A decision made by the State Bank of Vietnam on June 2 to cut the ceiling interest rates of deposits in the greenback is expected to promote bank savings in VND instead of USD.

Under the new decision, the annual rate applicable to institutional accounts will be reduced to 0.5 percent while that for individual depositors is just 2 percent against the previous rate of 3 percent.

The move took place shortly after the central bank ordered all credit institutions, except the Bank for Agriculture and Rural Development, to strengthen foreign reserves from six percent to seven percent and lengthened the list of compulsory foreign currency sellers to banks to include State-owned consortiums and corporations.

A series of actions have signalled the Government’s resolve to curb the trend towards “dollarisation” in the context that credits in foreign currency increased almost 18.9 percent against the growth of just 2.59 percent in Vietnamese dong credits, up to May 23.

Creditors blamed the situation partially to the recent huge difference in lending interest rates between the local currency and the greenback, making businesses to turn to loans in USD.

Economists warned that a surge in foreign currency credits would increase risks for the banking system as well as the entire economy and put pressure on forex rates at any point when debts in foreign currency are facing the payment deadline.

Former SBV Governor Cao Si Kiem has explained the central bank’s decisions that “Command for stronger compulsory foreign reserves will raise banking services costs in taking deposits, thus pushing up the lending interest rates and reducing demand for loans in foreign currencies”.

The Vietnam Bankers’ Association Secretary General Duong Thu Huong also backed the SBV’s decisions. She said the recent ceiling rate in deposits in USD at three percent a year was so high that it threatened to prompt a trend towards pumping overseas low-interest loans home for difference of rates in the long term.

“The decision to reduce interest rates of deposits in USD will not only help put any attempt to take difference at bay by bringing local interest rates close to international levels but also reduce the influence of the greenback”, emphasised the senior expert.

In an effort to curb the rampant circulation of US dollars in the domestic market, the State Bank of Vietnam has issued a circular to tighten rules on credits in foreign currencies for residential clients.

The new document, which came into force in May, discourages loans in foreign currencies for non-essential imports./.