Strong opinion against zero deposit interest rate
Strong opinion against zero deposit interest rate
here is strong opinion against reducing the Vietnam dong deposit interest rate to zero percent as proposed by VAFI, and is also being seen as a rigid administrative tool that could possibly lead to serious consequences for the market.
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In a talk with Saigon Investment, Mr. Truong Thanh Duc, Director of the ANVI Law Firm, said that businesses in particular and the economy in general, are facing severe difficulties because of the raging and ongoing Covid-19 pandemic, hence the current proposal to reduce interest rate needs deeper analysis.
JOURNALIST: - Sir, what are your thoughts on the recent proposal by VAFI?
Mr. TRUONG THANH DUC: - I think this is a proposal that lacks a scientific basis. The bank interest rate is based on the average rate of profit of the economy. It is the most typical principle that the market has gone through for a long time in millions of transactions and millions of customers. This also explains why there are times when interest rates are high and sometimes they are low, and why there are times when interest rates change because that is the market demand.
In the Vietnamese market, more than a decade ago, interest rates were extremely high, and we needed to reduce interest rates through many instrumental measures to regulate the market. For instance, right now if interest rates drop a lot, it will be very difficult to use tools to force interest rates to rise again. This is determined by the market.
When we borrow foreign currency, the loan interest rate is higher than the market rate. That is the element of risk assessment. Vietnamese market is risky, so there can never be a zero percent deposit interest rate. Of course, this will not mean that the market is completely free, but sometimes it still requires consideration of macroeconomic factors, the regulatory role of the State, and may still require some intervention to further reduce or raise interest rates. However, this absolutely cannot be imposed by extreme administrative tools, similar to the mistakes made in the past.
- Sir, there is an opinion that the current cash flow into banksis far too muchin excess. Is it necessary to take measures to prevent this?
- I agree that there should be measures to regulate cash flow. In my opinion, banks should lend less, though the main thing is still to do the service. If banking growth is too hot, it is dangerous for both the banking system and the economy. If the bank growth rate is less than 10% per year, it is acceptable, but when the bank grows above 10% per year, it will have to be reconsidered, because the risk to the economy begins. Especially in the context of the current outbreak of the Covid-19 pandemic, the hot growth banks have more grounds for concern.
However, in order to reduce input interest rates, that is to say, regulate cash flow, it is necessary to minimize the risk in the market. This is the deciding factor and something we have been working very hard on for many years but have not been able to succeed in so far. For example, the input is the deposits of individuals and organizations which must be calculated by tax on the profit of this cash flow. I made this proposal before and it was opposed by many people. For example, two years ago, there was a case where a customer deposited around VND 250 bn in the bank and then a risk incident occurred. The case was reflected on quite a lot in the media, but this money was an investment, not a saving.
Previously, there was a regulation that only workers, farmers, and laborers were allowed to deposit savings. Now, any person, organization, and business can send money to banks equally. In simple words, an individual with VND 100 bn, or an enterprise with VND 1,000 bn can both still deposit in the bank to enjoy interest, this is still true. However, it is necessary to consider this as an investment and should be taxed, as well as a way to limit the idle cash flow that pours too much into banks, instead of flowing into other investment channels, leading to market instability.
- Sir, it has been explained that the proposal of deposit interest rate to zero percent will help banks reduce output interest rate and businesses will also benefit, especially in the context of the current ongoing Covid-19 pandemic. What is your opinion on this?
- We completely agree that it is necessary to reduce interest rates to support businesses that are facing difficulties during the Covid-19 pandemic. However, the support must include both direct and indirect policies and must reduce the growth momentum of the banking industry.
The inhibition of the development of the banking channel will cause the cash flow to flow to other beneficial channels such as securities, real estate, stocks, etc. Wherever it is beneficial, the money will flow in. One market worth taking as a reference is China. We must see why China sometimes requires banks to have a reserve requirement ratio of more than 10%. This is to restrain the growth of banks, as banks themselves do not dare to lend to businesses anymore because it is not profitable. This is when the market shows signs of speculation, and risks appear. Only when the market grows well and businesses do well can they lend.
For Vietnam today, in the context of businesses facing difficulties, of course it is necessary to consider reducing bank interest rates. Although, how much to reduce depends on the market, and cannot arbitrarily be decided by rigid administrative tools, and must be indirectly through other economic measures. The goal this year is that our economy has to maintain a growth momentum of nearly 7% per year, which of course also comes with higher risks. This said, even if the interest rate drops to zero percent, but there are no measures and solutions, it will be difficult for this capital inflow to reach businesses, but rather it will move into high risk speculative channels instead.
-Thank you very much.
