Interest rate

Banks exploiting loophole

Banks have been forced to get creative to survive in an increasingly turbulent market According to a Bank for Investment and Development of Vietnam (BIDV) source, almost all banks are currently “cooking” documents on deposits to enjoy lower reserve requirements. Since early 2008, the State Bank has lifted the reserve requirement 1 per cent higher to further tighten monetary policies in the fight against inflation. Accordingly, reserve requirement for deposits with terms under 12 months was 11 per cent, while 12 months and above was 5 per cent. The reserve requirement is a proportion of deposits that banks are not allowed to lend designed to protect the banking system. An 11 per cent reserve requirement means lenders must give the central bank $11 for each $100 mobilised. “Most of local banks are seeking ways to convert on paper under 12-month deposits into 12 months and above funds to minimise reserve requirement. This fact forced us to do the same otherwise we would have to bear higher costs,” said the BIDV official. At the moment, the State Bank is managing local banks’ reserve requirements under nominal deposit terms which means that local lenders “pay” the State Bank reserve requirement according to depositing document between bank and depositors. Local banks have asked customers to undersigned 12-month and above term deposits for three-month deposits. After three months, the depositors withdraw their money and this withdrawal is considered as a premature withdrawal before the due date. The customer still enjoys three-month deposit interest rate, while the bank reduces the reserve requirement for this deposit to just 5 per cent from 11 as it should be. A State Bank Monetary Policy Department official said this “trick” has been applied for a long time but became more popular this year as the State Bank applied more tighter monetary policies. “We know [the trend] but to control this malpractice is not easy and it requires much enforcement from the State Bank inspection department in terms of human resources. Additionally, putting this under control is possible once the banking system reaches certain modernisation,” said the State Bank official. Financial experts expressed concern the trend could lead to data inaccuracy which commercial banks submit monthly to the State Bank especially on deposit terms. “This is a serious matter that should be controlled as accurate data is vital for appropriate monetary policy making,” warned a financial expert. Some financial experts have suggested that in the short term, the State Bank could apply a common level of reserve requirement for both deposit categories, somewhere between 11 and 5 per cent.