Vietnam’s central bank is taking the steps necessary to assist banks to cut their interest rates.
Support is coming from the State Bank of Vietnam (SBV) to commercial banks, with adjusting interest rates downwards considered a major priority for most banks during the second half of the year.
Plans to adjust monetary supply have been approved by the Prime Minister using monetary and fiscal policies, aimed at ensuring growth in payment and credit activities by 20 to 25 percent for the year as a whole. In addition, the pumping of money at low cost into commercial banks is a good option in reducing the interest rate platform.
Support in place
The SBV is undertaking a number of measures, such as increasing monetary supply, stabilizing the prime rate, re- financing, discounting interest rates and rates offered in the open market, increasing capital transactions via the open market with reasonable maturity and rates, and cooperating with the Vietnam Banking Association (VNBA) to request banks introduce consistent interest rates towards a lower platform. More importantly, SBV will continue to support re-financing activities to encourage commercial banks to expand credit activities to agricultural production with a focus on small and medium-sized enterprises. All of these measures have been implemented since late in the first quarter of this year.
The Consumer Price Index (CPI) in the second quarter was rather high, increasing in April by 0.14 percent against March, in May by 0.27 percent against April, and in June by 0.22 percent against May. Both deposit and lending rates have declined slightly.
A positive sign appeared in July, with the Government and related ministries expressing their determination to restrain high inflation. The CPI in July increased only slightly, by 0.06 percent against June; the lowest level in six years. According to Mr Cao Sy Kiem, a member of the National Monetary Consultancy Council, this lays a firm foundation for the SBV to utilize its managerial tools to reduce the interest rate platform.
Market expectations
Amid a high CPI in the first half of the year, it seems the SBV has been fairly successful in reducing interest rates since the second quarter via adjustments to monetary supply. It has continuously increased monetary supply via flexible adjustments in transactions on the open market, including purchasing valuable papers with maturities of seven and 28 days, reducing rates on loans with a maturity of seven days from 7.5 percent to 7-7.5 percent, increasing the re-fi- nancing loan volume, and exchanging foreign currency among credit insti- tutions with surplus foreign currency deposits. The SBV also offers lower rates for the exchange of foreign currency with a maturity of one month, to 7.5 percent from 8 percent, and three months from 8.5 percent to 8 percent. Small-sized banks have been given improved liquidity so as to stabilize the market.
Average lending rates in Vietnam dong by the four state-owned banks and the seven largest joint stock commercial banks have been retained at 13.3 percent per annum. Priority has been given to agricultural production activities, with rates of 12.5 to 13 percent on short-term loans and 14 percent on medium- and long-term loans.
With only a slight increase in the July CPI and falling interest rates at commercial banks, mobilization and lending in Vietnam dong have steadily improved. SBV Governor Nguyen Van Giau said that as at July 31, 2010, the country’s total means of payment had increased by 12.96 percent, capital mobili- zation increased 16.3 percent and lending increased 12.97 percent. According to a senior official at the SBV’s Ho Chi Minh City branch, credit activities at most banks in the city saw strong growth in July, of 4.7 percent, for 11.3 percent during the first seven months of the year, against the same period in 2009. At the end of July, total loans stood at VND681.758 trillion, soaring by 13 percent against 2009. Mo- bilization also saw a healthy increase, of 16 percent in July.
Developments in interest rates and the target of credit growth for 2010 being 25 percent very much depend on the SBV’s monetary supply for the remainder of the year. Over the last few weeks the SBV has bought valuable papers offered by commercial banks at a rate of only 7 to 7.5 percent, at an average volume of VND10 trillion per day.