(Adds comment from analyst in fourth paragraph)
Sept. 29 (Bloomberg) -- Vietnam’s central bank said it will cap interest rates on dong deposits that are non-term and those less than a month at 6 percent to address “liquidity risks,” amid concerns about the health of the nation’s banking system.
The State Bank of Vietnam will maintain the existing 14 percent rate cap on deposits of one month or longer, according to a statement on its website. The regulations will take effect from Oct. 1, it said.
Some banks have been offering interest rates as high as 14 percent for deposits as short as 24 hours, which creates “liquidity risks,” the central bank said in the statement. The central bank this month ordered lenders to comply with the 14 percent cap for deposits of one month or more.
“They’re closing a loophole that small banks were using to try to get around the cap on term deposits,” said Fiachra MacCana, managing director of Ho Chi Minh City Securities Corp. “The practical impact of this may be that more money will go out of the banking system into assets like gold, which could put a bit more pressure on the currency.”
Some banks previously offered clients incentives to entice deposit growth, taking the effective rate higher than 14 percent, Credit Suisse Group AG said last month. Vietnamese banks’ ability to mobilize deposits has been “disappointing” this year, limiting the lending capacity of the banking system, it said in a report.
“Depositors today don’t care about the quality of the bank, they just care about the interest rate,” Ly Xuan Hai, chief executive of Asia Commercial Bank, Vietnam’s biggest non-state- owned bank, said in an interview this month. “Because of that, very small, very badly managed banks, when they increase the interest rate for depositors, depositors will come to them.”
Vietnam’s banking system is facing a slowdown in credit growth, a deterioration in asset quality, and funding pressures after some companies reduced deposits as earnings weakened, Moody’s Investors Service said this month.
The deposit cap of 14 percent creates negative real interest rates, Moody’s said, making it harder for banks to attract funds to support its lending growth. Vietnam’s inflation rate in September was 22.42 percent.
Some of Vietnam’s small banks are under-capitalized and undisciplined, and the central bank should let “attrition or consolidation take its course” with these lenders, Credit Suisse said last month.
--Jason Folkmanis in Ho Chi Minh City and Nguyen Kieu Giang and Diep Ngoc Pham in Hanoi. Editors: Russell Ward, Linus Chua
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