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Deposit interest rate cap should stay for now

The central bank's plan to remove the interest rate cap on dong deposits is an ill-advised move, some experts say, stressing that the ceiling is the only tool that has proved effective in keeping the monetary market in check.

Policy interest rates including the base rate, the refinancing rate and the discount rate have failed to make any real impact in Vietnam since inflation is still high and instability remains a problem for the economy, economist Vu Dinh Anh said.

"The base rate, for instance, has been in place for 10 years, but it doesn't really mean anything. That's why there has to be an administrative tool, which is the rate cap," Anh said.

"What will the State Bank use to manage the market if the cap is removed?" he asked. "So for the time being, I'm in favor of having the cap because it is the only thing that can keep deposit rates at a reasonable level to support the goal of cutting lending rates."

The State Bank of Vietnam last week reduced the maximum rate that commercial banks can pay for dong deposits to 13 percent from 14 percent. Nguyen Van Binh, the central bank governor, said the cap may be removed in one or two quarters.

The deposit rate ceiling was introduced at the end of 2010, but was repeatedly breached by many lenders until last September when the central bank stepped up punishments for violators.

Vu Viet Ngoan, chairman of the National Financial Supervisory Committee, said administrative measures to interfere in the market are likely lead to unwelcome consequences, especially if they are not taken seriously.

But because liquidity of the banking system is not strong yet, it's necessary to sustain the rate cap for some more time, he said.

Nguyen Thi Mui, a banking expert, said if the limit is eliminated now, banks will start competing against each other again by raising deposit rates. It will be difficult to bring lending rates down then, she said.

Other experts, however, have called for the removal of the cap over the past year, arguing that the limit is an anti-market tool. The International Monetary Fund said last October that the ceiling should be abolished.

Lawyer Truong Thanh Duc of the Basico Law Firm in Hanoi told Vietweek that the cap has not been effective at all given that banks have tried different tactics to break it.

"So why not let the market adjust interest rates itself? The rate cap doesn't solve any problem, and it even stresses out commercial banks," he said.

Le Xuan Nghia, vice chairman of the National Financial Supervisory Council, agreed that the cap should be removed.

Local banks have been categorized and allocated with different credit growth limits, which means weak banks that tend to compete by offering high deposit rates are now under control, Nghia said.

The risk of interest rates spiking is not high because credit will not expand at a fast pace, he said. Even if deposit rates surge to 20 percent a year after the cap removal, rates are likely to fall down again, he said.

Nghia also said apart from policy rates, the central bank still has another powerful tool in store that can be used to influence money supply and interest rates the compulsory reserve ratio.

The central bank has been requiring reserve levels of up to 3 percent for dong deposits.

Nghia said the ratio in Vietnam is low, compared to around 20 percent in China. The requirement can be changed and applied to banks depending on their size, he said, adding that smaller banks should have smaller reserves.