Monday, September 26 2016

VietNamNews

Dollar deposit rate of above 0% proposed

Update: May, 26/2016 - 06:00
SBV cut rates for dollar deposits to zero per cent in December 2015, in order to prevent the hoarding of foreign currency in the country.— Photo hanoimoi.com.vn
Viet Nam News

HÀ NỘI – The central bank should evaluate the possibility of raising the interest rate on US dollar deposits instead of keeping it at zero per cent as it currently is to avoid side effects.

This advice was suggested by industry experts according to Pháp luật thành phố HCM (HCM City Law) newspaper.

The central bank had cut rates for dollar deposits to zero per cent in December last year, aiming to prevent the hoarding of foreign currency in the country.

For the past five months, the policy has proven to be an effective measure, helping the country stabilise the foreign exchange and monetary markets.

However, experts said the zero-rate policy should only be a temporary measure and should not be maintained for too long as it could have side effects.

The administrative control measure has achieved its goal and should be changed in light of current domestic and international changes, they said.

Economist Nguyễn Minh Phong said local people are not familiar with programmes to deposit their dollar savings with no interest, but they do not like to convert these savings into Vietnamese đồng. The dollar holders, therefore, have withdrawn their dollar savings from banks to invest in other channels.

In addition, a dollar interest rate hike is indispensable to avoid the outflow of foreign currencies to organisations overseas, especially when the Fed increases its interest rate, Phong said.

Another expert, who declined to be named, said foreign currencies have always played an important role in the local economy. Local dollar holders still consider savings an investment channel, so they do not want to deposit their money in banks when the zero rate policy is in effect. Meanwhile, firms still need dollar-based loans to make payments. This is why some banks have managed to offer dollar deposit rates above zero to raise funds for the loans.

As a number of banks have not obeyed the zero rate rule, the central bank on May 6 had to order banks not to offer higher-than-permitted interest rates for dollar deposits, warning that banks found breaking the rule would be banned from opening new branches, transaction offices and automatic teller machines and from running certain operations.

Economist Đinh Thế Hiển said when banks see a demand for dollar-based loans of firms that have no deposit source, some of them will try to find loopholes in the rule.

This causes the market to lack transparency, Hiển said.

Hiển said the authorities should adjust the foreign currency policy flexibly in accordance with the market economy and the current situation.

Experts said the central bank should set the rate to at least 0.5-1 per cent per year to encourage dollar savings in commercial banks. They said the dollar source could help cut the interest rate in the đồng and create favourable conditions for firms to cut costs.

Hiển suggested the central bank should first apply the rate of 1-1.5 per cent per year for dollar deposits in 6- or 12-month terms. He expected the new rate to encourage local dollar holders to keep their savings in banks for long periods.

This could also help local banks attract sources of funding from overseas Vietnamese, especially when Việt Nam needs capital for development, he said, adding it was regrettable that a significant amount of money in dollars accumulated by locals had not been invested to meet the country’s economic, social and development needs.

A commercial bank representative, who requested to be anonymous, said when the zero rate policy went into effect, some dollar holders continued making deposits at the bank but chose a demand deposit instead of the 6 or 12 month terms they had previously chosen.

This action causes banks to face foreign currency liquidity risks, besides not being able to become a foreign currency source for loans, the representative said.

The representative added that the zero rate policy could cause a reduction in remittance sources that flow into Việt Nam with the intention of making a profit on the difference in interest rates. - VNS

Send Us Your Comments:

See also: