Why are interest rates declining while deposits continue to rise? What is happening with cash flow?

DNHN - The amount of deposits into the banking system is at an all-time high, and banks must hold a large amount of deposits from individuals despite slow credit growth and falling lending interest rates.

Concerning the evolution of cash flow

The amount of deposits into the banking system is at an all-time high, and banks must hold a large amount of deposits from individuals despite slow credit growth and falling lending interest rates. This raises questions regarding the evolution of cash flows and the reason why interest rates continue to decline and deposits continue to rise.

According to State Bank statistics, by the end of April, the total value of people's deposits in the banking system reached an all-time high of 6,33 billion VND. In comparison to the end of 2022, people's deposits increased by approximately 8%, or VND 467,080 billion. Despite a significant reduction in bank interest rates, it is noteworthy that people's deposits continued to grow rapidly.

Due to a general fear of business difficulties and unstable market conditions, some individuals opt to save money rather than invest in businesses. Ms. Ngoc Mai, a resident of Thu Duc City, Ho Chi Minh City, stated that even though deposit interest rates have decreased, she still chooses to deposit her money in banks due to the increased business risks and trading difficulties. Mr. N. Phong, a resident of Hanoi's Cau Giay district, held similar views and only deposited funds with a short-term maturity to observe the market situation.

In addition, many people anticipated that the difficult situation would persist, so they opted for 12- to 24-month deposits. This demonstrates people's trust in banks and their desire to avoid business investment risks.

In contrast to the rise in individual deposits, the deposits of economic organizations decreased during the same period. Deposits of economic organizations reached VND 5.6 million billion at the end of April, a decrease of VND 8,833 billion or 5% compared to the end of 2022. This can be attributed to incidents involving the bond market and intermediary fund-raising products, such as the Van Thinh Phat event and the SCB, which eroded people's confidence and prompted them to deposit funds in banks.

Mr. Tran Ngoc Bau, CEO of Wi Group, stated that there are numerous causes for this phenomenon. One of them is the deterioration of the bond and intermediary markets following the recent market crashes. People are typically more assured when depositing funds in banks as opposed to investing in other financial assets. This has led to a rapid increase in deposits and a decrease in capital withdrawals from economic institutions.

In addition, the rapid and substantial increase in interest rates, as well as difficulties in capital mobilization, have put pressure on businesses. To carry out liquid operations and fulfill financial obligations, businesses were required to use all available funds, thereby reducing the amount of surplus cash that could be deposited in the bank.

The number of deposits made by individuals into the banking system continued to increase sharply, while deposits made by economic organizations decreased. This development is the result of several factors, including market confidence and business risks, the difficult economic climate, and the bond market's weakness. As a safety measure, high bank interest rates also motivate individuals to transfer funds from other financial assets to bank deposits.

Banks are in difficulty due to excess capital.

The fact that banks have excess capital but are unable to lend it presents several challenges. LPBank and Cake by VPBank have reduced their deposit interest rates due to their inability to lend.

Mr. Phan Duc Tu, Chairman of BIDV, stated that the bank's credit growth has reached 6.9%, which is lower than the previous year's rate of 8%.

State-owned banks such as Vietcombank, VietinBank, Agribank, and BIDV offer the highest deposit interest rates, at 6.3% per year for 12-month terms and 5% per year for 6- and 9-month terms. Meanwhile, the highest interest rates offered by large commercial banks with common stock were below 7% per year.

For example, VPBank has reduced interest rates for terms of 6 to 12 months by 2% over the previous two months, to 6.7% per annum. Currently, the interest rate for a 15-month term is only 6.1% per annum.

Small banks, including BacABank, GPBank, PVCombank, NamABank, ABBank, and NCB, offer the highest deposit interest rates, ranging from 7.6% to 7.8% per annum for a 12-month term.

Mr. Dao Minh Tu, Deputy Governor of the State Bank, stated that the credit growth target for the entire year is 14-15%. However, the credit balance grew by only 4.2% or 12,423,000 billion Vietnamese Dong. The capital mobilization rate reached approximately 4.16 percent with 12,691,000 billion VND.

Consequently, the current funding and lending ratios are comparable in terms of velocity, sales volume, and balance. However, the State Bank has only extended credit by approximately 11% since the start of the year. This demonstrates that there are still numerous opportunities for banks to lend.

Mr. Dao Minh Tu stated, "Currently, commercial banks have excess liquidity. In general, when interest rates increase, credit may decline, but in our case, interest rates have fallen, so credit will increase.

So why is credit growth slowing as interest rates fall? According to Mr. Dao Minh Tu, the economy is facing numerous challenges, and the decline in investment and consumption demand prevents an increase in credit demand. Many businesses are experiencing production and business difficulties due to the accumulation of inventories. In addition, many businesses are having trouble obtaining orders.

The housing market has not yet returned to normal. Small and medium-sized businesses struggle to obtain credit. Previously, the company's inability to borrow due to insufficient financial resources has become even more challenging.

Together with the banking sector, ministries, sectors, associations, and small and medium-sized businesses are working to resolve this issue. There are currently numerous businesses that wish to borrow money but cannot demonstrate their ability to repay. This is the minimum rule that banks must follow to lend, to ensure repayment capacity. Contrariwise, there are numerous banks offering loans, but few businesses have capital requirements.

Mr. Dao Minh Tu emphasized that these are the direct causes of the "unusual" when interest rates decrease but credit does not increase as rapidly as in previous years.

Thanh Ha t/h