All Aboard For Banking’s Big Year Of Change

UB.CA/HaNoi - November 21 became an historic moment in Vietnamese banking as the inter banking as the inter bank market interest rate skyrocketed to a 17 per cent annual interest rate for valuable paper overnight terms commercial banks to the central bank. The rate aimed to ease dong shortage fears.

This interest rate was abnormal and indicated that doing demand was far higher that doing demand was far higher than supply and there were problems with the inter bank market’s short term liquidity.

All local banks faced a dong shortage to satisfy customer payment demands and their duty to fulfill compulsory reserves at the end of each month after pouring money into buying central bank drafts from those banks.

In just a very short time, the inter bank interest rate on overnight loans hiked from an average of 4-5 per cent to 12 per cent and then to 13 per cent a day right after the central bank poured around VND11.5 trillion ($718.7 million) on to buying back valuable paper from commercial banks with an annual 8 per cent interest rate for short maturities.

A state owned commercial bank source said local banks could not fathom the sudden increase in demand for dong payments as well as not having a thorough plan for compulsory reserve extraction by the month’s end as demanded by the central bank.

“All bank asked each other whether they had the funds to buy, even at the crazy top inter

bank market interest rate,” the source said.

The dong shortage among banks was, the central bank said, due to corporations’ demand for dong worth VND7.2 trillion 9$450 million) during a short period.

“This interest rate is abnormal, once the interest rate changed greatly from 17 per cent to 13-14 per cent a day after. That is a clear sign of troubling short tern liquidity on the inter bank market” said a state owned commercial bank official.

The State Banks boosted its draft sales, but limited buying back its drafts to provide dong to commercial banks which invested a lot of capital in government bonds, central bank drafts and doubling compulsory reserves in order to prevent inflation from increasing.

Another bounce on the market was the state Banks refusing for months to buy back excess foreign currency that local banks hopped to sell. This caused the official forex rate to fall sharply, from VND16,200 on September 19 to VND16,079 on October 12 for purchase, and from VND16,080 and continued to fall.

The move put the foreign banks at the front line of the currency flood as it handled foreign investment capital directly from foreign source. Foreign banks suffered the most as they had only two source for selling the dollar, via customers and commercial banks.

State owned commercial banks were also reaching their 30 per cent caps on total foreign currency volumes. The sudden halt by the central bank in the purchase of dollars forced local banks to find a way to dry up the flood as they could not use other derivative tools like in markets where liquidity was strong. “In theory, commercial banks can offer derivative services in a stable market where investors are able to predict market trends to prevent losses,” the official said.

“During a peak week, the forex rate fell by 100 points causing VND100 million losses for each $1 million held by a commercial bank. The erratic forex rate cannot encourage any bank to provide derivative tools,” said the official.

The State Bank then stabilized the erratic market through expanding the forex trading band by +0.25 per cent to +0.75 per cent from December 24, a year after conducting similar increases. The move allows local banks to transact foreign currencies at a wider bands beyond the inter bank forex rate’s benchmark rate and made the dong appreciate against the US dollar.

Local banks were encouraged to develop derivative instruments in the wake of the State Bank loosening dollar trading controls.

“As foreign currency inflows into Vietnam get stronger, the authority’s move goes beyond forecasting. This signals a further liberalization of monetary management,” said a foreign banking expert.

A Vietcombank source said the bank expected to further develop derivatives such as futures and options are products designed to help businesses hedge against exchange rate risks.

Over the past year, the central bank managed to slightly depreciate the dong against the green bank within 1 percentage point annually, with exchange rate derivative products talking a back seat.

Since 2000, local banks have been providing four lines of derivative products options, for ward, futures and swaps. However, according to Ministry of Planning and Investment’s Development Strategy Institute figures, the contribution of derivatives had been negligible in local banks’ turnover with ratios of 11.7, 15.4 and 17.5 per cent in 1995, 2000 and 2006, respectively.