The impact of the move to lower interest rates of compulsory reserve on Credit Institutions (CIs) is limited and mainly reduces pressure on budget spending.
In the afternoon of August 6, the State Bank of Vietnam (SBV) announced decisions to further reduce operating interest rates with reductions from 0.2 to 0.5 percent per year, effective from August 6, 2020. Most notably, the SBV has reduced 50 basis points for the deposit interest rate of compulsory reserve at SBV to 0.5 percent per year.
KBSC Securities said that the impact of this move on CIs is limited and mainly reduces pressure on budget spending.
Specifically, the reduction of the compulsory reserve interest rate, although having an impact on the profitability of CIs, is not significant. The reason is that the compulsory reserves of banks are currently low, only about three percent for demand deposits and less than a year, one percent for deposits over a year.
According to the preliminary estimates of KB Securities Vietnam Joint Stock Company (KBS), the impact of this interest rate reduction on the total banking system is about 600 billion dong, of which SOCBs are most affected, around 60 billion dong per bank.
Meanwhile, this move also helps the budget reduce part of the cost in the context of budget deficit this year is expected to be high due to the economic support policies of the government this year under the influence of Covid 19 (including small and medium corporate income tax reduction packages, increasing public investment spending…).
Similarly, Bao Viet Securities Joint Stock (BVSC) also evaluates the recent interest rate reduction decisions of SBV with the main purpose of reducing operating costs for the SBV. This means the income of commercial banks from the compulsory reserve deposits deposited at the SBV will decrease accordingly.
BVSC supporse that the reduction of compulsory reserve deposit interest rate deposits is not the same as cutting other interest rates such as refinancing rate, rediscount rate… (helps to reduce borrowing costs of commercial banks, thereby helping to reduce interest rates in the market). Therefore, SBV reduces interest rates to pay for compulsory reserve deposits of commercial banks is not an act of further monetary easing.
