III – Solutions

2. Reasons for that high interest rate

2.1. Reason 1 - Sustaining liquidity

Since the international financial crisis of 2008, the Vietnamese economy has been not only swept up by the current of global recession but also has struggled with its inherent perennial challenges. Hence, the health of baking system has worsened as well. High inventory levels are attributed to low credit growth and an increase in banks’ bad debts. Many commercial banks have reduced their interest rates after the State Bank of Vietnam (SBV) decided to cut lending rates in more than three years to help local businesses iron out snags in their current economic difficulties. By far, 15 of Vietnam’s 39 commercial banks have reduced their annual short-term loan interest rates to 7.5%, while 14 others have cut their rates for non-term loans to less than 2% per year.

However, only those banks with ample liquidity are able to lend to good customers with low rates, but still had idle funds, and watched their loan growth quota remain under-utilized. In contrast, this is not the situation for banks being weak in liquidity, especially some small banks like BacA Bank, whose charter capital is about VND 3,000 billion. Moreover, due to its small scale, it lacks high prestige among households and enterprises to have more depositors than the larger, which forces them to pay high mobilizing interest rate to attract more capital to maintain its deposit base. In order to retain depositors, larger banks also follow the move, though they do not lack capital for lending. The race of interest rate starts and to win against the giants, the small banks often have to offer higher and higher interest rate to be chosen.

Many experts believed it was crazy to raise more and more funds in case of low credit growth and lending standstill. Nevertheless, the only way for small banks to sustain