However, there is a paradox that deposit growth is 10 per cent while loan growth is 11 per cent, which has raised a question concerning where the capital flows come from and how banks can reduce interest rates.
Where do the capital flows come from?
Since the beginning of this year, the demand for government bonds has increased significantly while the government bond interest rates have been falling continuously.
At the end of August 2017, the total deposit of the State Treasury in banks reached VND160 trillion (roughly US$7.055 billion), 68 per cent higher than the beginning of this year.
In addition, the money that financial institutions and insurance companies invested in government bonds have also been temporarily deposited in banks before being poured into the public investment projects.
Besides, foreign exchange reserves reached a new record of US$45 billion, an increase of US$6 billion compared to the end of 2016. Therefore, despite the trade deficit of US$2.7 billion in first six months of this year, the supply of foreign currency was abundant thanks to the capital inflows from foreign direct investment and indirect investment, including the auction of the State’s capital in Vietnam Dairy Products Joint Stock Company (Vinamilk). All of these factors have enriched the capital market.
Ph.D Huynh Trung Minh, a Vietnamese financial expert, said that 10 per cent and 11 per cent are the growth rates which do not relate to the amounts of loans and deposits. Under the State Bank’s regulation, the loan-deposit ratio (LDR) is not permitted to exceed 80 per cent. However, sometimes LDR of some banks can reach just 60 per cent.
“Loan growth being higher than deposit growth does not mean that a bank is thirsty for capital. As we can see that interest rates in the interbank market do not show any sudden or strong increase. In June 2017, the interest rates in the interbank market even dramatically decreased,” said Huynh Vu Minh.
Meanwhile, measures to support the market liquidity are not needed, according to the market survey. Specifically, open market operations (OMO) is a tool for the State Bank to give (or take) liquidity in its currency to (or from) a bank or a group of banks, stabilizing the banking system. In 2011 and 2012, the State Bank poured a huge amount of money into the banking system via OMO to quickly support commercial banks that faced liquidity obstacles. However, since the beginning of this year, only a small amount of money has been pumped into the banking system via OMO, showing the abundant liquidity.
It is hard to keep interest rates at a low level
As the loan growth is higher than deposit growth, it is difficult to reduce the interest rates as required by the government.
“Lending out still puts pressure on the mobilization of capital. When deposit increases, it is difficult for banks to reduce interest rates. Therefore, keeping the interest rates stable is important,” said Ph.D Nguyen Tri Hieu, a financial expert.
Hieu said that the 10 per cent growth in the total outstanding loans of the banking system in last three months means that about VND600 trillion (roughly US$26.46 billion) would be pumped into the market. “We must be careful as a large amount of money supplied may cause inflation in the next few years if it is not careful,” said Nguyen Tri Hieu.
Another financial expert Dang Quoc Tien said that reducing interest rates means that banks had to the reduce expenditure and balance between lending end receiving in order to minimize the gap between loans and deposit but still producing the positive outcome.
Reducing interest rates is increasing competitiveness in the banking system. Credit growth could only be sustainable when banks reduce interest rates voluntarily.
