Money is set to gush into economy after rate move

Authorities have removed the last lending rate restrictions with an expectation that banks will accelerate pumping money into the economy.

An Eximbank source described it as a “decent move” to bring freedom back to the banking system by setting lending rates in tandem with different credit risks.

With Circular 12/2010/TT-NHNN released on April 14, the State Bank removed the cap on banks’ short-term lending rates, which were previously capped at 1.5 times of the base rate. The base rate stood at 8 per cent. Earlier in March, the authorities removed caps on medium and long-term lending rates.

State Bank governor Nguyen Van Giau said that a floating lending rate mechanism would stabilise the credit market, encourage banks to increase loan extensions and lower market lending rates.
“Via discussions with banks from north to south, bankers said that they would lower lending rates to around 14-15 per cent, per year from the current 15-17 per cent, per year.

With a 6.5 per cent gross domestic product (GDP) growth target, easier access to banking credits will be needed for local enterprises,” said Giau.

However, the Eximbank official said that bringing down the market lending rate would take some time. “Mobilisation is based on depositors’ interest rate expectations. The only way that the State Bank can ensure that the rate goes down in a timely manner is by extending loans to banks via open market operations (OMO) in like three months,” said the Eximbank official.

Currently, the State Bank is pumping money into the banking system via an OMO window, with terms from one week to two months and with valuable paper such as government bonds.

Economist Vu Thanh Tu Anh agreed that lowering the market lending rate, currently at 15-17 per cent per year, was almost impossible to meet in such a short time.

“The government certainly wants to see lower lending rates, but the market talks. Over the past two months, mobilising rates went up to 13-14 per cent, per year. We cannot expect banks to extend loans at 11-12 per cent, per year right now.

Banks will also have to lower deposit rates, but this has to be in tandem with depositors’ reactions. Whether depositors accept a lower rate or not is still an open question,” said Mr. Tu Anh.
However, he concluded that lending rate liberalisation was a good move.

“It is simply a market-oriented policy,” said Mr. Tu Anh. The Eximbank official added that no bank wanted to be first to lower deposit rates, with concerns that depositors would simply migrate away to other banks offering more attractive rates. 

Source: VIR

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