Vietnam Tin Nghia and Saigon Joint Stock Bank are offering the sky high interest rate for gold deposit at 3.2 percent per annum. Eximbank has not only raised the gold deposit interest rates, but also raised the Euro deposit interest rate to 3 percent per annum and Canadian dollar interest rate to 1 percent per annum. HSBC is now paying 4 percent per annum for Australian dollar deposits.

Mobilizing capital at any costs

After the State Bank of Vietnam set caps for dong deposits (commercial banks are not allowed to pay more than 14 percent per annum in interest rate for more than one month term deposits, and more than 6 percent per annum for short term deposits), small banks have been facing more serious problems with their liquidity.

Since both small and big banks offer the same interest rate of 14 percent for dong deposits, people tend to withdraw money from small banks to deposit at big banks. As a result, small banks have seen their capital decreasing dramatically, which has caused big liquidity problems.

It is now even more difficult for small banks to mobilize capital these days because of the information about the restructuring of the banking system, under which, people believe that a lot of banks will get dissolved or merged into others.

Especially, a lot of people have decided to make deposits at many different banks, after they heard that a new law on deposit insurance would be promulgated, which said that depositors would get only 50 million dong as compensation when risks occur.

Therefore, small banks have to try all possible measures to mobile capital. Some commercial banks have to borrow money from finance companies at high costs. Meanwhile, others have raised the gold and non-dollar interest rates (no cap has been set by the State Bank on gold and non-dollar foreign currency deposits) in order to mobilize more capital.

The move by the banks has been described as a “wise move” which allows banks to successfully mobilize capital, while they can avoid the caps of 14 percent and 2 percent set by the central bank for dong and dollar deposits, respectively.

Besides, the move also helps commercial banks diversify the currencies.

Exchange rate risks more obvious

Meanwhile, finance experts have warned about the high risks banks may face when they are too concentrating on raising capital in non-dong and non-dollar currencies.

Most commercial banks, when trying to attract non-dollar capital, aim to improve their liquidity. However, they would face the risks in the exchange rate, experts say, because most of the small banks lack management experiences in dealing with the non-dollar exchange rate fluctuations.

Though banks mobilize gold or non-dollar currencies, their main goal is attracting dong capital. Therefore, after mobilizing gold or non-dollar currencies, they would convert the capital into dong.

There are two ways to do that. First, they can sell the foreign currencies for dong. In this case, banks would face the exchange rate risk.

Second, they can use the capital as the collaterals at big banks to borrow dong on the interbank market. This method allows banks to ease the liquidity problem and avoid the exchange rate fluctuations. However, the banks would have to bear very high interest rates when borrowing money.

In general, the exchange rates of non-dollar foreign currencies against the dong are always calculated by comparing with the dong/dollar exchange rate. As such, the exchange rate of a foreign currency against the dong will depend both on the exchange rate of the currency against the dollar on the international market, and on the dong/dollar exchange rate on the Vietnamese market.

At present, banks have reasons to feel secure about the stability of the dong/dollar exchange rate, because the State Bank of Vietnam has committed not to devaluate the dong by more than one percent by the end of the year. However, the exchange rates of foreign currencies against the dollar have been fluctuating on the world market.

Source: SGTT