Liquidity shortage hamper small Vietnamese banks

Local small Vietnamese lenders were forced to borrow in interbank market with sky-high interest rates after seeing massive deposits outflows.

Small banks are confronted with severe liquidity drain after the central bank took measures to strictly reinforce the interest rate cap at 14%, raised the refinancing rate to 15% from 14% and lifted the overnight interest rates on electronic transactions to 16% from 14%, triggering an upsurge of interest rates in the interbank market.

There recently occurred a soaring rise in  interbank rates with the interest rates surging to 16% p.a. for overnight; 18% p.a. for 1-week and up to 20% for 1-month terms.

The interbank interest rates on weekend were recorded to be as high as 22% for 1-month term and around 18-21% p.a. for other short-term transactions.

The State Bank of Vietnam raised the refinancing rate to 15% from 14%, effective Oct. 10 in a fight to Asia’s fastest inflation. However, the move hurt small banks, which were struggling with their liquidity shortage and found interbank loans the way out of the problems as they held few commercial papers.

The net withdrawal on OMO and the lifted key rates showed the SBV’s desire to restructure the local small banks, specialists of Thang Long Securities Joint Stock Company inferred.

Restructuring the banking sector is becoming more urgent as small banks are confronted with liquidity shortage resulting from the massive withdrawals of depositors and interbank interest rates hike, according to a statement by the Ho Chi Minh City Securities Corporation.

The central bank is preparing a roadmap for restructuring the banking system, the HSC said in its report, adding the Law on deposit insurance is the final step to complete the legal framework for banks’ restructuring.