The State Bank of Vietnam will hold the line on the prime rate while increasing pressure on commercial banks to comply with the cap on deposit interest rates, State Bank Governor Nguyen Van Binh has announced last week in a bid to help commercial banks reduce borrowing costs.

The statement released by the central bank confirmed that the prime rate will continue at 9 percent, while the discount rate will remain unchanged at 13 percent and the refinancing rate at 14 percent. Interbank open market operations will continue to be managed flexibly, the statement said.

In a meeting on Aug. 28 with representatives of 12 major commercial banks, Binh said the central bank will apply comprehensive measures to force the banks to comply with the State Bank's cap on deposit interest rates, currently at 14 percent per year.

Many domestic lenders have been violating the cap, offering 17.5 percent for one-month deposits or 15-16 percent per year for three-month deposits.

To more effectively enforce the cap, the newly-named central bank chief announced tweaks to some existing regulations in Circular No 13 and Circular No 19 issued by the State Bank last October under then Governor Nguyen Van Giau.

The two circulars allowed banks to consider 25 percent of non-term corporate deposits as funds available for lending, as well as capital borrowed from other institutions at terms of three months or more. The circulars allowed a loans-to-deposit ratio of 80 percent for commercial banks, and 85 percent for non-banking credit institutions.

Binh said these regulations were no longer suited to the current financial market, adding that reducing capital input costs was vital to bringing down borrowing costs for Vietnamese enterprises.

Binh reiterated his determination to cut average lending interest rates for businesses to around 17-19 percent by next month without injecting additional capital into the banking system.

Current borrowing costs for production enterprises were averaging 17-21 percent per year at State-owned banks, 21-24 percent at private commercial banks, and 20-22 percent at financing companies.

Binh said that slashing commercial lending rates to 17-19 percent was feasible because the banking system had sufficient capital on hand. This was reflected by the low interbank rates of 9.4-13 percent per year.

The general director of one commercial bank present at the meeting agreed, saying, "We don't lack of capital. However, if we cut deposit interest rates, depositors will immediately move to other banks."

He blamed small banks for igniting an interest rate war.

A representative of a smaller bank countered that they offered high interest rates meet the demand of borrowers and the bank was also under pressure to prepare for a possible increase in the compulsory reserves ratio.

Binh also said that the central bank will reconsider money supply targets, following a 6 billion USD buy-in of foreign reserves.

The nation's total money supply was estimated by the State Bank at 2,500 trillion VND (120.2 billion USD). Of the total, 2,100 trillion VND (101 billion USD) was being held in local banks as reserves or restricted deposits.

However, the money supply expanded at a rate of 2.45 percent in the first six months of the year, well behind the pace of the Government's target of 15-16 percent for the year. This has, in turn, slowed credit growth well below the 20-percent target for the year, with commercial bank credit expanding by just over 7 percent in the first six months of 2011./.