The State Bank of Vietnam (SBV), the country’s central bank, has announced its decision to cut the rate on banks' reserve requirements from 1.2% per year to 0.8% for the first time in 14 years.

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Additionally, interest rates for deposits in excess of VND reserves are 0% per year, while the interest rate for required reserves in foreign currencies is 0% per annum, and the interest rates for deposits in excess of the compulsory foreign currency reserves are 0.05% per year.

Reserve requirements are the cash minimums that must be kept on hand by banks in order to meet the central bank's requirements. The bank cannot lend the money but must keep it in the vault, on site or at the central bank, in order to meet any large and unexpected demand for withdrawals.

Banking expert Nguyen Tri Hieu said a reduction of reserve requirements would help banks reduce expenses, in turn expanding its lending capacity and boosting profit.

However, expert Can Van Luc said with the required reserve amount of banks at 3%, a reduction of the rate for reserve requirement to 0.8% would not have much impact on banks’ profitability, but at the same time to relieve pressure on the state budget, as interest payment for such reserve requirements is being taken from the state budget.

Sharing the same view, Bao Viet Securities Company (BVSC) said the reduction of interest rates on compulsory deposits and excess compulsory reserves has two main purposes.

Firstly, it is to encourage banks that have excess liquidity, regularly have deposits in excess of the minimum required reserved at the SBV to increase lending activities to the economy instead of leaving the money at the SBV. When the opportunity cost of lending is reduced, commercial banks may consider increasing lending more.

“It is likely that the credit growth in the first 11 months of the year is quite far away from the target of 14%, so the SBV is strengthening solutions to boost credit,” stated BVSC.

According to BVSC, this move is also "in sync" with a series of recent monetary policies related to reducing the ceiling interest rates and lending to priority areas, such as the reduction of OMO lending interest rates and credit interest rates, among others.

Other countries like Japan and Europe are applying negative interest rates (-0.1% and -0.5% respectively) for the money deposited by commercial banks. This means that commercial banks even have to pay a fee to the central bank instead of enjoying interest.

Secondly, the reduction of interest rates paid for minimum required reserves also helps the SBV save a certain cost in the policy management process, which BVSC considered this second purpose as an important one.