Hanoi Times – Commercial banks have increased deposit interest rates and limited loans to deal with the VND capital shortage.

The VND interest rate race has not slowed down after Tet as experts forecast, but keeps escalating. A new wave of increasing interest rates is occurring after a similar trend occurred in late 2007.

VIB Bank now offers the highest interest rates for VND deposits of different terms after it announced it would raise interest rates by 0.12-0.24%.

The interest rate for 12-month term deposits applied by most banks has reached 9.6% per annum, while some offer 10% per annum. Some of the banks have raised interest rates twice within o­ne month.

Experts say the interest rate race will be increasingly fierce as more banks become operational. In general, late comers o­n the market always have to attract clients by offering higher interest rates. Sources say that nearly 200 applications for setting up banks are awaiting the State Bank of Vietnam’s approval. In the near future, six foreign banks will establish branches and five licensed banks will become operational.

Experts all forecast that interest rates will be even higher in the time to come, as the central bank tries to tighten credit by requiring a higher compulsory reserve ratio.

Commercial banks all are seriously lacking VND. The inter-bank market opened the New Year with a ‘soft’ overnight interest rate of 6.52%. However, the rate soared by four times o­ne month later, which shocked bankers and even policy makers.

On January 29, 2008, the overnight interest rate stayed at 10.86% per annum. Just o­ne day later, the rate skyrocketed to 20% and then 25%, and reached the highest peak of 27% for the first time ever.

What was behind the interest race was commercial banks’ serious VND shortage.

The difficulties in mobilizing capital have forced several banks to limit lending, especially the funding of real estate investments.

At the end of 2007, many commercial banks announced they would reserve VND 200-300 billion for consumer lending with no mortgage required. However, some banks have stopped disbursing for these programs because they cannot find enough capital.

Limiting lending is actually worsening the problem, which will surely affect the business performance of local banks, whose earnings come mostly from credit operations.