Dong flow to banks slows down, putting pressure on liquidity

by lexie Tue Oct 18, 2011 10:18 am

October 18, 2011

Dong flow to banks slows down, putting pressure on liquidity

Commercial banks all have reported the sharp decreases in the volume of capital mobilized since September, when banks began applying the 14 percent ceiling interest rate mechanism. Experts have warned that the decrease in mobilized capital means higher liquidity risk, while the pressure on the foreign currency market has also appeared, sooner than expected, partially because of the gold price increases.

Mobilized capital decreases put pressure on liquidity

General Director of Eximbank Truong Van Phuoc said that the capital mobilized by the bank has decreased by two percent in comparison with the previous month, while the lent volume has also decreased equivalently. From July to September, the deposits at Eximbank dropped dramatically by 4 trillion dong. The bank sometimes saw 400-500 billion dong withdrawn from the bank just within the day.

Other bankers declined to give concrete figures, but all have confirmed that they are facing the same problem.

Depositing money at banks has become no longer the biggest choice for people who have idle money. The deposit interest rates have been lowered to 14 percent per annum at the highest as instructed by the State Bank of Vietnam, which means that depositors cannot obtain the expected profit if they deposit money at banks.

People nowadays tend to use their idle money to buy gold. The gold price has been decreasing since mid September, and people believe that the gold prices have become low enough to buy in. Bankers believe that people have withdrawn money from banks to inject in gold, as they believe that the gold price keeps rising.

They also think that a big volume of money has been withdrawn from banks to be poured into the foreign currency market. Analysts all have warned that the demand for dollars would increase towards the end of the year, when businesses have to buy dollars to pay due debts. Therefore, people believe that it is now the right time to buy dollars.

As such, banks now have to compete with other investment channels, including gold and dollar, to attract capital.

Explaining the outstanding loans increases, Phuoc of Eximbank said that a lot of enterprises are facing too big difficulties which have forced them to scale down the production. Especially, many of them have to halt business or have gone bankrupted. The current lending interest rates prove to be unaffordable to businesses, even though the interest rates have been eased by a little.

The decrease in the capital flow to banks has immediately raised the worry about the liquidity of banks. This explains why the interbank market has heated up since mid September. In the first week of October, the overnight interbank interest rate increased sharply to 14.5-15 percent, while the rate for one week loans increased to 15-15.5 percent. The rates have been surged to 16 percent for two week loans and 16-17.5 percent for one month loan, higher than the ceiling interest rates applied to the deposits from the public.

Meanwhile, the overnight interest rate was only 12.7 percent per annum in the last week of September, while the rates for other terms of loans hovered around 13.36-13.93 percent per annum.

Pressure on exchange rate appears soon

The pressure on the exchange rate has appeared, sooner than previously expected. The interbank exchange rate was raised to 20,678 dong per dollar on October 13 after five times of consecutive adjustments.

Commercial banks have also adjusted their quoted prices. Vietcombank, for example, quoted the dollar prices at 20,880 (purchase) and 20,885 dong per dollar. Banks all tend to raise the purchase prices, thus narrowing the gap between the purchase and the sale prices.

The dollar trading volume on the interbank market increased sharply to 3014 million dollars (602 million dollars a day) in the last week of September, while the figure was 2641 million dollars only in the week before.

This does not surprise anyone at all, because everyone understands well that the demand for foreign currencies always increases in the last months of the year, in accordance with the increases of the trade deficit.

Director of an agricultural machine import company said that his bank debt will become due later this month. However, he has decided to buy dollars right now for fear that the dollar price would be increasing. The director bought dollars on October 13 at 21,450 dong per dollar, though the official quoted price was 20,885 dong per dollar.

http://www.vietfinancenews.com/2011/10/dong-flow-to-banks-slows-down-putting.html