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Vietnam central bank may remove deposit rate cap

Vietnam's central bank is considering either increasing the interest rate cap of 14 percent on dong deposits or terminating it altogether as banks complain about difficulties in raising funds.

A State Bank of Vietnam source told Thanh Nien that the bank may raise the cap to 15.5-16.5 percent and start imposing a lending rate cap of 18-19 percent.

The central bank may otherwise scrap the deposit cap and go with the proposed lending cap only, the source said, adding that the second option was being favored more right now.

The State Bank of Vietnam in February recognized the rate cap of 14 percent on dong deposits that had been established earlier by the country's bank association. Local banks are not allowed to offer perks or cash bonuses that would raise their rates above the cap.

Deposit rates at some banks, however, have exceeded that limit, with some banks even offering 19 percent. Lending rates are thus pushed to up to 28 percent, putting many businesses in a tough situation.

Cao Sy Kiem, former central bank governor, said only lending rates should be capped.

"At least the elimination of the deposit rate cap would create fair competition among banks," he said. "Meanwhile, a cap on lending rates will prevent very high rates, allowing businesses to survive."

Kiem, also chairman of the Association of Small and Medium-Sized Enterprises, said many businesses cannot afford interest rates of above 18 percent, so the central bank should consider setting a cap at this level.

Le Xuan Nghia, deputy chairman of the National Financial Supervisory Commission, told Thanh Nien that both options being considered by the central bank are not feasible.

Banks have found ways to break the deposit cap once, so it's possible they would do the same with a new lending cap, Nghia said. It can be even easier because they can impose various assessment and collateral fees on borrowers to bring lending rates up, he added.

What the central bank needs to do now is to stabilize the market, he said, noting that it should use the compulsory reserve ratio tool and stop restricting banks from lending more than 80 percent of deposits.