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Paradox: short-term deposit interest rates higher than long-term   2008-10-10 - Tien phong

Duong Thu Huong, Secretary General of the Vietnam Banking Association (VNBA), said that a paradox exists in banks’ interest rate policy. Short-term deposit interest rates are now higher than long-term interest rates, which doesn’t normally occur unless there are problems with liquidity.


Banks should only apply higher short-term than long-term interest rates when they are facing problems in liquidity

Duong said that VNBA chaired a meeting on October 8 with its members in Hanoi to discuss the interest rate policies for the time to come. A similar meeting is scheduled to take place on October 9 with HCM City-based banks.


Huong said that banks should only apply higher short-term than long-term interest rates when they are facing problems in liquidity. When liquidity is no more a problem, they should follow the principle that longer-term deposit interest rates should be higher.


Huong said that if banks maintain the current interest rate policy, they will face problems in capital sources.


Short-term deposits (1-2 week) account for the biggest proportion of capital mobilised by banks, while banks mainly provide long-term (1-2 years) loans.


“The curved line that shows interest rate movement is irregular, and needs to be adjusted,” Huong said.


Pham Huy Hung, Chairman of the Management Board of VietinBank, also thinks that long-term deposit interest rates should be higher than shorter-term rates. However, he added that banks should sit together to find a common voice in the adjustment of interest rates.


A representative of the Hanoi branch of the State Bank of Vietnam also said that there are latent high risks in the interest rate policy currently applied by banks.


When asked to give predictions about interest rates’ movements in the time to come, the official said that if the consumer price index increases steadily by 0.2% per month as expected, deposit and lending interest rates will be lowered by 0.5-1% for all terms of loans and deposits.


Meanwhile, other bankers have told the press that interest rates will decrease step by step, while businesses should not expect sharp falls.


A representative of Techcombank also thinks that banks should slash their deposit interest rates as the CPI increased very slowly in September at 0.18%, expected inflation rates are expected to decrease in the time to come, and the liquidity of banks has considerably improved.


According to the State Bank of Vietnam, since the bank decided to raise the interest rates on compulsory reserves from 3.6% to 5% per annum, state-owned banks and Vietcombank have applied the new lending interest rates, which see the decreases of 0.5-1.8% per annum from the previous levels.

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