Bankers say dollar rate cap gives strength to dong

Local banks have lowered their interest rates on dollar deposits.

Economists and bankers are expecting a switch from dollar holdings to dong assets after the central bank capped the interest rate on dollar deposits.

The State Bank of Vietnam has capped dollar deposit rates at 3 percent for individuals and 1 percent for institutions, effective April 13. Local lenders will also have to raise their reserve ratio on deposits held in US currency from May onward.

Bankers welcomed the move saying it will end the race among banks to raise their dollar deposit interest rates. Before the rate cap was imposed, local banks were offering to pay up to 6 percent annually on dollar deposits.

Ly Xuan Hai, general director of Asia Commercial Bank, said dollar rates in most other countries remained under 1 percent while they surged unreasonably to 5-6 percent in Vietnam.

Hai said the new rule will discourage foreign-currency holdings and ease pressure on the dong.

His bank now sets interest rates between 2.90 to 3 percent on dollar deposits. That compares to a maximum interest rate of 14 percent on dong savings.

Another bank manager said depositors are expected to sell dollar deposits and switch to the dong because of the widening gap between local and foreign currency interest rates. Pressure on the dong will ease when the market no longer prefers the US dollar, he said.

The manager estimated that banks in Ho Chi Minh City alone had around US$10 billion in dollar deposits, more than half of which came from individuals.

Foreign-currency loans increased 13 percent in the first three months of the year. Even though foreign-currency liquidity at banks was ensured, the central bank said dollar lending rose unexpectedly.

Experts said even companies that don’t need to import goods prefer dollar loans so they can benefit from low borrowing costs. Interest rates on dollar loans are 6-8.5 percent, approximately half of dong lending rates.

The rate cap on dollar deposits will allow banks to lower their lending rates, but Hai of Asia Commercial Bank said a sharp decline is unlikely.

The amount of dollar deposits lenders must set aside will be increased next month, and this will prevent drastic cuts in lending rates, Hai said.

Economist Le Tham Duong, on the other hand, said a cap on interest rates may force banks to find ways around the new rule.

“An administrative order often results in dodging of regulations,” he said. “If corporate demand for dollar loans remains high and banks are unable to attract dollar deposits (at the new low rates), they will be forced to break the cap.”

Duong noted that local banks have already circumvented a similar cap on dong deposits.

The State Bank of Vietnam in February recognized the 14 percent rate cap on dong deposits established earlier by the Vietnam Bank Association.

News website VnExpress reported last week that many banks, including the bigger ones, were breaking the cap. As banks had trouble raising funds amidst soaring consumer prices, they tried to attract deposits with rates of up to 18 percent a year, the report cited an official of Vietnam Bank Association as saying.

Reported by Thanh Xuan 

Higher rates hurting economy

The Hanoi-based Southeast Asia Commercial Joint Stock Bank (SeABank) on Thursday raised deposit interest rates to 18 percent early Wednesday before reduced them to 13.5 to 14 percent.

Interest rates in Vietnam have soared over the past few weeks after the central bank signaled tighter monetary policies to curb inflation and stabilize the foreign exchange market.

While raising interest rates can help contain inflation, very high rates can hurt the economy, Tran Hoang Ngan, a member of the National Monetary and Financial Policy Advisory Council, told Thanh Nien Weekly. A deposit rate of 12 percent is reasonable, as it is higher than the anticipated full-year inflation rate of 11 percent or so, ensuring that depositors can cover the higher prices of goods.

Thanh Nien Weekly: Each time the interest rates rise, several explanations are offered, such as stronger capital inflow into the stock market, higher inflation, and tightened monetary policies. What about the latest increases?

Tran Hoang Ngan: The higher interest rates are due to increasing inflation and exchange rates. To curb inflation and stabilize the exchange rate, the central bank increased the base rate, pushing up the interest rates in the banking market.

However, the (interest rate) hike should be seen as a short term phenomenon. The central bank should consider bringing them to a reasonable level. In theory, when inflation rises, countries will increase interest rates, but the increase must stand at levels firms can accept. This is where the central bank should come in.

The latest interest rate hike has hurt local production and business, so current levels should not be allowed to continue.

Some say that the capital mobilization capacity of commercial banks is still limited, and that this has contributed to the sharp rise. Would do you agree?

High interest rates are also due to the weak management of commercial banks. They increase the cost of credit for businesses.

Under the mechanism of free interest rates, we apply a policy of negotiable interest rates, which makes banks compete against each other to lure deposits through increased deposit rates.

The banking network has extended after some rural banks turned urban in 2006. Operating on a larger scale, the banks’ expenditures have increased, so they have to raise their interest rates as well. Besides, banks looking to strengthen lending operations increase deposit rates to increase their capital supply. Thus, their lending interest rates increase as does the risk they face.

In general, local banks’ business effectiveness is still low. The prices of banking stocks, which were high several years ago, are now very low. Some banks have seen their stocks falling below their face value. This shows that the banks’ use of capital has not been efficient or effective, and that it is necessary to restructure the banking system, merging weak banks with stronger ones and dissolving those without sufficient charter capital.

In the context of the economy always needing foreign capital, how is credit supply affected?

Our savings now are lower than investment requirements, so we need foreign capital sources. However, there is a problem with this as well. From foreign direct investment (FDI) projects, we expected technology transfer and a reduction in imports. However, after 20 years (of opening the market to FDI) we receive outdated technology, and the FDI sector sees a trade deficit.

Vietnam is one of the countries with the highest interest rates in the world. This will discourage investors and encourage people to deposit money in banks. So, prolonged high interest rates will destroy small firms in the country, causing a shortage of goods, and therefore, increasing inflation again. The central bank should intervene to keep interest rates at a reasonable level.

What do you think is reasonable?

It is the correct thing to do, to accept high interest rates to curb inflation, but not at extraordinary levels. So, keeping the deposit rates at 12 percent is reasonable, ensuring that it is higher than inflation. Our country’s full-year inflation is estimated at 11 percent, so a 12-percent deposit rate can help depositors cover the higher prices they pay for goods.

Inflation in Vietnam is caused by a number of factors not decided by money supply. Some countries have an interest rate policy based on base inflation in which non-monetary factors are not calculated.

For example, prices of crude oil and food in the market are not increasing because of higher money circulation in Vietnam, but because of world supply and demand.

So it is necessary to pay attention to this issue. Interest rate adjustments should be based on the base inflation rate, not the general inflation index (or headline inflation rate that has a larger basket of goods and services).

The latter is a measure of living standards that can be used to adjust wages, but the base inflation rate should come into play in formulating interest rate policies.

Reported by Ngan Anh 

Loan sharks scam HCMC students

Students unable to repay debts fear for their limbs

Binh left his home in a nearby province and came to Ho Chi Minh City with dreams of a degree.

Struggling with the high costs of living in the city, he failed to pay his university fees in October and ended up borrowing VND5 million (US$256) from a friend.

When the friend asked him to return the money, Binh reluctantly went to one of the many loan sharks that lend money to cash-strapped students in the city.

“I had no choice. Banks and legal loan services won’t give me loans because I have no assets [to mortgage],” he said.

At a money lender’s in an alley off Tran Hung Dao Street in District 1, just steps away from the dormitories of the HCMC University of Economics and the HCMC University of Natural Sciences, Binh was “approved” for a loan at an interest rate of 21 percent per month.

To legalize the loan, Binh was made to sign a document saying he received the money as a deposit for a laptop he would deliver later.

Before he left, the lender warned the student with dire consequences if he failed to pay his debts. “They threatened to contact my family and cut off my limbs,” he said. Thankfully, he was able to pay off his debts within ten days.

But another student, Tu, was not that lucky. He was threatened and seriously bullied all November after failing to pay interest on a loan of VND11 million ($564). Fearing for his limbs and life, Tu borrowed money from his sister to pay off the interest. But he is still mired in debt.

According to Tu, hundreds of students have borrowed money from the same lender, identified only as C.

The 47 universities in HCMC attract thousands of students every year from around the country, especially the southern provinces. Loan sharks lurk around the universities and thrive on ripping off broke students.

Students get mired in extortionate interest rates, often ending up struggling to pay off just the interest, without any hope of getting out of debt.

Abundant bloodsuckers

Following a complaint from a victim student, Thanh Nien conducted an investigation and found hundreds of students who have seen their hardships turn into horrors.

Disguised as a relative repaying a student’s debt, a Thanh Nien reporter found that the loan shark popularly known as C. belongs to a ring with at least three unlicensed lenders around universities in HCMC.

He was told that he could pay the interest at any of the other “branches” in the city – at Street No. 2 near University of Technology in District 10, at D5 Street near a branch of Foreign Trade University in Binh Thanh District, and in the Thu Duc university area in Thu Duc District.

The service on D5 Street appears to be a pawn shop with a board advertising “low-interest loans with easy procedures.” A man called H. directed the “customer” to a nearby service on D2 Street to discuss the loan. However, he refused to lend money when the reporter presented an invalid student card.

Another loan shark in H.’s racket said many other loan sharks in Thu Duc university area charged even higher interest rates, of VND40,000 per day on a VND1 million loan, which works out to be 120 percent per month.

H. also claimed that the ring has tight connections with government and police officials who protect the illegal services.

According to state regulations, interest rates should be no more than 150 percent of the benchmark interest rate set by the State Bank of Vietnam. At the moment, the benchmark rate is 9 percent per annum, and the maximum interest rates charged by money lenders should not exceed 13.5 percent. Violating lenders can be punished by jail terms of up to three years and fines up to ten times the involved interest amount.

INVESTIGATION UNDERWAY

Following Thanh Nien’s report published Monday (December 6), the police in District 1 summoned 28-year-old Nguyen Manh Cuong, previously identified as C., for interrogation. Cuong, who operates the money-lending service on Tran Hung Dao Street confessed he had lent money to students at a monthly interest of 21 percent. He also admitted that he had forced borrowers to sign false documents saying they received the money as a deposit for laptops. However, he failed to say how many students had borrowed money from him. A subsequent police raid of his facility found records of 29 students who had borrowed a total of VND185 million. The police also found several leaflets introducing his services. Police said Cuong has so far not revealed any connections with other loansharks’ services in Binh Thanh District or elsewhere in the city. A District 1 police officer said they are investigating the case and are determined to crack down on the loan sharks. Meanwhile, several students who had borrowed money from Cuong told Thanh Nien that they received anonymous phone calls instructing them to pay their debt at a facility in Binh Thanh District. The Binh Thanh District police told Thanh Nien they would verify the information about the loan sharks operating in their jurisdiction.

Reported by Thanh Nien staff