Deposit rate drops ensure banking system stability

Deposit rate drops ensure banking system stability

Vietnam’s move to cut treasury bill rates, inject long-term liquidity, and support lower deposit rates is a strategic step to ensure banking system stability and reduce capital costs.

The State Bank of Vietnam (SBV) is implementing a series of measures to reduce capital costs for commercial banks, thereby stimulating credit growth and supporting the economy. It has decided to halt the issuance of treasury bills, lower the open market operations interest rate from 4.1 to 3 per cent, and extend the maturity period for purchasing valuable papers from 28 days to 91 days.

“This is highly significant in ensuring stability for the banking system. By injecting long-term liquidity instead of just short-term support, the SBV is providing a more stable capital source, enabling banks to better plan their capital management,” said Nguyen Quang Huy, CEO of the Faculty of Finance and Banking at Nguyen Trai University.

In addition to halting treasury bill issuance, the SBV is also injecting liquidity into the market through short-term treasury bill contracts with maturities of 7–28 days.

Thanks to the SBV’s proactive liquidity support, interbank overnight lending rates have dropped from nearly 5 per cent after the Lunar New Year to 3.88 per cent by the end of the trading session on March 7.

During the first trading session of the following week, interbank interest rates slightly rebounded, with the overnight rate at 4.19 per cent, the one-week rate at 4.34 per cent, the two-week rate at 4.06 per cent, and the one-month rate at 4.28 per cent.

After four consecutive weeks of net withdrawals, the SBV resumed net injections. On March 11 alone, it injected over $410 million into the market.

“These moves not only enhance liquidity for the banking system but also create conditions for deposit interest rates to gradually decline, paving the way for sustainable reductions in lending rates. However, for this policy to be truly effective and mitigate long-term risks, the SBV must exercise strict regulation and supervision,” added Huy.

The SBV has also extended the maturity period for certain reverse repos to 14–28 days while maintaining the interest rate at 4 per cent, ensuring stability in long-term capital sources. This, in turn, facilitates maintaining a low medium-term interest rate environment and abundant liquidity.

“Strong intervention in medium- and long-term interest rates, such as imposing ceilings on deposit or lending rates, is unlikely in the short term. The regulator prefers these rates to be determined by market supply and demand dynamics. When liquidity is ample and interbank rates decline, banks will naturally adjust their deposit and lending rates accordingly,” said Bui Van Huy, director of Investment Research at FIDT.

Speaking at the banking credit promotion conference covering Phu Tho, Vinh Phuc, Ha Giang, Tuyen Quang, Lao Cai, and Yen Bai on March 11, SBV Deputy Governor Dao Minh Tu said that the central bank ensures liquidity for commercial banks, eliminating the need for aggressive deposit rate competition.

“Banks require capital and liquidity to lend, prompting them to raise deposit rates. However, we are adopting a more flexible approach by utilising monetary policy tools, particularly refinancing operations and interbank market participation, to address funding needs in the secondary market. Deposit rates will only be raised when absolutely necessary,” said Tu.

In the short term, the SBV aims to stabilise deposit rates while gradually reducing lending rates. This directive is expected to be incorporated into the business plans of the four state-owned commercial banks of Agribank, BIDV, VietinBank, and Vietcombank, requiring them to cut costs to facilitate lower interest rates.

“When these four biggest state-owned banks significantly lower their rates, private commercial banks, including some smaller ones, will have no choice but to follow suit,” added Tu.

“Interest rates are ultimately determined by commercial banks as they reflect the price of capital. Banks have the right to set deposit and lending rates. However, within the broader financial landscape, one must consider the collective interest before individual gain.”

In the retail market, commercial banks continue to lower deposit rates.

Since the SBV’s meeting with the banking sector to implement the prime minister’s Directive 19 on February 25, a total of 20 commercial banks have reduced deposit rates as of March 12.

On March 12, Vikki Bank announced a new deposit rate schedule, cutting its highest rate by 0.5 percentage points to just 3.9 per cent per annum for one-month deposits.

Vikki Bank still offers a rate of up to 7.5 per cent per annum for 13-month term deposits with end-of-term interest payments. However, the minimum deposit required to qualify for this rate has increased from $8 million to nearly $40 million.

Meanwhile, BVBank, Cake by VPBank, VRB, Dong A Bank, VietABank, HDBank, BAOVIET Bank, and ABBank, are listing long-term deposit rates at 6 per cent per annum without minimum deposit requirements.

Pham Quang Thang, deputy CEO at Techcombank, stated that this bank has consistently maintained stable interest rates while striving to reduce funding costs to enable lower lending rates.

“Our deposit rates mainly focus on short-term tenors. To restructure our capital base, Techcombank has increased rates for six-month deposits while lowering rates for other terms. Overall, the bank’s average deposit rate remains on a downward trend, aligning with the general direction of reducing lending rates,” Thang said.

VIR