Banks need solutions to raise long-term capital

In order to raise long-term funds for lending, most banks pay their clients attractive deposit rates. However, many customers have to consider seriously before depositing in the banks because if they withdraw earlier than maturity date they will not receive the interest. To meet both the demands of banks as well as clients, most banks have offered their customers the service that allows customers to use their deposit as collateral to get a bank loan.

Advising customers at VietCapital. Photo: LONG THANH

Advising customers at VietCapital. Photo: LONG THANH

Competition for long-term deposits

At the end of May 2019, the credit grew 5.74% YTD and 6.16% YoY. This is a low growth compared to previous years. The disbursement of public investment was also slow, reaching VND 96,899bn in the first five months, equivalent to 23.25% of the full year target.

The above two conditions have helped maintain the liquidity in the banking system in the first five months. The interest rate in the interbank market has been stable since beginning of the year and is expected to continue being stable at around this level for next couple of weeks.

However, the competition to raise long-term deposits in the banking system is still going on. At NamABank, the interest rate for online deposits in 6 months rocketed to 8%/year while it is 8.3%, 8.5% and 8.7% for 12 months, 18-24 months and 36 months, respectively.

Especially, the competition to raise deposits for the term of 24-36 months is very tough. VietCapital Bank offers clients a deposit rate of 8.6%/year. PGBank, SCB and Vietbank also listed the deposit rate for 24-36 months at 8.5%, 8.3% and 8%, respectively. Exceptionally, VietABank and SHB offered the interest rate of 9.1% and 8.9% for a 36-month deposit on amount above VND 2bn.

For smaller deposit amounts, clients also receive an attractive interest rate. For example, 8.5% of SHB and 8.4% of VIB or 8.3% of NamABank for the deposit amount above VND 500mn.

According to a Ho Chi Minh City leader, with the current deposit rate, the net interest margin (NIM) of banks is quite low. However, these banks do not have many choices. To meet the requirement of the State Bank to deduce the ratio of short-term deposits to long-term loans, banks have to compete to raise the long-term funds.

While the state owned banks have plentiful resources of deposits from big clients like State Treasury, or other super state owned corporations, the commercial banks have to mainly depend on deposits from individuals. This leads to tough competition among commercial banks.

Increase benefits for clients to attract long-term deposits

Under pressure of the requirement of the State Bank to balance short-term deposits with long-term loans, many banks have been willing to increase the deposit rate to attract customer deposits.

However, the high interest rate is not offered to normal deposits, hence, customers have to consider seriously when depositing in banks so as to get higher interest rate. Customers also have to commit to not withdraw before the maturity period. If clients settle the deposit earlier than the maturity date, clients will not receive the interest either. Furthermore, in case the clients do not send notice to the banks about withdrawal in advance, clients may be charged a fee amount.

A 13-month deposit helps banks to increase long-term deposit, but it is just a technical solution, not sustainable as a real long-term deposit should have maturity of over 3 years, given that a long term loan maturity is usually more than 1 year.
To meet the sudden cash demand of long-term deposits, most banks offered clients the bank loans which are guaranteed by the deposit amount, at a reasonable lending interest rate.

Visiting some banks in Ho Chi Minh City, we see most bank staff encourage clients to deposit long term to achieve higher interest rate. The most favorite term is 13 months as this term is not too long but offers an attractive deposit rate. To persuade clients to deposit for long term, bank staff usually introduce clients to the service that banks allow clients to use their deposit as collateral to get a bank loan at attractive lending interest rate in case clients suddenly need cash. The maturity of the loans is mostly shorter than the maturity of the deposits.

According to Tung, a client at HDBank, in April he deposited VND 1bn in HDBank at 7.3%/year for the term of 13 months. However, because of unexpected need of cash in May he had to borrow VND 500mn from the bank at the interest rate which is 1.5% higher than the deposit rate. The lending interest rate of the loan is deducted directly from the interest of the initial deposit.

By using this method, the clients’ future cash flow will still be more flexible although they deposit in banks for long term.

The other example is at Eximbank, clients who deposit long term at the bank will be allowed to borrow at the interest rate which is 1.5-2% higher than the deposit rate.

A bank staff in Ho Chi Minh City said that banks have to create this service to attract long term deposit of clients. However, this service is only popular in the 13-month deposit.

According to several experts, 13-month deposit helps banks to increase long term deposit, but it is just a technical solution, not sustainable as the real long term deposit should have maturity of over 3 years given the long term loan maturity is usually more than 1 year.

The government should encourage enterprises to raise funds through corporate bonds rather than mainly depend on bank credit and create liquidity burden for the banking system.

Cat Tuong

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