The State Bank of Vietnam (SBV), the country’s central bank, on November 18 announced its decision to reduce the interest rate cap to 5% annually from 5.5% for deposits with maturities of one month to less than six months, starting today.

The State Bank of Vietnam's headquarters in Hanoi.

The deposit interest rate with maturities of less than one month is reduced from 1% to 0.8% per annum, while the maximum rate for deposit with maturities of one month to less than six months at people’s credit fund and micro finance services is cut from 6% to 5.5%.

The deposit rate for maturities of over six months is subject to each credit institution’s decision on the basis of supply – demand, stated the SBV.

Meanwhile, the SBV also ordered banks to lower the maximum lending rate for short-term loans to 6% from 6.5%, aiming to help companies operating in the fields of agriculture, high-tech industries and exports, among others. Similarly, such rate at people’s credit fund and micro finance services is down from 7.5% to 7%.

Since the beginning of the year, the SBV has managed the monetary policy flexibly along with fiscal and other macro-economic policies to maintain macro-economic stability and support growth, with inflation beneath the government’s 4% target.

In October, the consumer price index (CPI) expanded 2.24% year-on-year, leading to average growth of 2.48% between January and October.

A series of banks have reduced deposit rates of various terms. Unlike previous adjustments, this interest rate cut is taking place on a large scale, including both state-owned joint stock commercial banks such as Vietinbank and other small and medium-sized commercial banks such as VPBank, TPBank, VietCapitalBank, by 0.2-0.4%, stated Bao Viet Securities Company (BVSC) in its latest report.

Notably, on the same day, Vietcombank announced to reduce lending rates by 0.5 percentage points for all businesses. This is Vietcombank’s largest-ever cut on lending rates for businesses. According to Vietcombank, this interest rate cut will have a direct impact on its VND320 trillion (US$13.81 billion) outstanding loans, almost 50% of Vietcombank's total outstanding loan at the end of the third quarter in 2019. Also, this interest rate cut is expected to lower the bank's profit by about VND260 billion (US$11.21 million).

BVSC expected that abundant liquidity supported banks’ simultaneous deposit rate cuts. Interbank interest rates remained low at 1.8-2.2% per annum in the last four weeks, suggesting that banking system liquidity is no longer a burning issue. In addition, banks’ interest rate reduction also supports the government's another 0.5% lending rate cut in 2020.

However, the implementation of Circular 41, stipulating that banks and branches of foreign banks must regularly maintain the capital adequacy ratio (CAR) based on their financial statements of at least 8% in early 2020 is approaching, making it difficult for over 20 banks that do not meet CAR to cut deposit rates sharply, especially in medium and long terms.

On September 12, the SBV issued Decision No.1879 regulating a 25 basis-point cut to refinancing interest rate, rediscount interest rate, interest rate applicable to overnight loans, and interest via open market operation (OMO), effective since September 16. 

Following the decision, the refinancing interest rate is down from 6.25% per annum to 6%, rediscount rate from 4.25% to 4%, overnight interest rate from 7.25% to 7% and interest rate via OMO from 4.75% to 4.5%.