It is not feasible to remove the deposit interest rate cap by the first half of this year, State Bank of Vietnam Governor Nguyen Van Binh said Wednesday at a press briefing, while claiming that solving banks’ liquidity problem is the main task.
One of the largest obstacles facing the central bank in its management this year is cutting lending rates, Binh told reporters.
“We cannot cut rates at a time when banks are struggling with liquidity shortages while demands for loans constantly surge,” he said.
Binh said that since the liquidity problem has yet to be solved, the deposit interest rate ceiling must be kept in order to ensure a particular rate for banks to mobilize capital, so that they can offer loans at acceptable interest rates.
He said the banking system restructuring will aim to solve the problem of exorbitant lending interest rates, which have affected businesses’ operations and the country’s economic growth.
“Once the restructuring has successfully been conducted, there will be neither the deposit rate cap nor the liquidity difficulties,” Binh said.
He said that after the Lunar New Year, which falls on January 23, the central bank will focus on solving the liquidity problem and creating capital for production activities.
“We have to keep a close eye on the development of inflation – the deposit interest rate cap will be lowered should inflation cool down,” Binh assured.
Handling liquidity
The country’s inflation rate has been on a downwards trend for the last six months, which may lay the groundwork for the lending rate to be cut, some insiders said.
However, the central bank governor said that even though low inflation provides the basis for an interest rate cut, what matters most is the management of the liquidity, or restructuring the credit institutions’ capital sources.
Liquidity will be the main focus of this year, he said.
Binh said many banks now face a liquidity shortage, which is a major issue for the national economy.
“The reason for this is the fact that many banks have been borrowing deposits at short terms, while offering loans at medium- and long-terms,” he explained.
In 2010, the central bank stipulated that commercial banks were allowed to use 40 percent of its short-term mobilized capital for offering loans at medium- and long-terms.
However, Binh added, few banks have followed this ratio. Some have even posted a ratio of 100 percent.
Meanwhile, the central bank did nothing to handle this issue, and banks have thus increased outstanding loans and their ratios of medium- and long-term loans, and faced liquidity risks.
“And when the central bank began tightening credit policies last year, a liquidity shortage was inevitable,” he concluded.
Commenting on industry insiders’ suggestions that the central bank pump more money to help ease the shortage, Binh said that what can help improve the situation is an adjustment of the ratios of medium- and long-term loans in total outstanding loans.
In order to make this change, the banking system has to undergo a restructuring, he said.
“Thus, the main target of the central bank this year is to restructure the system, especially credit institutions that are operating poorly,” Binh said.
“Afterwards, the central bank will begin pumping more money into the system to maintain economic growth.”
