Central bank cuts compulsory reserve interest rates

The new compulsory reserve interest rate has been reduced to 0.8 percent per annum for dong deposits, down from 1.2 percent prior. This change came into effect on Sunday.

A compulsory reserve is the minimum amount calculated on the ratio of total deposits that credit institutions must deposit with the SBV to ensure solvency and reduce risks in savings activities. In Vietnam, this ratio is 3 percent.

The SBV will continue not paying any interest on dong deposits from banks that exceed the minimum 3 percent requirement.

But all deposits by the Vietnam Development Bank (VDB) and Vietnam Bank for Social Policies (VBSP), both state-owned banks; People's Credit Funds and microfinance institutions will receive the 0.8 percent interest.

Conversely, for foreign currency deposits with the SBV, no interest is paid on minimum reserves, but anything in excess is now subject to 0.05 percent interest per annum, which has been slashed from 0.5 percent, according to the central bank statement.

The reduction of compulsory reserve interest rates to 0.8 per year will not have a significant impact on the profits of banks by the end of the year because the required reserve ratio is currently at a low 3 percent, Dr. Can Van Luc, chief economist at BIDV, Vietnam's biggest state-owned bank, told the local press.

Banks also do not maintain reserves at the SBV higher than the minimum requirement, as it would be a waste of resources because investing or lending this money would bring more returns, he added.

The reduction in compulsory reserve interest rates is most likely a move by the SBV to reduce the burden on the state budget, because interest payments are taken from there. "But like the impact on profits of commercial banks, the savings will not amount to much," Dr. Luc said.

Last month, the SBV also lowered the interest rate cap on 6-month dong deposits from 5.5 percent to 5 percent, prompting many banks in the sector to cut deposit rates across various terms.