Dollar lending interest rate stays unchanged despite deposit cut

The US dollar lending interest rate has remained unchanged though the central bank has recently made a significant cut on dollar deposit rates.

On September 28, the State Bank of Vietnam (SBV) slashed the interest rate cap on dollar deposits offered by commercial banks to organisations and companies from 0.25 percent to zero percent per year, while the rate for individuals was reduced from 0.75 percent to 0.25 percent per year.

After the move, businesses expected the dollar lending rate would reduce from between 3 percent and 3.5 percent per year, to roughly between 2.5 percent and 3 percent, which would help them cut input costs to enhance competitiveness.

The businesses estimated that the rate between 2.5 percent and 3 percent rate was reasonable as it still helped lenders make profits after deducting costs for capital mobilisation and setting aside for compulsory reserves regulated by the central bank.

Hoang Thi Lan, director of a consumer goods import company, which often borrows US dollar from commercial banks, said as dollar lending often faced foreign exchange volatile risks, the lending interest rate must be attractive enough to offset the risks.

However, experts said that it would be difficult to see a reduction in the dollar lending rate as lenders currently encouraged borrowers to be access to dong loans instead of dollar loans to avoid the foreign exchange volatility.

Besides, the dong lending interest rate currently has reduced significantly, making the rate gap between the dong and the dollar loans insignificant, they said.

Commercial banks forecast that demands for dollar loans would not increase with customers adopting a wait-and-see attitude about the volatility of the domestic foreign exchange, though the central bank affirmed that it would keep the forex rate steady this year and even in the first quarter next year.

Last week, the central bank said that the dollar deposit interest rate cut last month would not cause economic losses for organisations or individuals, adding that it is more beneficial to shift to the dong as the difference between the interest rates on dollar and dong deposits was now above 5 percent.

The central bank recommended that companies making future payments in dollar transfer their dollar deposits into the dong to eliminate any potential opportunity costs and purchase dollar under a forward contract for the payment.

According to the central bank, the forward contract will enable the company to exchange an amount of currency in a specific future date for a specific rate in order to avoid exchange rate risks. Interest payments from the new dong deposits would both make up for the cost of the forward contract and generate profits for the firms.-VNA