Deposit interest rates fall amid low credit demand, policy easing

At the end of last year, deposit interest rates were as high as 11-12% as banks scrambled to mobilize resources. But this year they have decreased rapidly.

As of the end of September, 12-month deposits at some major banks offered less than 5.5% interest, lower than during Covid.

The decline started in April after the State Bank of Vietnam lowered policy interest rates.

In the first half of the year the central bank slashed policy rates four times and the rate ceiling three times.

The maximum interest rates banks could pay for deposits of less than six months was cut from 6% to 4.75%.
International financial expert and chairman of Prometheus Asia SDN BHD, Peter Verhoeven, said the decision to reduce interest rates is contrary to the international trend but is appropriate and smart in Vietnam because of various factors, the most important being excellent control of inflation.

Another important factor for falling deposit interest rates is that money has found it hard to flow into the economy.

Banks have excessive liquidity amid the poor absorption in a gloomy economy, lack of export orders and falling domestic consumption.

Corporate demand for credit is low. With the bond market becoming quiet following a government crackdown, and the property market remaining in a slump, money flows into them have slowed to a trickle.

With banks sloshing in liquidity, overnight lending interest rates have fallen close to 0%. Credit growth for the year was only 6.9% as of September end, comparable to the rate during the worst period of the pandemic.

Nguyen Thi Phuong, deputy general director of state-owned Agribank, said deposit interest rates could decrease further, but the decline would be slower.

The room for further reduction is limited in terms macro indicators such as inflation and exchange rates, she said however.

They would remain steady through the first quarter of 2024, she predicted. They could then increase slightly when the economy’s capital absorption capability improves.

Another variable that could affect the interest rate scenario is that the U.S. has not stated it would stop hiking interest rates.

A recovery by the property industry, with its huge great demand for credit, remains questionable unless its legal problems are fully resolved.

The general director of a private bank expected deposit interest rates to remain low at least until the end of 2023.