Home News Vietnam to limit bank lending from short-term funds

Vietnam to limit bank lending from short-term funds

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ImageVietnam will restrict commercial banks from giving loans with short-term funds to ensure the stability of the banking system, according to a statement on the central bank's website Monday.

State Bank of Vietnam Governor Nguyen Van Giau has set a maximum limit of 30 percent of short-term funds that banks can use to offer medium- to long-term loans.

The move is "to ensure the safety for lenders and especially sufficient liquidity in the banking system," the central bank said. Previously, the limit was 40 percent of short-term funds.

The restrictions will come into effect 45 days from the date of the announcement, the central bank said.

"The central bank will limit lenders from offering certain kinds of loans on concern the pressure for inflation to return will be more if banks continue raising interest rates to lure more cash like now," said Pham Phuong Lan, head of bond and currency trading at Bank for Investment & Development of Vietnam in Hanoi.

Major banks, including the country's largest lender, Agribank, have increased rates by 0.1-0.3 percentage point on deposits ranging from three to 24 months, the State Bank of Vietnam said in its weekly money market review.

State-owned banks were offering 8.2-8.5 percent on 12-month dong deposits, up from 8.19 percent the previous week.

The interbank overnight deposit fixing has jumped 1.73 percentage points this month, according to data compiled by Bloomberg.

"Along with the positive signs from the economy in the first months of 2009, corporate demand for funds is forecast to rise strongly in the last months of the year," Hanoi-based Habubank said.

Ho Chi Minh City-based HDBank, or Housing Development Bank, on Thursday raised its 36-month dong deposit interest rates to 10.3 percent a year, saying it is the highest saving rate in the banking system now.

"Many banks don't lack funds for lending, but most of what they have are short-term funds while the demand for loans of longer terms is rising quickly," said Nguyen Manh Quan, deputy general director of HDBank.

Some banks said their customers favor short-term deposits which allow more flexibility. This means the new limit set by the central bank would make it difficult for them to generate enough funds for long-term loans.

Banks now have little room left for raising deposit rates since many are already lending at the 10.5 percent ceiling. The central bank said in its weekly report banks have been offering medium- and long-term dong loans at 10.0-10.5 percent.

The central bank has said that overall credit growth this year should be between 25 and 27 percent.

Lending has slowed, especially loans given under the government's subsidy scheme launched in February.

Central bank data showed loans under the package in the week ending August 7 rose 0.9 percent from the previous week to VND392.6 trillion (US$22.95 billion), after 0.91 percent growth in the week ending July 30 and 2.08 percent the previous week.

Economic expansion quickened to 3.9 percent in the April to June period. Inflation slowed to 3.3 percent in July, the least since 2004. But inflation may quicken to 6.7 percent by the end of the year, HCMC-based fund manager Dragon Capital said in a research note this month.

Dollar demand

On the dollar front, bankers said the central bank had sold dollars to banks, helping to ease a dollar shortage triggered by demand to cover the country's trade deficit.

Vietnam's trade deficit last month widened to an estimated $1.25 billion, on par with the 12-month-high gap in May, after a deficit of $1.16 billion in June.

According to domestic media, short-term demand for dollars has also been driven up by parents buying dollars in the unofficial market as their children return to schools overseas after the summer holiday.

Dollar demand declined in Vietnam last week as liquidity improved at banks, with trading volume rising to VND64 trillion ($3.6 billion) for the Vietnamese currency, and $2 billion of US dollars, the State Bank of Vietnam said on its website, without providing comparable figures.

The dong traded at VND17,812 per dollar as of 4 p.m. in Hanoi, compared with VND17,814 on August 7, according to prices from banks compiled by Bloomberg. The dong touched a record-low VND17,862 on July 23 on speculation banks were short of dollars.

The State Bank fixed the reference rate at VND16,964 Monday, compared with VND16,966 on Augugst 7, its website showed. The currency is allowed to trade up to 5 percent on either side of the set rate.

The central bank said on its website on August 7 that it will "continue watching closely the development of the market," and may "take suitable action to intervene to keep the foreign-currency market stable."

Vietnam's five-year bonds fell for a third day, driving yields to near their highest level this year, as a shortage of funds in the banking system made it expensive to buy debt with borrowed cash.

The yield on the benchmark five-year note climbed five basis points to 9.84 percent, according to a daily fixing price from about 10 banks compiled by Bloomberg. A basis point is 0.01 percentage point. The yield reached this year's high of 9.85 on July 31.



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