Director of Cam Ranh International Terminal Joint Stock Company, said the company had received two times of interest rate reduction, the first time was 1%, the second time reduced by 0.5% and the loan period was extended. However, the scenarios are only applied till September and the pandemic has been complex and prolonged, so Minh proposed to reduce interest rates further and extend the debt restructuring period until 2021.

In fact, borrowing is not easy for many businesses or even banks themselves. Because expanding loan conditions will help banks grow credit but how to ensure credit quality in the context of the difficult economy is the banks’ problem. Therefore, not lowering credit standards and not loosening lending conditions have been policies maintained by banks. According to several economists, cutting interest rates only supports the economy psychologically. Deposit rates will likely slightly increase if credit recovers.

Another issue of interest rate lowering is concerns about cash flow trends going to other investment sectors, such as real estate, gold, foreign currencies and securities. However, according to Dr Nguyen Tri Hieu, a specialist on banking and finance, under the impact of the Covid-19 pandemic, investment channels like gold, securities and real estate faced many risks, erratic fluctuations or "standstill". Therefore, investors are worried, looking for safer asset channels, which leads to more money flowing into banks, although interest rates continuously decline in the near future.