While the State Bank has been urged to raise the required compulsory reserve ratios on deposits to help control the inflation, experts believe that the tool should not be used at this moment, or it will cause a liquidity shock to banks.
Duong Thu Huong, Secretary General of the Vietnam Banking Association, (VNBA) believes that if the central bank raises the required compulsory reserve ratios now, it would be unbearable for banks.
Huong, in the interview given to Saigon Tiep Thi, said “she does not think that it is necessary to raise the compulsory reserve ratios at this moment, because the monetary market is becoming better. The deposits and outstanding loans in foreign currencies have decreased, while banks now can purchase dollars from businesses and individuals, and dong keeps flowing to the banking system.”
In principle, there are many monetary tools to control the inflation, including the compulsory reserve ratio adjustment. However, it is not necessary to use all the tools at the same time. Especially, it is not advisable to use this tool now, when banks have to struggle hard to mobilize dong to ensure the liquidity.
Though the State Bank has stipulated that the deposit interest rate ceiling is 14 percent per annum, depositors want higher interest rates. Huong said that a banker called her several days ago, telling that a business demands the deposit interest rate of 19 percent per annum. Though the bank was thirsty for capital, it had to refuse the deposits.
“It is clear that the input costs have become too high for banks. If the central bank raises the compulsory reserve ratios now, it would be unbearable for banks,” Huong warned.
A paradox exists that while many enterprises have profuse idle capital and they demand high interest rates when depositing the sums of money at banks, many other enterprises are lacking capital seriously and they wish to borrow money at low interest rates.
A banker said that he expects the central bank to raise the compulsory reserve ratios. If so, commercial banks will be thirsty for capital, and they will have to accept to pay any deposit interest rates businesses want. As for these enterprises, the decision on raising compulsory reserve ratios would be a golden opportunity for them to make money.
Of course, the majority of enterprises wish to see the interest rates going down, but it is the market, not the enterprises, will decide how high the interest rates will be. Moreover, high interest rates would help reduce the demand for capital, thus helping curb the credit growth rate at less than 20 percent.
In fact, the State Bank has taken a series of drastic measures to curb inflation already by raising some key interest rate, while having decided that the total money supply (M2) must be curbed at below 20 percent.
Governor of the State Bank of Vietnam, Nguyen Van Giau also said, “that only when the credit growth rate is still overly high though all necessary measures are taken, will the central bank consider raising the compulsory reserve ratios.”
Currently, the State Bank only sets high compulsory reserve ratios as a method of punishment, applied on some banks which cannot lower the outstanding loans to non-production sectors to the allowed levels.
Cao Sy Kiem, Member of the National Advisory Council for Monetary Policies, former Governor of the State Bank, also thinks that the increase of the compulsory reserve ratios should be considered only if the inflation keeps increasing uncontrollably. Meanwhile, Kiem believes that with the measures taken so far, the inflation would begin decreasing from June 2011.
Huong has warned that one should not think that the monetary policy management alone can curb the inflation. A lot of comprehensive measures should be applied to fight inflation. Local authorities and branches have decided to cut down the public investments totaling 3400 billion dong. However, Huong said that the sum of money is too small, just like “a spec sand out of the sea”.