The fact that “big” state-owned commercial banks announced to reduce interest rates is creating more pressure for small banks.
At the conference of implementing tasks of the banking industry in 2019 took place on 9th January, two State-owned commercial banks, Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) and Vietnam Bank for Agriculture and Rural Development (Agribank), announced to reduce lending interest rates for priority sectors. Specifically, Trinh Ngoc Khanh, Chair of Agribank’s Board of Members, said that in response to the call of the Governor of the State Bank of Vietnam (SBV), right from the beginning of 2019, Agribank will reduce 0.5 percent of the lending interest rate for five priority sectors according to Circular 39/2016/TT-NHNN dated 30th December 2016.
Meanwhile, Vietcombank also announced a sharp reduction in interest rates to support businesses borrowing dong operating in priority sectors according to the SBV’s regulations, such as high-tech agricultural applications and start-ups in 2019. Specifically, this bank will apply the short-term dong lending interest rate of up to six percent per annum (p.a.), equivalent to 0.5 percent lower than the ceiling regulated by SBV, applied to all outstanding loans and new loans in 2019; at the same time, it also decreased interest rate by 0.5 percent p.a. in 2019 for existing medium and long-term loans in dong of businesses.
The action of lowering interest rates of these two big banks is not surprising to many people when the interest rate level in 2019 is forecasted to still be under pressure.
According to Le Duc Thuy, former Governor of SBV, the interest rate in 2019 is likely to stay at a high level as at the end of 2018. Dr Can Van Luc, BIDV’s chief economist also warned: “Vietnam may have to raise interest rates slightly according to the rise of the world market, which is the risk that businesses need to pay attention to.”
In fact, deposit rates continue to increase in the last days of 2018 and in early 2019. Currently, interest rates for deposits with tenors of less than six months have been pushed up by banks to 5.5 percent p.a.; while the six month deposit rate was pushed up to 8.2 percent p.a.; the highest nine month rate is 8.3 percent p.a.; 12 months rate is 8.55 percent p.a.; over 24 month rate is 8.6 percent p.a. Vietcombank itself has increased deposit rates many times in the last months of 2018.
Statistics from the National Financial Supervisory Commission show that, in 2018, the average deposit interest rate increased from 5.11 percent in 2017 to 5.25 percent in 2018; the average lending interest rate in 2018 also increased to about 8.91 percent compared to 8.86 percent in 2017.
Nghiem Xuan Thanh, Chair of Vietcombank also acknowledged that the reduction of 0.5 percent p.a. interest rate for both short, medium and long-term loans makes Vietcombank reduce about 450 billion dong profit in the near future.
Noting the Vietcombank’s effort to support the business community with the move to reduce interest rates, but analysts also said that it is the thing that the bank should to after a successful year of 2018. For example, Vietcombank’ pre-tax profit in 2018 reached more than 18 trillion dong. Obviously, spending 450 billion dong to reduce interest rates is too small compared to the above profit.
However, this move of the big banks is creating a great pressure on small banks. If the interest rate is not reduced according to the big banks, the risk of losing customers is huge. However, reducing interest rates may cause small banks to suffer losses when the average of these banks’ funding costs is often much higher than those of big banks. The difficulty is even more when with the current policy of SBV; it is likely that the credit room of small banks is also very low, while credit is still their main source of income.
All of this will create deep deviation among banks and the merger story to increase financial capacity and competitiveness is once again prompted.
