This week the Vietnam Banking Association will hold a meeting that gathers banks engaged in the ongoing market interest rate feud.

After several commercial joint stock banks raised their deposit interest rates, concern over a domino effect that could lead to increased interest rates among state commercial banks, pushing the market interest rates up, thereby influencing investment activities.

Some bankers said that it is difficult to arrange to lower interest rates through the Vietnam Banking association, except for the prevention of a massive increases on interest rates.

There are differing views on interest rate issues in the domestic banking sector. Some said that it is “abnormal” for so many banks to be increasing their deposit rates when the capital market is in surplus. In fact, credit growth has been much lower that capital raising. Most of state commercial banks have low credit growth while capital raising growth is as high as 20%.

Some others believe that increased interest rates are normal as joint stock banks still lack capital, but cannot borrow from larger banks because the monetary market is still imperfect. Increased deposit interest rates at their current level are not high and therefore don’t put pressure on loan interest rates. In addition, with the predicted inflation rate for this year, the real loan interest rate (around 4%) is not high.

Le Xuan Nghia, Director of the State Bank of Vietnam’s Banking Development Strategy Department, said that interest rate developments recently have “had their own reasons”.

State commercial banks have the advantage in terms of prestige, network, and clients so they easily raise capital. While there are signals of capital surplus now, it doesn’t mean that capital will continue to be surplus, because there are many large projects that banks have committed to provide with loans in the near future.

According to Mr Nghia, raising capital is a vital issue for each bank. With current market conditions, capital raised should be being to other banks. This is the reason many banks continue to raise capital.

Regarding the meeting for the debate of interest rate increase this week, an official of a state commercial bank said that it was not a concern among large banks.

“It is easier for small banks to adjust their interest rates. In my opinion, if the market doesn’t fluctuate strongly, it is difficult for state commercial banks to raise interest rates, especially when the compulsory reserve rate is high,” the official said.

Two years ago, aiming to reduce the consumer price index through monetary measures, the SBV increased the capital re-granting interest rate and discount rates as well as the mandatory reserve rate for commercial banks.

At the end of 2005, once again the SBV increased these interest rates, measures brought about certain effects when they helped cut the credit growth rate, reducing the monetary volume in the market to support price index stablisation.

According to the banking official, the compulsory reserve rate of 5% for VND and 8% for USD increases capital raising costs for banks. If the SBV wants to lower interest rates, it must consider reducing the mandatory reserve rate.