The State Bank of Vietnam should pursue one of two goals

	Bad debts under the new circumstance
	The abnormal movement of exchange rate analyzed
	Interest rates under pressure

Mr. Nguyen Tri Hieu, the financial and banking expert.

What do you think about interest rates in the coming time?

Currently, the liquidity of the banking system is relatively stable. However, due to the effect of Circular 06/2016 / TT-NHNN amending some articles of Circular 36/2014 / TT-NHNN on limits, ensuring safety in the operation of credit institutions, which requires banks to reduce the use of short-term capital for medium and long-term loans from 60% to 50% from the beginning of 2017, commercial banks must restructure their capital, pushing up deposit rates, especially the interest rates of long-term deposit in accordance with this regulation.

However, in my opinion, interest rates from now to the end of the year may increase but the rates will not reach a high level. The reason is that commercial banks are in need of abundant sources of capital for credit growth under the direction of the State Bank of Vietnam. Moreover, deposit rates usually have a 2% margin on the inflation rate, while the inflation rate is expected to increase this year, which will have an impact on deposit rates as well as interest rates. In particular, in real estate lending, the risk will increase from 150% to 200%, which leads to higher capital costs for mobilization and lending. Therefore, commercial banks have to raise interest rates to offset this rising cost.

The liquidity of banks is quite stable, but is it illogical for commercial banks to raise deposit interest rates in vnd?

The liquidity of the banking system is generally stable, but in terms of small-scale banks, liquidity is not as abundant as medium and large banks. Therefore, to support lending in accordance with Circular 06, small banks will have more difficulty in finding capital, so the interest rates of small banks are always higher than big banks to attract customers. Therefore, this increase in interest rates does not take place on a large scale.

Moreover, interest rates increase due to the impact of bad debts, when in many commercial banks, bad debts have not been thoroughly and effectively handled. With a certain level of bad debts, some banks must not only have to increase the risk reserve but also directly affect the banks’ profitability, so banks need to increase its capital mobilization. In addition, these costs will offset interest rates, which can lead to higher interest rates.

The deposit interest rates in VND are forecasted to increase, so the interest rates in VND and USD also likely to increase. Is it reasonable for the State Bank of Vietnam to keep deposit interest rates in USD at 0% per year?

I always ask the State Bank of Vietnam to consider allowing commercial banks to pay deposit interest by USD. Because interest rates of major foreign currencies in the world such as USD, EURO ... are rising, the interbank interest rates in USD is at least 1% per year. Moreover, the banking system still has to lend USD to support import and export activities. Currently, deposit interest rates in USD of many banks in the world has increased, so the banking system of Vietnam should take part in. Therefore, in my opinion, the deposit interest rate in USD at 0.25% per year is still too low, and it should be adjusted to 0.5% per year.

With the difficulties mentioned above, please tell us how should the State Bank of Vietnam operate?

In order to reduce interest rates, the State Bank of Vietnam has to push a large amount of money into circulation, creating a large liquidity for the bank. But this affects inflation because of the inflation increases, interest rates also increase. It is very difficult for the State Bank of Vietnam in this context.

In addition, Government bonds are at a high level, while Government bonds have almost no risks or much lower risks than deposits in banks. Moreover, Government bonds are easy to buy and sell. Therefore, if the two interest rates are equal, investors will undoubtedly choose Government bonds. Thus, if interest rates on Government bonds remain high, it is difficult to reduce interest rates in the banking system. In addition, the factors from inflation and exchange rates are influential. If you want to create USD liquidity for banks to lend, you then consider permitting to pay interest in USD. But if banks pay interest rates in USD, then banks should push up the interest rates in vnd because banks need to keep a certain gap for investors not to transfer the VND to USD.

It can be seen that there are no perfect solutions. While the State Bank of Vietnam should have the right solution to pursue the goal of macroeconomic growth and stability of the domestic currency. But in the current context, if State authorities want to stabilize VND, they have to accept a low economic growth. And if State authorities want a higher economic growth, they may have to sacrifice the stability of VND in some way. In the short term, the State Bank of Vietnam can not achieve the two goals, because Vietnam is a developing country, unlike other developed countries in the world. Thus, I think that the State Bank of Vietnam should choose one of the two goals.

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