Commercial banks are stepping up the race to raise interest rates on dong deposits, with the highest rate being offered now at more than 10 percent per year.

HD Bank on June 16 increased its yearly interest rates by half a percentage point on term deposits of more than 12 months. With the increase, the HCM City-based lender currently pays a top rate of 10.1 percent for three-year deposits, currently the highest among that offered by commercial banks.

Earlier, Nam Viet Bank pushed up its yearly interest rates on three-year deposits of at least 1 billion VND (about 56,000 USD) to 10 percent.

An Binh Bank last week also began offering dong depositors a yearly interest rate of 9.99 percent on one-year deposits of at least 999 million VND (56,000 USD), or 900-day deposits of 99 million VND (5,600 USD).

The State Bank of Vietnam , meanwhile, has issued its weekly report showing that interest rates on dong deposits rose an average of 0.2-0.4 percent per year in the week ending June 10. Interbank rates also surged, with yearly and overnight rates reaching 8.37 percent and 5.97 percent, respectively.

The 10-percent rate being offered to depositors by commercial banks is bumping up against the current lawful ceiling rate. The current benchmark rate is 7 percent, and commercial banks are allowed to pay interest at up to 150 percent of this rate, or 10.5 percent. Meanwhile, they can charge interest of up to 16.5 percent on consumer loans.

State Bank figures showed that credit growth was higher than deposit growth. In May, credit was up 4.86 percent month-on-month and 11.6 percent from the end of 2008, while deposits grew only 3.74 month-on-month and 9.88 percent over last year.

VIB Bank deputy director Tran Hoai Nam said high credit growth and a recovery on the securities market in May had increased demand for dong. Moreover, less money was flowing into banks than into other investment channels, including securities and real estate, began to show signs of recovery, Nam said, leading commercial banks to adjust interest rates to attract more deposits.

However, some banks were facing difficulties by continuously raising interest rates. With a modest gap between interest rates on deposits and loans, commercial banks were facing narrower profit margins.

Further compounding the problem, a State Bank representative recently told the Vietnam Business Forum that the Government and businesses had recently urged the State Bank to cut the benchmark rate to reduce lending interest rates. The State Bank has so far declined to make the move./.