Vietnamese banks thirst for money

Not only businesses but banks themselves are also thirsty for money, reflected by their continuous interest rate hikes to attract deposits.

By the end of October, credit expansion was 2.4 times higher than deposit growth, along with increasing bad or doubtful debts.

In anticipation of the U.S. Federal Reserve's (Fed) November 2 interest rate hike, on October 25, the State Bank of Vietnam (SBV) increased regulatory interest rates by one percentage point for the second time in less than a month. Accordingly, the refinancing rate and maximum rate for deposits from one month to less than six months rose to 6% a year.

Responding to the regulator’s move, commercial banks massively pushed the interest rates for deposits of under six months to the ceiling, 6%, and 12-month deposits to 7.5-9% per year, equivalent to those before the Covid-19 pandemic.

It has led to increased lending rates, ending the period of cheap money and pushing commercial banks into a rate race. A representative of a bank said that lending interest rates now average 14-15% per year and are forecast to continue rising. Only in the last two to three months, this bank's lending interest rates have been adjusted five times.

Soaring interest rates, fluctuating exchange rates and lack of capital are the biggest problems businesses are facing. In fact, not only enterprises but banks themselves are also thirsty for money, especially after the arrests of leaders of real estate developers Tan Hoang Minh and Van Thinh Phat for violations in corporate bond issuance, which have had negative impacts on financial markets.

The SBV explained that the interest rate adjustment ahead of the Fed's decision aimed to relieve pressure on the exchange rate and forex market, contributing to stabilizing the macroeconomy and controlling inflation.

In the year to end-October, the whole banking system’s credit growth reached 11.35% while deposit expansion was only 4.78%. Hiking the regulatory interest rate ceiling for deposits in Vietnamese dong will help banks attract deposits, thereby ensuring the liquidity and safety of the banking system.

From October 31 to November 4, the central bank net injected more than VND74 trillion ($2.99 billion) into the system, most of which came from maturing treasury bills. The average Vietnamese dong interest rate on the interbank market cooled down last weekend, but still remains high, at about 7% per year for overnight term.

The SBV believes that the liquidity of the banking system remains stable and fluctuations in October mainly came from psychological factors. At a recent meeting with commercial banks, the central bank noted the liquidity bottlenecks in the market, and asked commercial banks to strengthen mutual support for the sake of ensuring the safety of the system and of each bank. The SBV affirmed that commercial banks in the system all ensure operational safety criteria in accordance with its regulations.

According to economist Nguyen Tri Hieu, in fact, banks are "stuck" in bad debts and corporate bonds.

According to Decree 65 amending a number of articles of Decree 153 on private placement of corporate bonds, issuers are allowed to repurchase bonds before maturity when they show signs of violations of bond issuance regulations.

"This may prompt issuers who violate bond issuance regulations to buy back bonds before maturity, otherwise they will be dealt with," Hieu said.

According to statistics, the total value of corporate bonds issued in the third quarter of 2022 plunged by 50.5% compared to the previous quarter and 70.9% over the same period last year to over VND60.63 trillion ($2.45 billion). Of which, the finance-banking industry accounted for the largest proportion, 82.5% of the total value of privately-placed bonds or VND48.68 trillion, down 39.5% quarter-on-quarter and 37.9% year-on-year.

Meanwhile, the number of bonds redeemed before maturity increased sharply. In September 2022, the total value of bonds bought back by businesses before maturity was VND28.83 trillion ($1.16 billion), up 199% over the same period last year, lifting the nine-month figure to VND142.21 trillion ($5.75 billion), up 67%. The total value of maturing bonds from now to 2024 is estimated to exceed VND745 trillion ($30.2 billion).

Corporate bonds used to be an effective channel to raise medium- and long-term capital for businesses and credit institutions in replace of short-term mobilization channels of banks and bank credit, but now it is putting pressure on the banking system when they are forced to pay off bonds before maturity. Banks are now in a dilemma as they cannot issue bonds to increase capital, but have to spend money to buy back bonds before maturity.

Hieu also said that the reported bad or doubtful debt ratio of over 5% is also causing cash flow stagnation. Bad debt will continue to increase in the fourth quarter when the SBV's circular on debt payment rescheduling and postponement expires.

Banks with a high loan-to-deposit ratio (LDR) will certainly have to actively lower the ratio, causing difficulties for capital flows in the market and forcing banks to restructure loans, step up debt collection, and expand capital mobilization to rebalance the LDR.

Although many commercial banks reported big profits mainly due to the reduction in provisions for credit losses in the third quarter, most of them have not fulfilled 75% of their yearly targets. This will be a hurdle to their plans to raise capital and issue bonds next year.