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What happened to the cash flow into the banking sector through savings deposits as the interest rates kept falling?

Wednesday 14, 10 2020
What happened to the cash flow into the banking sector through savings deposits as the interest rates kept falling?

The State Bank of Vietnam’s movement amidst Covid-19 pandemic

On October 1, the State Bank of Vietnam (SBV) officially reduced the operating interest rates for the third time this year. Accordingly, the refinancing interest rate, the rediscount rate, and the interest rate applicable to overnight loans, etc. are adjusted to decrease by 50 basis points.

The State Bank of Vietnam’s movement amidst Covid-19 pandemic
Specifically, the maximum interest rate for deposits with terms from one month to less than six months fell from 4.25% to 4% per annum, the rediscount interest rate was cut from 3% to 2.5% per annum, the interest rate for overnight loans in interbank electronic payment and SBV’s loans to offset the capital deficit in clearing payment of banks were down from 5.5% to 5% per annum, etc.

The SBV decided to cut its policy rates the third time this year to support credit institutions in improving liquidity. Meanwhile, the SBV also asked banks to lower the maximum lending rate for short-term loans to 4.5% from 5% per annum. This move was aimed to help lower the overall interest rates in the market, reducing the borrowing cost for businesses and individuals.

It was not until October 1, 2020, on which the SBV lowered the operating interest rates, that banks started to decrease the interest rates for savings accounts. The deposit interest rates had declined constantly since the beginning of this year. However, after the SBV's adjustments, the deposit interest rates were expected to slip further.

From October 1, banks simultaneously lowered the deposit interest rates.

ACB & VietCapital Bank

For deposits with the term of one month, ACB’s savings interest rate dropped by 0.1% to 3.6-3.7% per annum. The interest rate for a two-to-three-month term remained unchanged at 3.8-3.9% per annum. VietCapitalBank’s interest rate for a one-to-five-month term was down to 3.9% per annum.

LienVietPostBank & SaigonBank
As for LienVietPostBank, the interest rate for a three-month to six-month term decreased by 0.2% from October 1. The interest rate for a one-month to two-month term was maintained at 3.7% per annum. Saigonbank’s savings interest rates sharply decreased by 0.2% to 0.7% in some terms.

The group of four state-owned commercial banks (Agribank, BIDV, Vietcombank, VietinBank) offered the lowest interest rates in the system. The interest rate was 6% for the term of twelve months or more, 4.4 - 4.5% for a six-month to nine-month term, 3.5 - 3.8% for a three-month to five-month term, and 0,1% for non-term deposits.

The deposit interest rates have been continuously lowered sharply due to the abundant liquidity of commercial banks. Meanwhile, the impact of the Covid-19 pandemic on credit growth would create a downtrend in interest rates.

According to the forecast of SSI Research experts in a recent report, the SBV's loosening monetary policy will be maintained in the coming time, and the liquidity of commercial banks will remain abundant. The interbank interest rate is predicted to remain at a low level, and the deposit interest rate may continue its downward trend, dropping 10-30 basis points shortly.

Lower interest rates do not stop idle money from flowing into banks

Despite the continuous decrease in deposit rates this year, idle money is still flowing into banks.
According to a bank leader, that the interest rate went down while idle money still flowed into the bank shows that savings deposit is still the choice of many people in the context that the Covid-19 pandemic was still complicated worldwide and other investment channels were bleak.

According to Mr. Ngo Quang Trung, General Director of Ban Viet Bank, this year's inflation was controlled at 4%, which also had a positive influence on savings. Mr. Trung also believed in a downward trend in the interest rate in the coming time.
The State Bank of Vietnam’s movement amidst Covid-19 pandemic

Meanwhile, VCBS stated that, at this time, the savings deposit’s growth rate of economic institutions and residents, though lower than the previous years, was not too concerning. The number of deposits declined because people tend to hold a portion of cash for fear of uncertainty amidst the pandemic.

Although the interest rates have been and are forecasted to decrease in the following period, Vietnamese people have always had a habit of keeping accumulated money and idle money in banks. For many people, banks go with certainty, something they need in the context of this global pandemic.
Therefore, it is expected that even if the interest rate drops to 6-7% per annum, people will still choose banks as a safe, effective and low-risk investment channel.

Even Mr. Huynh Trung Khanh, a senior consultant to the World Gold Council in Singapore, Indonesia and Vietnam, said that though gold prices were expected to increase in the context of falling deposit interest rates, people should not withdraw all their savings to invest in gold but rather invest in several channels such as savings, gold, real estate, etc.

In conclusion, although the interest rates for savings accounts have dropped sharply, savings deposits are still chosen by many people as a safe investment channel in the context that other channels are badly affected by the Covid-19 pandemic.

Translated by Mia - VietnamCredit

Source: VietnamFinance
Banking & Finance

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