Story: ANH THU
Photos: SHUTTERSTOCK

Many people and business owners are concerned about rising interest rates, especially when there appears to be no end in sight.

From September 22, the State Bank of Vietnam (SBV) increased the regulatory interest rate for short-term savings under six months by 1%, making interest rates the hottest topic on the front page and in casual conversations. The story appears to be getting hotter with each passing week.

Immediately after the SBV increased the regulatory interest rate, small banks began to quickly raise their deposit interest rates, only for the Big 4 banks (Vietcombank, BIDV, Vietinbank, and Agribank, banks whose capital mostly comes from the state) to enter the deposit interest race less than a week later. The following week, small banks began to go all in on the interest rate race. With each passing week, the deposit rate is rising to new heights. As a result, many people are becoming more concerned about not only which banks offer the best savings rates, but also whether interest rates will continue to rise and when this rise will come to a halt. Before delving into that question, several causes underlying soar

Growth disparity between deposit mobilization and credit growth

During the first nine months of 2022, credit growth increased by more than 10%, while deposit mobilization only grew by 4%. The 6% difference was more than enough for banks to mobilize savings from citizens. To attract deposits from citizens, banks were compelled to raise their interest rates.

Central banks in various countries are raising interest rates to curb inflation

Global inflation and imported inflation

The bad news for Vietnam and other countries with high raw material import turnover is that inflation in the US and many other countries is currently very high. In the United States and European Union (EU), inflation has risen steadily in 2022, setting a new record for the past 40 years. In June 2022, the US experienced an inflation rate of 9.1%. In July, the EU set a new record for inflation at 8.9%, marking the ninth consecutive month of rising inflation. According to statistics, central banks in various countries had to raise interest rates 278 times in the first nine months of 2022 to curb inflation.

Interest rate hikes cause the dollar to rise, harming countries that rely heavily on imported raw materials, such as Vietnam. Given the broken global supply chains, a stronger dollar will greatly impact production stabilization while also aggravating cost-push inflation due to imported inflation.

Excessive investment in real estate; short-term capital use for medium and longterm loans

According to economic expert Dinh The Hien, “Survey results show that 70% of real estate purchases are financed by bank loans.” Real estate loans are typically medium-to longterm loans in nature. However, the SBV required that, from October 1, 2022, the short-term capital ratio for medium and long-term loans be reduced from 37% to 34%.

 

With loan recovery becoming more difficult due to low real estate liquidity, banks must enhance mobilization to compensate for their short-term capital needs, particularly as many businesses require cash withdrawals at the end of the year. To mobilize capital, banks have no choice but to increase their interest rates. It is the price that they must pay for earmarking too much short-term capital for medium and long-term loans.

Bond bottlenecks

Since new regulations are trending toward a safer direction, bond issuance has become more difficult and is no longer a refinancing option for many businesses. One new regulation on “professional traders” may deter many people from buying privately-placed bonds since professional traders are now defined by having a stock portfolio with a minimum average value of VND 2 billion in the past 180 days. The stock portfolio is also determined by the assets of the trader, excluding loans. Bond bottlenecks are forcing businesses to return to bank credits, increasing credit demand. As the demand for credit increases, so will interest rates.

Interest rates in Vietnam are predicted to keep rising in the upcoming fiscal year

Bad debts on the rise

According to FiinGroup, the total bad debts of 27 listed banks increased by 20% as of June 30, reaching VND 120,938 billion, while group-5 debts (possible debt losses) increased by 40%, reaching VND 62,316 billion, accounting for 51.5% of all bad debts. The proportion of bad debts in the banking industry has risen from 1.84% at the beginning of the year to 2.13%. The service-debt coverage ratio has surged from 113% to 118%. The rapid increase of bad debts is now forcing banks to forego profits in order to set aside a provisio

The struggle to retain customers

When the SBV first adjusted the deposit rate ceiling, numerous commercial banks raised their short-term deposit interest rates with different tenors to the maximum allowed limit. Only four days later, three out of four Big Banks (Vietcombank, VietinBank, and Agribank) modified their deposit interest rates. By early October, BIDV had no choice but to join the race. In reality, if small banks increase their interest rates to mobilize deposits from savings accounts, big banks must follow suit to retain their customers. Small banks will then be forced to raise interest rates or create new incentives to attract savings as they cannot possibly compete in terms of prestige, credibility, and security with the Big Four. As a result, the interest race begins and intensifies.

Creation of new fiscal space in response to exchange rates

Stabilizing exchange rates is currently one of Vietnam’s top priorities, as rising exchange rates will depreciate the VND and drive up inflation, severely affecting the lives of many low-income people. In addition, when exchange rates increase, people tend to withdraw their savings and invest in other assets, such as foreign currency or gold, to maintain the value of their assets. Therefore, following the Swap point theory, in order to retain saving deposits, banks will need to raise interest rates so that people feel more secure when holding VND rather than USD. Increased interest rates can help relieve pressure on the increasing USD/ VND exchange rate and create more fiscal space for policymakers to better adapt to the Federal Reserve (FED)’s upcoming interest rate hikes. In 2022, the FED raised interest rates five times, and it will almost certainly do so again this November. They have also sent out a strong message of maintaining a high regulatory interest rate, despite forecasts that the US may enter into a recession in the next 12 months. Most of the above reasons are either long-term or international issues that Vietnam can’t resolve on its own. Therefore, many businesspeople predict that interest rates will continue to rise. However, memories of the 2011-2012 era, when interest rates were between 15% and 20%, still linger, haunting many businesses.