FOREIGN TRADE UNIVERSITY
SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS

======  ======

GROUP REPORT
Course: Money And Banking

INTEREST-RATE POLICIES AND ITS IMPACT ON
VIETNAM'S ECONOMY

Members
Nguyễn Cẩm Hà – ID: 1611150016
Bùi Phương Hoa – ID: 1611150024
Ngô Thị Kim Lan – ID: 1611150032
Đặng Minh Trang – ID: 1611150065

Hà Nội – August, 2019


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Table of Contents
INTRODUCTION............................................................................................................................. 4
CHAPTER 1: OVERVIEW OF INTEREST RATE...........................................................5
1.1. Definition................................................................................................................................... 5
1.2. Characteristics........................................................................................................................ 5
1.3. Types of interest rate and interest rate policies.........................................................6
1.3.1. Types of interest rate......................................................................................................6
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Simple Interest........................................................................................................................... 6

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Compound Interest...................................................................................................................6

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Amortized Rates........................................................................................................................ 6

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Fixed Interest............................................................................................................................. 7

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Variable Interest........................................................................................................................7

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Prime Rate.................................................................................................................................. 7

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Discount Rates.......................................................................................................................... 7
1.3.2. Interest rate policies.......................................................................................................7

1.4. Factors affecting the interest rate...................................................................................9
1.4.1. Economic Growth........................................................................................................... 9

The most important factor in determining why interest rates change is the supply
of funds available from lenders and the demand from borrowers........................9
1.4.2. Fiscal deficit and government borrowing............................................................10
1.4.3. Inflation........................................................................................................................... 10
1.4.4. Global interest rates and foreign exchange rates:............................................11
1.5. The role of the interest rate in the economy............................................................11
1.5.1. Macro role:..................................................................................................................... 11
1.5.2. Micro role........................................................................................................................ 13
CHAPTER 2: THE IMPACT OF INTEREST-RATE POLICY ON VIETNAM'S
ECONOMY........................................................................................................................................ 15
2.1. Interest rate policy and interest rate channel in Vietnam..................................15
2.2. Impact of Interest rate policy.........................................................................................17
2.3. Expected impacts and changes in interest-rate policy to Vietnam's economy
in US-China trade war..............................................................................................................18
CHAPTER 3: RECOMMENDATIONS................................................................................20
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3.1. Solutions to regulate and control interest rate........................................................20
3.1.1. Improve interest-rate liberalization mechanism................................................20
3.1.2. Improve the effectiveness of interest rate instruments....................................22
3.2. Solutions to create conditions and foundations for the implementation of
policies and mechanisms for interest rate management..............................................23
CONCLUSION.................................................................................................................................24
REFERENCES................................................................................................................................. 25

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INTRODUCTION

In this modern economy, the interest rates is one of the important tools for
controlling market system. Interest rates are an economic category, reflecting the
relationship between lenders and borrowers, between supply of and demand for
money and the economic status of a country. The fluctuation of interest rates directly
affects the decisions of individuals, businesses as well as the credit institutions and the
whole economy. Through those changes of interest rates, researchers can predict
whether the economy is going up or down. Therefore, interest rates are one of the
most attracted variables in the economy and its movements are globally reported day
by day. Interest rate policy is an important instrument in managing national monetary
policy, in order to promote economic growth and control inflation.
Based on this practical need, we would like to choose the topic: "Interest-rate
policy and its impact on Vietnam's economy".
Our report consists of 3 chapters:
Chapter 1: Overview of interest rate.
Chapter 2: The impact of interest-rate policies on vietnam's economy.
Chapter 3: Recommendations.
Due to limited knowledge and experience in the field of finance and banking,
our report cannot avoid some careless mistakes. We are looking forward to receiving
comments and access from teacher and friends.

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CHAPTER 1: OVERVIEW OF INTEREST RATE
1.1. Definition
The term “interest rate” appeared when the relationships among sale, purchase
and exchange of goods were formed. Interest rate is one of the most universal
variables in the economy that directly affects our daily life. Interest rate (or credit
interest rate) is an extremely important and sensitive economic tool for every economy
which plays an important role of stabilizing and contributing to the completion of

monetary policy to create a sustainable and prosperous world. There have been many
different views when making the concept of interest rates.
An interest rate is the amount of interest due per period, as a proportion of the
amount lent, deposited or borrowed (called the principal sum). The total interest on an
amount lent or borrowed depends on the principal sum, the interest rate, the
compounding frequency, and the length of time over which it is lent, deposited or
borrowed. It is defined as the proportion of an amount loaned which a lender charges
as interest to the borrower, expressed as an annual percentage or basis point. It is the
rate a bank or other lender charges to borrow its money, or the rate a bank pays its
savers for keeping money in an account.
Interest rates, in the simplest terms, are the costs to borrow money or the return
for lending money.
1.2. Characteristics
Interest rates have 2 main characteristics:
● Competitiveness: The interest rates are formed on the basis of competition
among commercial banks or other credit institutions. The competitiveness for
interest rates is more obvious when the arrival of organizations participating
and providing credit is increasing. Interest rates must be attractive to take
notice of customers to join. Therefore, each commercial bank and credit
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institution wishing to develop their system must offer a competitive interest
rate to others in order to draw customers’ attention.
● Flexibility: The interest rates are formed in a flexible and sensitive manner,
adapting to all subjects or objects under any circumstances. The frequent
changes of credit policies are consistent with the changes in the supply and
demand for loans, the inflation rate, the State revenues and expenditures, the
psychological factors of borrowers and lenders in the financial market.
1.3. Types of interest rate and interest rate policies

1.3.1. Types of interest rate
There are several ways of dividing interest rates into groups. This report shows
a breakdown of seven forms of interest, and how each might impact consumers
seeking credit or a loan
● Simple Interest
Simple interest represents the most basic type of rate. Simple interest is paid only
one time and does not change. To calculate simple interest, multiply the principal by
the rate and the term.
● Compound Interest
Compound rates charge interest on the principal and on previously earned interest.
Compound interest rates are often used for credit cards and savings accounts.
● Amortized Rates
Amortized rates, common in car or home loans, are calculated so that borrowers
pay a larger amount of interest and a smaller amount of principal at the start of the
loan. As time passes, the amount of principal paid each time increases, shrinking the
principal and therefore the amount of interest charged on it. Thus, the amount of

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interest charged on the principal decreases over time while the interest rate stays the
same.
● Fixed Interest
A fixed interest rate stays the same over the life of a loan. Often used in mortgage
or other long-term loans, fixed rates are pre-determined. Borrowers benefit from a
fixed interest rate because they know the rate won't rise. The loan payment then
remains the same, making it easier to include in the family budget.
● Variable Interest
Variable interest rates change depending on an underlying interest rate, usually the
current index value. Variable interest rates are used on loans such as adjustable rate

mortgages. Variable interest rates usually change weekly or monthly, and can increase
or decrease.
● Prime Rate
The prime rate refers to the interest rate that commercial lenders use with their best
– or most credit-worthy – customers. This rate is based on the federal funds rate, or a
daily rate that banks use when they borrow and lend funds with each other. Though
large corporations are normally the recipient of prime rate loans, the prime rate affects
consumers, as well; personal, mortgage and small business loan interest rates are
influenced by the prime rate.
● Discount Rates
When the Commercial Bank makes a short-term loan to a financial institution, they
apply an interest rate known as discount. Discount rates are based on cash flow
analysis, which takes both the time value of money and the risk of future cash flow
projections into account.

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1.3.2. Interest rate policies
● Ceiling interest rate policy: The ceiling interest rate policy is a policy of fixing
the maximum lending interest rate. This policy encourages capital mobilization
and enhances government control. The Government sets a certain interest rate
and imposes common rates on the whole banking system and on the whole
economy.
● Fixed interest rate policy: Fixed interest rate is the interest rate that the Central
bank controls Commercial banks in both mobilizing and lending rates. Under
this policy, there will be no interest rate competition in the credit and financial
market and thus do not promote economic development.
● Free interest rate policy: The policy of interest rate liberalization is the policy
that the government will intervene when the interest rate exceeds the general

interest rate. Interest rates increase or decrease completely due to changes in
supply and demand in the market. However, it only works in a perfectly
competitive environment. In Vietnam, we are currently using the negotiable
interest rate policy. Credit institutions are allowed to use the negotiable interest
rate mechanism in commercial activities, replacing the basic interest rate
management mechanism. In the long term, the elimination of the "ceiling" on
lending rates will enable credit institutions to expand methods of capital
mobilization, lending and mobilizing with interest rates suitable to demand and
supply in the credit market. This is especially beneficial for economic
organizations and producers in rural areas, especially in the context of credit
growth is much faster than capital mobilization growth. This interest rate
mechanism will create favorable conditions for the reform of market-oriented
banking system. This will eliminate the "differences" in the Vietnamese
banking system to gradually integrate into the international credit market.
● Preferential interest rate policy: Preferential interest rate policy is a policy for
some special subjects such as the poor with low interest rates. The
implementation of this policy makes borrowers pay less attention to efficiency,
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which leads to the inefficient use of capital invested in projects, which does not
help capital growth and most of this policy is taken from the Budget.

1.4. Factors affecting the interest rate
1.4.1. Economic Growth
The most important factor in determining why interest rates change is the
supply of funds available from lenders and the demand from borrowers.
Take the mortgage market as an example, in a period when many people are
borrowing money to buy houses, banks need to have funds available to lend. These
funds can come from their own depositors since the banks pay 2% interest on fiveyear GICs and charge 4% interest on a five-year mortgage. By borrowing from their

depositors and lending to their mortgage borrowers, a bank makes a 2% “Net Interest
Margin” (NIM) and a profit. But if the demand for mortgage borrowing becomes
higher than the available funds, the banks will either have to raise their GIC rates to
attract more retail funds or borrow money by issuing bonds to institutions in the
“wholesale market”. Institutional investors have more investment opportunities so this
source of funds is more expensive and the banks might have to pay higher interest
rates.
Mortgage rates will then go up to reflect the higher cost of bank mortgage
funding if funding is hard to obtain. If the banks have lots of money to lend and the
housing market is slow, any borrower financing a house will get “special rate
discounts” and the lenders will be very competitive, keeping rates low.
1.4.1.1. Demand for money
Typically, in a growing economy, money is in high demand. Manufacturing
sector companies and industries need to borrow money for their short-term and longterm needs to invest in production activities. Citizens need money as they need to
borrow for their homes, buy new cars, and other needs.
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But when an economy isn’t doing that well, companies avoid borrowing if the
demand for their products is low. A very high inventory is detrimental, so they
produce less. In effect, they borrow less, ergo less demand for money. Consumers also
spend less as a bad economy could result in job loss. Other things remaining the same,
higher the demand for money higher the interest rates.
1.4.1.2. Supply of money
Like any other commodity, if the supply of money increases - other things
remaining the same - interest rates go down. In recessionary times the interest rates
tend to go down.
A case in point is the sudden dip that took place in bond yields for a short
period of time after the announcement of demonetization. As the general public
deposited the demonetized currency notes into bank accounts, banks were flooded

with money. The banks could not lend all that money so they choose to invest in
government securities and that led to a fall in yields on bonds.
1.4.2. Fiscal deficit and government borrowing
Fiscal deficit is a result of government expenditure exceeding government
revenue. To fund this deficit, the government resorts to borrowing. A rising fiscal
deficit (as percentage of the GDP) indicates that the government will have to borrow
more from the market. This puts an indirect upward pressure on the borrowing rates in
the market.
Higher the fiscal deficit, higher the government borrowing, higher the interest
rates. Generally, bond markets respond to higher fiscal deficits by an uptick in bond
yields.
1.4.3. Inflation
Prices of all goods and commodities are set by taking into account the general
price increase in the economy—inflation. Interest rates, which the price of money, are
no exception to this rule.
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Savers need to be compensated by way of higher interest rates for sacrificing
their current consumption motives in a high inflationary scenario. Investors will forgo
their current consumption and invest in fixed income investments if they get positive
real rates of return.
The real rate of return is arrived at by deducting inflation number from the
nominal rate of return offered on the bonds and deposits. The ideas to keep the real
rate of return positive so that after inflation the saver saves something. That means in
high inflation era, the interest rates tend to stay up and vice versa.
1.4.4. Global interest rates and foreign exchange rates:
With the increasing globalization over the last few years, the economic
conditions of international markets have also started playing an important role in
deciding the interest rate direction. The global economic conditions influence the

lending pattern of foreign investors to domestic companies and thus compete with
domestic sources of funds in the market.
Attractive interest rates bring in capital and support the foreign exchange rate.
Tweaks in the interest rates in the economy can be used by a central bank for
influencing the exchange rate. A central bank may choose to up the policy rates to
indicate higher interest rates in the economy and thereby attract capital from overseas
investors.
1.5. The role of the interest rate in the economy
Interest rates are one of the most closely considered variables in the economy,
because interest rates not only directly affect our lives but also an indicator of the
health of the economy. We can generalize the role of interest rates through two
aspects: the macro role and the micro role:
1.5.1. Macro role:
For the State Bank, interest rates are a macroeconomic regulation tool. The
fluctuation of interest rates in the adjustment process of the State Bank affects many
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aspects of the economy such as investment, consumption, savings, exchange rates ...
thereby directly affecting macroeconomic objectives of the country.
In a market economy, consumers and businesses can do anything they want
within the framework of the law, as long as they have the means of payment. So by
controlling prices and the right to use money, or the interest, the State Bank in any
country can dominate the growth of the economy. By raising interest rates, the State
Bank can weaken the lending capacity of commercial banks and thus implement
monetary policy, reducing the amount of money needed to expand business production
and consumer spending. By using interest rates, the State Bank can also facilitate
economic development. To curb or promote the pace of development of a certain
industry, the State Bank may increase or decrease lending rates to narrow or expand
investment in this sector.

Besides guiding the economy, interest rates also play an active role in curbing
inflation. In March 1989, Vietnam advocated the super-deposit rate regime to quickly
bring about the result of stopping inflation: from 7% in January, 9.2% in February
dropped to 4.5% in March, 3.5% in April and continue to decrease in the following
months. This substantiates the power of the interest rate in regulating the economy at
the macro level, even though it has a negative effect on economic activities. From
1989 to the present, interest rate policy has always been used to adjust the economy in
Vietnam. After stabilizing and keeping inflation at a stable level, the State Bank is
gradually lowering the interest rate frame to encourage investment in expanding
production and business, which will, in turn, recover the economy.
It can be said that interest rate policy is a part of the monetary policy of the
state to regulate monetary circulation, stimulate, regulate and guide business and
production activities of economic units. Interest rates are used to expand money
supply, narrow investments and curb inflation.
In the role of economic leverage, interest rates are adjusted to suit the
economic goals at different stages. Incentives on interest rates, favorable conditions of
credit supply and payment are state tools to encourage enterprises to focus on products
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of priority in certain economic development strategies. This is important for LDCs
who want to take the leap to get right into modern technology. Thus, interest rate can
be considered as a direct tool of monetary policy. It directly or indirectly influences
the amount of money supply in circulation, thereby helping to achieve the goals of
monetary policy. An adjustment in the interest rate management mechanism will affect
the amount of money in circulation, especially the amount of money supplied by
banks into circulation because the interest rate directly affects the business profits of
banks. The expansion of the interest rate frame, either raising the ceiling interest rate
for the old rate control mechanism or raising the basic interest rate in the new interest
rate mechanism, will have the effect of increasing the amount of money in circulation

and vice versa.
Another impact of interest rates is its effect on investment and savings. There
are many different opinions about the impact of interest rates on the formation of
savings, but most economists think that interest rates have an impact on the size of
people's savings. The higher the actual interest rate, the greater the amount of money
deposited in the bank, which will affect the size of people's asset purchases. When
interest rates are positive, it will stimulate people to deposit at the bank because it is
more profitable and safer than hoarding assets, thereby increasing the bank's overall
capital and the amount of money for the national economy, the impact of positive real
interest rates has created favorable conditions for financial savings.
In summary, interest rates have impacts on several dimensions of the economy,
on development and economic growth. A reasonable interest rate policy will be both a
condition to attract idle capital and to promote investment in the economy, helping the
economy growing steadily.
1.5.2. Micro role
Interest rates are the factors that promote the effectiveness of businesses, offset
costs and bring profits to banks: businesses that borrow money from banks must repay
in due time both capital and interest. Therefore, in order to ensure the capital
repayment, businesses must really pay attention to their production and business
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results. If repayment is not on time, the overdue interest rate is higher than the timely
interest rate (equal to 1.5 times the due interest rate), which motivates enterprises to
try to perform better in business to repay debts on time. Financial activities of
business banks and credit institutions are mobilizing capital for lending. When
mobilizing capital, the bank must pay interest to the creditors, and upon lending, it
will collect interest from the borrowers. The Bank must calculate the appropriate
lending and borrowing rates to offset its operating expenses and make profits.
On the other hand, interest rates are a tool to compete among credit institutions.

Recently, the State Bank of Vietnam only controlled the maximum ceiling on lending
rates and the difference between deposit interest rates and loan interest rates to ensure
benefits for depositors, borrowers, and business banks to have the ability to offset
partly costs and risks, if any. In the market economy, due to the competition law, all
economic sectors have a fierce rivalry in terms of products, prices, customer services,
sales services, etc. Remaining stable in such competition is not simple. With the motto
"borrowing to lend", banks’ mobilization and use of capital are closely related to each
other. Therefore, commercial banks have to renovate their service methods and
mobilize capital to maximize capital mobilization while also boosting lending. In
addition, other credit institutions also need to strive to lower costs, create an
infrastructure for lowering "output" interest rates to attract more customers to open
accounts

and

borrow

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capital.


CHAPTER 2: THE IMPACT OF INTEREST-RATE POLICY ON VIETNAM'S
ECONOMY
2.1. Interest rate policy and interest rate channel in Vietnam
Before 2000, the SBV managed interest rate administratively by ceiling and
floor mechanism. A new interest rate policy was adopted in August 2000, under new
mechanism, commercial banks could adjust their domestic currency lending rates
based on a base interest rate announced by the SBV. However, for lending rate, the
ceiling was 0.3% and 0.5% for short-term loans and medium and longterm

respectively. Interest rates were fully liberalized in June 2002, banks are now free to
determine their business interest rate based on their own appraisal and negotiation
with their customers. However, due to negative effects of the Global Financial Crisis
in 2007, the SBV had to return the administrative mechanism. Since then borrowing
and lending of commercial banks has not been allowed to exceed 150% of the base
interest rate, which is announced by the SBV monthly.
To date, the SBV has three types of policy interest rates including the base rate,
the refinancing rate, and OMOs’ rate:
(i) The base rate: The SBV calculates and announces the base rate monthly
based on economic performance and commercial interest rates. This SBV’s rate was
used as a reference rate for commercial banks to determine their business interest rate.
However, in fact this rate had no impact on market rate, event just for reference. In a
number of period, the base rate was kept unchanged while market rate fluctuate
significantly. This is because the calculation of the base rate had not actually based on
economic performance and more importantly, there was no policy instrument to
support this rate.
(ii) The refinancing rate is the interest rate of the central bank’s last lending
resource for the market (the highest interest rate ceiling), but it tends to be lower than
the interest rates on the interbank market. This situation has been terminated since the
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middle of 2011 when the central bank began to adjust and continuously improve
refinancing to push interest rates higher compared to the market rate. However,
binding and the impact of this rate to the market are still limited to control the market
interest rates. Thus, the central bank must use additional interest rate tools such as the
ceiling rate
(iii) The interest rate on the open market in theory is the interest rate that
had the closest relationship with the interbank interest rates, however, the relationship
between these two types of interest rates are not tight.

Simultaneously, interbank interest rates are lower than deposit rates on the
primary market. This reflects the excess of liquidity in the system but difficulties in
attracting liquidity by the central bank. Thus, the control of interest rates by the
system tools/money market operations of the central bank was not effective. This is
also why besides the use of this tool from 2010 till now to bring the market interest
rate to the desired level, the central bank must use the ceiling rate.
Discount rate, refinancing rate and base rate were positively correlated with
market rates (3-month deposit and lending rate). However, deposit rate was above
discount rate and refinancing rate for most of the period. Hence, Vietnam has not
succeeded in establishing a benchmark interest rate corridor in which deposit rate
should be between the discount rate and refinancing rate.
In addition, The State Bank of Vietnam also allowed commercial banks to
apply negotiable lending interest rates for medium and long-term lending activities
(Circular 07/2010 / TT-NHNN issued by the State Bank on February 26). / 2010 and
for all types of loans (Circular 12/2010 / TT-NHNN, April 14, 2010), in order to
stimulate capital markets for businesses. The return to applying negotiable interest
rates between borrowers and lenders policy have significantly reduced the role of the
base interest rate because they have terminated their operations under the ceiling
interest rate regime (maximum equal to 150% of the prime interest rate). The increase
in basic interest rate from 8% to 9% / year in November 2010 and stable at 9 shows

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that the guiding role and reference information of the base interest rate become very
lackluster in terms of being a reference.
2.2. Impact of Interest rate policy
It can be said that the SBV operates the base interest rate, refinancing interest
rate and discount rate are relatively flexible, consistent with the monetary policy,
market demand and supply, ensuring a harmonious relationship between VND interest

rates - exchange rate - foreign currency interest rate and considering the quantitative
relation, the fluctuation trend of major interest rates in the monetary market. The main
types of interest rates on the money market were more positively related: The OMOs
rate < base interest rate < lending interest rate of credit institutions to customers.
However, the mechanism of interest rate management of the State Bank still
has some limitations:
- The amount of money supplied for the credit line is controlled by the
Government every year and the main objective is to curb inflation, so the effect
of refinancing interest rate in operating monetary policy is still limited.
- The relationship between market interest rates and the interest rates of the
State Bank (refinancing interest rate, discount rate, open-market professional
bidding interest rate, treasury bill bidding interest rate, deposit interest rate of
banks CIs at the State Bank) are still weak, sometimes separated, fluctuating
and not suitable to the market interest rate mechanism. The role of regulating
market interest rates of OMOs rate is still limited.
- The monetary market is not yet developed and heterogeneous, making the
effectiveness and transmission speed of monetary policy affect market interest
rates more sluggish.
- Generally, treasury bills play a very important role in the money market,
treasury bill interest rates are considered the lowest interest rates in the money
market. However, in fact, over the past years, the interest rates of Treasury bills
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did not really match this principle, but sometimes equal to the interest rates of
the same term of commercial banks. The treasury bill bidding session at the
SBV is not quite an interest rate tender, so it sometimes doesn't reflect correctly
the market interest rates.
- The current interest rates on interbank money market among credit
institutions sometimes still do not reflect the true supply - demand of capital

2.3. Expected impacts and changes in interest-rate policy to Vietnam's economy
in US-China trade war
After the decision to apply a 25% tax on US $ 50 billion of goods imported
from China took effect in August 2018, on September 17, 2018, US President D.
Trump officially announced that US would impose a 10% tax on goods imported from
China worth nearly 200 billion USD, effective from September 24, 2018 and the tax
rate was to 25% from May 10, 2019. President D. Trump also warned, if no agreement
is reached, the US will continue to impose tariffs on about USD 300 billion of
remaining imported goods from China. In response, China imposed a tax of 8-25% on
more than 5,000 products imported from the US with a total value of 60 billion USD,
one of which came into effect on September 24, 2018 and the rest came into effect
from 1/6/2019.
The complicated happenings in the global finance market have had strong
impact on emerging countries. However, Vietnam bears less impact thanks to its
flexible exchange rate policy.
Currently, to respond to the potential impacts of trade war, countries tend to
lower their interest rates. However, in the case of Vietnam, there are numerous reasons
why VND interest rates cannot be lowered. First, inflation remains high, as expected
by the National Assembly of 4%. Normally, interest rates must be higher than inflation
to some extent. Over the years, when inflation rate stood at 3-4%, interest rate would
be at 7-8% / year. Therefore, the VND interest rate was not lowered, because the
inflation did not decrease much.
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Secondly, Vietnam is implementing the policy of restructuring banking system,
including bank liquidity. In general, Vietnam's banking system is still stable, although
there are still Credit Institutions with bad liquidity indicators and debt treatment.
Therefore, a number of credit institutions recently raised their interest rates and have
been warned by the State Bank of Vietnam.

Third, the State Bank of Vietnam also requested to reduce the ratio of shortterm capital used for medium and long-term loans. To meet the requirement, credit
institutions must have more capital. Therefore, though they can curb credit growth,
credit institutions at the same time need to increase capital mobilization. Those are the
reasons why Vietnam cannot lower interest rates.
However, lowering interest rates is a legitimate requirement of the economy
because this is the cost of capital and input for manufacturing and production of the
economy, so it is necessary to set a target to reduce interest rates. Specifically, when
macroeconomic stability with low inflation is achieved, the State bank of Vietnam
must set a roadmap to lower interest rates.

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CHAPTER 3: RECOMMENDATIONS
3.1. Solutions to regulate and control interest rate
3.1.1. Improve interest-rate liberalization mechanism
In order to implement the process of interest rate liberalization, contributing to
the integration into the global financial and monetary market in the coming time, the
author proposes the following solutions:
Firstly, build a system of indicators to control the interbank market: The
establishment of a system of indicators controlling the interbank market to timely
monitor interest rate movements in the interbank market, as a basis for issuing
refinancing interest rate. Currently, the State Bank is implementing a direct operating
mechanism with limits on mobilizing and lending interest rates of commercial banks,
making commercial banks' interest rates inconsistent with capital supply and demand
relations in the market making the use of refinancing interest rate tools, discount rates
less effective.
Secondly, forecast interest rate fluctuations according to the economic
situation: The forecast of interest rate fluctuations according to the domestic and
foreign economic situation, thereby applying measures to guide interest rates in line

with the reality of the economy , because interest rates are an important regulator of
monetary policy, especially in the process of Vietnam’s integration.
Thirdly, amend and supplement regulations on refinancing, discounting and
rediscounting. Accordingly, the State Bank needs to make amendments and
supplements to the regulations on refinancing, discounting and rediscount of the State
Bank for credit institutions in a more open way in terms of borrowing conditions and
loan limits for commercial banks.
Forthly, perfect the regulations on interest rates, foreign exchange management
regulations in accordance with international practices. SBV needs to improve the
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regulations on interest rates in line with international practices, improve and develop
the inter-bank domestic currency market, government bond bidding market, open
market operations to get interest rates. This market is the basis for determining base
interest rates in Vietnam dong. At the same time, it is necessary to announce the
interest rates of deposits and loans in VND by the year, the specific terms for lending
and mobilizing interest rates are calculated on the basis of the annual interest rates for
foreign currency interest rates in accordance with international practice.
Fifthly, reducing forms of preferential loans in the banking system: This is an
indispensable requirement in the process of interest rate liberalization. Based on the
experience of interest rate liberalization in other countries, it is too late to mention the
issue of eliminating preferential interest rates in the process of interest rate
liberalization in Vietnam. Countries usually carry out this control at the beginning of
interest rate liberalization process because the existence of preferential interest rates
affects the commercial lending rates of financial intermediaries.
Normally, commercial banks still use the self-mobilized capital to give
preferential loans according to the designated targets, but the subsidy for reducing
lending interest rates has not been fully implemented (only done when the business is
making a loss). In such cases, commercial lending rates will be pushed up to

compensate for preferential loans. In addition, preferential lending in these cases is
often associated with credit risk, caused by the borrower, may also be caused by
commercial banks themselves, because they think the loans have been guaranteed by
the State, should not care about the efficiency of investment, monitoring the use of
loans ...
Sixthly, improve the management capacity and supervisory role of the State
Bank: It is necessary to improve the independent position of monetary policy and the
autonomy of the State Bank in managing monetary policy. Reform the organizational
structure of the State Bank system aiming for centralizing management,
administration, improving specialization, clearly defining functions and duties, and
strengthening coordination among units.
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Seventhly, improve the competitiveness of commercial banks. The State Bank
of Vietnam should approve the classification and resolving of non-performing loans
(NPLs) of commercial banks, enhance the transparency of annual financial statements
and strengthen assets and credit quality as well as improve the quality of credit control
activities of commercial banks to meet the requirements of international integration.
3.1.2. Improve the effectiveness of interest rate instruments
Currently there are many ways to determine the operating interest rate of the
money market. In the US, FED uses interbank-oriented rates and discount rates, the
ECB (Eurozone’s Central Bank) uses refinancing rates, overnight lending rates, and
overnight interest rates, BOJ (Bank of Japan) uses use discount rates and overnight
rates. Meanwhile, the trend of using interbank interest rates is gradually becoming
popular in developing countries. Interbank market can be understood as wholesale
capital market among banks. Therefore, interest rates on the interbank market are
always a sensitive variable and fully reflect the fluctuations of the interbank market in
particular and the monetary market in general. Therefore, interest rates in the
interbank market should become interest rates in Vietnam market.

The interbank market establishes interest rates based on negotiated interest
rates (lending rates are based on self-assessment and negotiation with customers).
Hence, the general solution is to improve the efficiency of the interbank market,
ensuring that this market rate is the basis for the central bank to determine the interest
rate of the VND (VN BOR interest rate).
- Select a number of reputable banks and their offered interest rate on the
market as a basis for determining the average transaction interest rate in the
interbank market, this average interest rate will be published daily for reference
by credit institutions.
- The State Bank should develop an interest rate scheme based on interbank
rates and other interest rates

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- Besides, other interest rates need to be revised and supplemented to suit the
development trend in the future to further improve the effectiveness of these
interest rate tools, for example: Treasury bills interest rates, rediscount interest
rates, interest rates on the open market…
3.2. Solutions to create conditions and foundations for the implementation of
policies and mechanisms for interest rate management
Enhancing the independence and operability of the State Bank, step by step
clearly delineating the powers and responsibilities of the National Assembly, the
government and the State Bank in the process of planning and implementing monetary
policy, restructuring the bank. The State Bank should follow a centralized
management model
Issuing new regulations on the safety of the credit institution system,
accounting, bank audit, building a system of measures to control international capital
flows and foreign debts.
Innovating monetary policy and planning, improving macroeconomic and

monetary forecasting capability of State Bank
Developing money market, modernizing payment system; diversify and
standardize debt instruments; developing interbank market; developing foreign
exchange market. Mobilizing capital sources, including ODA, to continue investing in
modernizing the payment system; continue to improve the legal framework in the
field of payment. Finally, encouraging commercial banks to expand and connect card
payment network and other modern forms.

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