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 profit. Borrowers who are short of capital have chances to get additional capital to meet production, business or living needs. Therefore, owing to the credit activities that a large proportion of capital in the economy are mobilized, concentrated and distributed fromtemporary capital surplus sections to shortage ones to meet different needs of all entitiesin the economy.

Indispensable leverage and tool in credit activities is interest rate. Interest rate of bank credit is the ratio in percentage between income and amount of loan for a certain period. Thus, interest rate is the price of using capital which is associated with banking,credit, and all economic activities related to deposits and loans.

On the other hand, the interest rate is a sensitive and effective tool of national monetary policy for controlling the economy. Through changes in the level and structure of interestrates in each period of time, Government may affect the size and density of investment’stypes, so that affect the structural adjustment process, thegrowth, production, unemployment and domestic inflation. Moreover, in certainconditions of an open economy, interest rate policy is also used as a tool for controllingcapital flows for a country, affecting and regulating stability of exchange rates. This doesnot only impact directly on investment and development but also the balance of paymentsand international trade relations of a country.

Therefore, in the developed countries which are following the financial liberalization policy, interest rate is formed based on the market. It means that the relationship betweendemand and supply will determine the interest rate.

1.2 Some criteria for classification of bank credit interest rate:

There are many criteria for classification of bank credit interest rates.

 Based on credit terms, interest rates of bank credits were divided to three types. Short-term interest rate is applicable to short-term credits, medium-term interest rate is appliedto medium-term credits and long-term interest rate is applied to long-term credits.

 Based on the stability of interest rates, they are divided to a floating rate and fixed rate. Floating rate can change up and down, but fixed rate is the interest rate applied duringthe credit period.

 Based on the type of credit interest rates , interest rates are divided to differentcategories. Deposit interest rate is paid on deposits, which has different levels dependingon the time-limit and scale of deposits.

 Loan interest rate is the amount of money that borrowers pay to banks by using bank loans. It is applied to calculate the loan interest that customers must pay to the banks.

 Discount rate applied to bank loans in the form of commercial bill discounting or other customers’ undue valuable papers. It is calculated by the ratio in percentage of the papers’ par value and deducted as soon as banks make loan to customers.

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 Rediscount interest rate was applied in the process of capital refinancing, in form of re-discounting commercial bill or other undue short-term valuable papers of the banks. It iscalculated by the ratio in percentage of the papers’ par value and also be deducted as soonas the State bank makes loans to commercial banks.

 Interbank interest rate is the interest rate that banks apply for others’ loans on theinterbank market. It is formed by money supply-demand relationship of creditorganizations and under the control of State Bank’s capital refinancing interest rate. Baserate is the interest rate banks use as the basis to determine the rate of their business.

2.Some distinctions about Interest Rate.

2.1. Interest rate - Income

 Interest rate is the rate at which interest is paid by a borrower for the use of money that

they borrow from a lender.

Interest rates are fundamental to a capitalist society. Interest rates are normally expressedas a percentage rate over the period of one year.

 Income is the consumption and savings opportunity gained by an entity within aspecified time frame, which is generally expressed in monetary terms. For firms, incomegenerally refers to net-profit: what remains of revenue after expenses have beensubtracted. In the field of public economics, it may refer to the accumulation of bothmonetary and non-monetary consumption ability, the former being used as a proxy for total income.

2.2 Real vs nominal interest rates

The nominal interest rate is the amount, in money terms, of interest payable.

• For example, suppose a household deposit $100 with a bank for 1 year and theyreceive interest of $10. At the end of the year their balance is $110. In this case,the nominal interest rate is 10% per annum.

The real interest rate, which measures the purchasing power of interest receipts, iscalculated by adjusting the nominal rate charged to take inflation into account.

• If inflation in the economy has been 10% in the year, then the $110 in the accountat the end of the year buys the same amount as the $100 did a year ago. The realinterest rate, in this case, is zero.

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After the fact, the 'realized' real interest rate, which has actually occurred, is given by theFisher equation, and is

where p = the actual inflation rate over the year. The linear approximation

is widely used.

The expected real returns on an investment, before it is made, are:

where:

= nominal interest rate

= real interest rate= expected or projected inflation over the year 

Generally a real variable, such as the real interest rate, is one where the effects of inflation have been factored in. A nominal variable is one where the effects of inflationhave not been accounted for. A few examples illustrate the difference: Nominal Interest

Rates vs. Real Interest Rates

Suppose we buy a 1 year bond for face value that pays 6% at the end of the year. We pay

$100 at the beginning of the year and get $106 at the end of the year. Thus the bond pays

an interest rate of 6%. This 6% is the nominal interest rate, as we have not accounted for 

inflation. Whenever people speak of the interest rate they're talking about the nominal

interest rate, unless they state otherwise.

 Now suppose the inflation rate is 3% for that year. We can buy a basket of goods todayand it will cost $100, or we can buy that basket next year and it will cost $103. If we buy

the bond with a 6% nominal interest rate for $100, sell it after a year and get $106, buy a basket of goods for $103, we will have $3 left over. So after factoring in inflation, our $100 bond will earn us $3 in income; a real interest rate of 3%. The relationship betweenthe nominal interest rate, inflation, and the real interest rate is described by the Fisher Equation:

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Real Interest Rate = Nominal Interest Rate - Inflation

If inflation is positive, which it generally is, then the real interest rate is lower than thenominal interest rate. If we have deflation and the inflation rate is negative, then the realinterest rate will be larger.

3. Interest rate policy

3.1 Concept

There’re many ways to define Interest rate, but in the briefest, Interest rate is the amount

charged, expressed as a percentage of principal, by a lender to a borrower for the use of 

assets. Interest rates are typically noted on an annual basis, known as the annual

 percentage rate (APR). The assets borrowed could include, cash, consumer goods, large

assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to

the borrower, for the asset's use. In the case of a large asset, like a vehicle or building, the

interest rate is sometimes known as the “lease rate”.

To simply put: The interest rate is the yearly price charged by a lender to a borrower in

order for the borrower to obtain a loan. This is usually expressed as a percentage of the

total amount loaned.

There’re also 2 elements of interest rate that we have to consider: Nominal & Real 

interest rate.

In finance and economics nominal interest rate or nominal rate of interest refers to the

rate of interest before adjustment for inflation; or, for interest rates "as stated" withoutadjustment for the full effect of compounding. An interest rate is called nominal if thefrequency of compounding (e.g. a month) is not identical to the basic time unit (normallya year).

The "real interest rate" is approximately the nominal interest rate minus the inflation rate. It is the rate of interest an investor expects to receive after subtracting inflation. Thisis not a single number, as different investors have different expectations of futureinflation. If, for example, an investor were able to lock in a 5% interest rate for thecoming year and anticipated a 2% rise in prices, he would expect to earn a real interestrate of 3%

3.2 Some interest rate policies in the free market

 A, Fixed interest rate policy

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 Fixed interest rate is a loan or mortgage with an interest rate that will remain ata predetermined rate for the entire term of the loan. It’s neither changed during loan period at a bank nor effected by fluctuation of interest rate in the market.

The benefit of fixed interest rate is that we can estimate the bank’s interest in the loan

 period, which makes it easier to arrange finance.

This policy can bring another advantage to customers when the market interest rate israised higher than that of the bank. However, when the interest rate decreases lower thatthat of the bank, the customers have to bear higher interest rate than others do.

 B, Liberalized interest rate policy

 Liberalized interest rate policy is the interest rate that changes over time. It depends onthe legal agreement between the bank and the customer, which is stipulated on the loancontract.

 Liberalized interest rate policy is more suitable for a changing market. For example, if the market interest rate decreases, the interest rate the customer has to pay is reduced.However, the customer can only estimate the interest in the first term, facing difficultiesin the long run. Furthermore, when the market interest rate increases, the amount of money the customer has to pay is higher.

C, Ceiling interest rate policy

The ceiling interest rate, or the maximum interest rate that a financial institution cancharge a borrower for an adjustable rate mortgage or loan according to the contractual

terms of the mortgage or loan. This interest rate is expressed as an absolute percentage.

For example, the terms of the loan might state that the interest rate can never exceed19%.An interest rate ceiling is sometimes used interchangeably with the term "lifetime interestrate cap". However, an interest rate cap is usually expressed as a maximum changeallowed in an initial interest rate.

For example, a 5% interest rate cap would suggest that the interest rate on the borrower'sloan can fluctuate within a 5% range during any specific rate adjustment period.

 D, Preferred interest rate policy

Preferred interest rate policy is the proportion of rate the bank charge over loyalcustomers. This policy strengthens the relationship between the bank and the customer.

II. Influences of interest rate policies on Vietnam macroeconomy

1. Roles of interest rate

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discount rate higher than market interest rates, they will cause an increase in moneysupply.

There is always a force to push the banks to race for the higher deposit and loanamount, and to capture the bigger market share. To obtain high deposit amount, the bank may increase the interest rate of deposit. With the big amount of deposit obtained, the bank can also offer good quality of loans, and gain more and more power on the lendingside (in term of availability, flexibility and amount). On the other side, to release thecaptured deposit, the banks can not increase the lending interest rate too high. The“price war” of interest rate is always a danger for the banking system, because itdeduces the margin (lending rate - deposit rate - operation expenses) and it can leadthe banking system to crisis. In Vietnam, the failure of some small banks (or small creditinstitutions) in 1990s is one bloody experience of this type.

- Inflation domination

+ what is inflation?

inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods andservices; consequently, inflation is also an erosion in the purchasing power of money – aloss of real value in the internal medium of exchange and unit of account in the economy.Annual inflation rate is reflected by the ratio of the increase in average price after a year.

If  P 0 is the current average price level and P  − 1 is the price level a year ago, the rate of inflation during the year might be measured as follows:

+ Inflation domination

When serious inflation occurred, the government tends to impose monetary policies inorder to reduce the amount of money in circulation to keep the value of the currency. Inthis case, they usually push up interest rate. This method is also used to stabilize the pricelevel among different areas, which help to promote production and goods circulating.

Following the quantity theory of money, as the interest rate increases, the moneysupply decreases, and the price tends to decreases to balance the equation of quantitytheory of money (MV ≡ PV). In addition, an increase in interest rate will cause both theconsumption and investment demand to decrease as discussed above, which resultsin the decrease of aggregate demand of economy, and a lower equilibrium pricecan be expected due to the move of demand curve to the left. However, this effectseems to be short-term because the decrease of investment will finally result in thedecrease of supply, which in turn moves the supply curve to the left and bring the price back to the first equilibrium position.

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- Effect on investment and savings

+ InvestmentIn respect of investment, it concerns more about businesses, who increase

their investment if they can borrow money at low REAL LENDING interest rate.In Vietnam, where bank loans are major local sources of financing investment,interest rate is very important for investment. On the other side, if the investmentis high (e.g. in booming economy), banks demand more money by increasingDEPOSIT rates, while increase LENDING rates to compensate and get profitsfrom the investors (who are hungry for money). Collectively, a low real interestrate will boost consumption and investment, which results in the growth of [HOT]economy; while a high real interest rate tends to COOL the economy. Empiricalevidence in Vietnam shows that, when the effect of inflation is removed, the Real GDP

goes in opposite direction against Real Interest Rate.

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+ Savings

Because the consumption is by individual and households and the borrowing for consumption is very low in Vietnam, it relates more closely with the deposit interest rate,than the lending rate. If the REAL DEPOSIT interest rate is high, people tend to savemore money in deposit, rather than spending. On the other side, if the consumption ishigh, the income available for saving is low, and the banks have to increase depositinterest rate to get more deposit.

1.2 In microeconomic

Interest rate is the tool that helps corporations decide on investment spending: on

 business activities or savings.

Consumption and investment spending: Increased interest rate reduces the attractiveness

of current spending rather than spending in the future of individuals and companies.

Domestic credit, the total amount of money and the actual demand are reduced (in case

the interest rates decreases it will have the opposite effect). When the real interest rates

increase, households have to reduce demand at home or the purchase of durable

consumer products because their credit costs increase. Along with interest rates, real

interest rate also increases. The increase in interest rate has affect on consumption

decisions of the household sector in the way of reducing the current consumption and

increasing savings for consumption in the future. For the business sector, the increase in

interest rate will heighten the cost of bank loans. This requires investment projects using

 bank loans must create greater profit. As a result, investment projects which are

implemented with higher interest rates could reduce or fixed investment may be reduced.

In addition, high interest rates also increase the costs of holding working capital (eg

inventory) and therefore, the government should put pressure on companies to reduce

 business investment and increase working capital.

Therefore, interest rates can impulse the effective performance of companies and become

competitive instrument between credit organizations.

2. Reality of Vietnam during the period from 2000 up to now

 Period from 8-2000 to 5-2002: Managing interest rate along with amplitude

The meaning of this is that the Central Bank was manage the interest rate by banking law

instead of setting ceiling interest rate. The prime rate or basic interest rate and amplitude

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are published monthly, in case of indispensability, the Central Bank will make timely

correction.

With foreign currency interest rate, basically, commercial banks, and credit agencies

were able to establish it based on interest rate in International market and domestic

capital supply and demand of those foreign currency. The mechanism showed that theCentral Bank was try to renovate interest rate policy by liberalizing and step by step,

integrate interest rate into region and international market

 Period from 6-2002 to 2008: Interest rate agreement 

In fact, this mechanism was establish by the Central Bank step by step since 5-2001,

applied for foreign currency loans. Follow by the interest rate agreement mechanism in

domestic credit activities. In overview, the process of liberalizing interest rate in Vietnam

was showed some results.

2008: Chaos

The year 2008 begin with an unfavorable turn in the situation of the stock market and

raising inflation rate. SBV (State Bank of Vietnam) apply tightening currency, using both

means of interest rate and open market activities. Means of interest rate are maximized

used, continuous corrected and aggressively developed.

Since the middle of January, required reserve rate was increased 1% with domestic

currency deposit and foreign currency deposit. Interest rate for refinance also increased

twice during the period from January to June 2008. Discount rate raised 8.5% in compare

with late 2007, to 13% per year since 10-6-2008. During these time, SBV set the primerate as 14% which made the ceiling interest rate went up to 21% per year. The

 prominence in these time when banks were cope with difficult liquidity is mobilizing

interest rate in short term is equal, even higher than mobilizing interest rate in long term.

2008 also a year with the interest rate varies with flexibility in managing currency policy

of SBV. Open market businesses are implemented in both expand and tighten currency

was not a big deal with interest rate. In the third week of 2-2008, SBV pushed 33.000

 billion VND in circulation but commercial banks were keep raising mobilizing deposit

interest rate. At SHB (Saigon-Hanoi joint-stock commercial bank), mobilizing interest

rate were corrected 3 times only in 10 days and went up to 12,5% with 1 month schedule.

The statement of publishing 20.300 billion official paper was declared in the middle of 2-

2008 and implemented 1 month later. In case of interest rate level was increasing, it was

difficult to find out how this business affected the interest rate. In June 2008, mobilizing

interest rate at commercial banks was nearly the lending interest rate. 30-6-2008. Kien

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Long Bank applied the highest record of 20% mobilizing interest rate for 12 months

schedule customers. Vague effects of those open market business in the time of inflation

was the sign of liquidity trap in the system. In that case, adjust increasing means of 

interest rate was reasonable solution and soon lead to stable currency market.

At the end of 6-2009, 2 billion Government bond with 2 months schedule and interestrate of 11% per year was mobilized successfully. In spite of not very large amount but the

issue opened the ability to maintain the currency-finance macro policies. Only 2 weeks

ago, the tendering of 2 and 3 years schedule Government bond in 13-6-2008 was not get

any appealing. In the market, some financial organizations were ready to assign the

owned bond with discount level raise up to 40% par value, but can not find attention.

Biểu đồ lãi suất và lạm phát năm 2008

0

2

4

6

8

10

12

14

16

 

In compare with region currency crisis in 1997-1998, Vietnam currency policy in 2008used more means and more intensive adjustment. In order to support the business units to

overcome the difficulty in case of region currency crisis, currency policy was expanded

during 1997-1999. With positive real interest rate, the currency solutions were help

stabilize macro economic. High lending fee and increasing price input were put pressure

on production activities in 2008. Accept high raising input cost, limit credit expand,

commercial banking system was also have problem with liquidity. It can be the

consequence of low quality credits which were provided before, with large percentage for 

real estate projects and finance investments.

2009: Loosening, supply production

In early 2009, SBV began loosening currency by correcting some important interest rate

in the currency market. For more details, interest rate for refinance, rediscount, overnight

lending in electronic payment in interbank system and lending for supplying the shortage

in payment of SBV with other banks are decrease with popular level of 1%.

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From 10-4-2009, interest rate for refinance was 7.0% per year instead of 8%; discount

rate was 5.0% instead of 6% and overnight lending interest rate in electronic payment in

interbank system and lending for supplying the shortage in payment of SBV with other 

 banks decrease from 8% to 7%. Although the basic interest rate was still 7%, the act of 

decrease the important interest rate in the market of SBV was considered the act of 

loosening currency policy in order to make money for production activities.

Supply production

The remarkable issue of SBV in 2009 is the support interest rate package for short term

lending, a part of demanding stimulation package of the Government. Regulation number 

131 said that since 23-1-2009, with loans with maximum 8-month currency, customers

are supported 4% account for the amount of money lent and real lending time, during 1-2

to 31-12-2009. Aiming at the mid and small business, the Government hope that the

support package would help decrease price of goods and services, maintain production

activities and created job in the situation of recession.

With 218.424 billion VND for the interest rate support package, in theory, lending

interest rate for production-business would be only 4.5-6.5%, agriculture in rural area

could lend with 0% interest rate. But in fact, in the late 2009, the race of interest rate

 between banks was start again because of credit demand increase sharply.

Other demanding stimulation methods (exclude the interest rate support package) lead to

the raise of demand for credit capital to invest. Beside that, favourable policies and

 promotional policies and people were become familiar with lending money for 

 production and consumption. Maybe, the inflexible exchange rate policy also createvisual prediction for increase exchange rate which made the companies lend domestic

currency and keep foreign currency instead of sell out.

The credit demand overcome the supply would push the real interest rate increase.

Obviously, when interest rate raise, the issue would automatically decrease the demand,

 but it was decrease the number of new lending, with the old contracts and credit

commitments, customers might suffer the high interest rate because they could not stop

 production or investing project. The ceiling interest rate also became a barrier when the

 banks could not increase interest rate (and promotion) of input if the interest rate (and

lending fee) of output could not increase either.

Dual interest rate regulation (ceiling and over-ceiling) which create a big hold for the

 banks to claim higher ceiling and also available for them to cheat or process negative

 policies. The effectiveness of controlling those activities was still not high so the issue

would open more chances for the interest rate racing. Increasing interest rate could not

increase total deposit of the banking system, it was only make the money transfered

 between banks themselves. Interest rate racing didn’t help increase net income and only

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make the system cope with more risks, raise the income of depositor by increasing

 burden on paying interest of firms and lender.

In fact, when the interest rate support package was applied the first time, a lot of firms

still could not approach the procedures and conditions. 2% credit growth rate had nothing

to do with 70% funding rate. According to SBV, up to 3-4-2009, total disbursement likethe interest rate support lending balance due (202.131 billion VND), in that case, credit

 balance due had be 16% but the real data was 2.67%. Obviously, the rest was pushed

 back to the banks and instead of demanding stimulating, it was supply promotion.

At the end of 2009, the stimulus package ended and capital demand in the post-crisis

  period increased sharply, while the basic interest rate almost failed in promoting its

effects as before. With the basic interest rate at 8 percent, the official credit rate ceiling is

at 12 percent, while the deposit rate has an agreed ceiling of 10.5 percent. In practice,

however, the actual credit rate is at 17-18 percent, and the deposit rate was generally 13-

14 percent.

2010: Prime rate 8% and benefits in the first 3 months of 2010

SBV’s announcement that it would leave the basic interest rate unchanged marked the

fourth consecutive month it has applied this policy, begging the question of why it has

maintained its policy.First, SBV is sending the message that inflation is still under 

control, and that it is commited to maintaining moderate interest rates to stimulate

economic growth.

The consumer price index (CPI) increased 1.96 percent in February as compared to the

 previous month. In the first two months of the year, CPI has already increased 3.35

  percent, nearly half the 7 percent target for all of 2010. Compared with the

 previous years, February’s CPI is higher than that of February 2009, but much lower than

CPI from 2002 to 2008. The average CPI in this 7 year period increased 2.54 percent and

was above 2 percent in February.

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As viewed in this context, February’s CPI increase does not appear to pose a major 

concern. The sharp increase of many goods during the Lunar New Year is partially

attributable to the long holidays. Additionally, the adjustment of the exchange rate alsoled to price increases for some items.

The price increase of input materials, such as chemicals, cement, and steel, for production

may impact CPI in the coming months. Furthermore, as discussed below, the basic rate

will not have the same impact as SBV begins allowing negotiable interest rates for 

medium and long-term loans and more fees for short-term loans.

Finally, maintaining the basic interest rate reassures investors and the stock market,

 particularly as the effects are felt of the exchange rate adjustment.

Basic interest rate is not making senseTo amend the rigidity of the interest rate cap regulation, SBV issued Circular No.

01/2009/ TT-NHNN on January 23, 2010, allowing credit institutions to apply negotiated

interest rate mechanisms for loans for living consumption.

While the basic interest rate (and other rates of SBV) acts as a sign of monetary policy,

real interest rates will have more impact on the stock market. When the basic interest rate

and real interest rate are not as closely linked as they were previously, more attention

should be paid to the actual interest rates on the market.

Interest rate increases affect the stock market in three ways:

(1)The discount rate for shares will increase, meaning that the interest rate required by

investors to purchase a stock becomes higher, and stocks prices tend to decline. In

addition, higher interest rate costs will negatively affect the business results of 

enterprises.

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(2) An interest rate increase is a signal that monetary policy is tightening, which will limit

cash flow into the stock market since it can be switched to more attractive investment

channels.

(3) Investors’ confidence in the market will be rattled, with some fearing more significant

instability.

The real credit rate is currently at 17-18 percent, while deposit interest rates are at 13-

14 percent. This high rate clearly hasn’t had positive impacts on the stock market

recently. With the gradual withdrawal of the economic stimulus package and capital

demand remaining high, it may take more time to reduce the stress on actual interest rates

in the market.

Fail to cut interest rate down

Up to date, bank deposit and lending rates in dong are still high compared to the

government targets set earlier May, 2010 at 10 percent per year (input) and 12 percent

(output). Currently, the highest deposit and lending interest rate are at 11.2 percent and

15 percent per year. It seems that the solution to cut down interest rates is not as effective

as expected.

Right from the beginning of July, Vietnam Banking Association (VNBA) has identified

optimistic outlook about Vietnam’s economic situation, and sees this as a favourable

opportunity for commercial banks to reduce deposit and lending rates.

VNBA also agreed with the interest rate reduction policy of the government. In response

to the policy of the government, VNBA has set out the roadmap to reduce deposit rates to10.5 percent in August and 10 percent in September, 2010.

But now, reality shows, these goals have gone almost “bankrupted”! A credit manager of 

a large commercial bank in HCM City said that the maximum interest rate of the dong of 

many commercial banks is now 11.2 percent per year and not to added with any

 promotions.

So interest rates cannot be decreased as expected, and the lowest interest rate (around 12

 percent – 13 percent per year) is just for banks’ traditional clients in the export sector,

while production business lending rates generally ranges from 14 percent – 15 percent

 per year.

 Not only businesses complain, but also does right the above manager admits that current

loan interest rates are unbearable for businesses. Therefore, the number of new customers

of commercial banks increased very little, mostly former clients.

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The general situation is not different much. Under the State Bank of Vietnam (SBV) – 

HCM City Branch’s data, in late August, the highest deposit rates in dong generally have

reached almost 11.2 percent per year, while the business lending rate of commercial

 banks is common at 13 percent – 14 percent per year. This figure in the nation is almost

similar.

SBV’s statistics showed that in the same time, dong deposit interest rates of commercial

 banks ranged from 10.6 percent – 11.2 percent per year and production and business

lending rate is located at about 13 percent – 15 percent per year. Furthermore, interest

rates in non-production areas such as consumer, and securities are again much higher,

ranging from 16 percent to 20 percent per year.

Therefore, the credit growth has been quite slow in Vietnam. In HCM City, the credit

increased only 1 percent in August compared to July, while credits in the first 8 months

only grew 11.3 percent compared with the end of 2009. In the country, the credit growth

in first 8 months was quite low, posting a 16.27 percent rise compared to late 2009.

According to a number of leading banks, the slow credit growth was blamed for banks

that were concerned to deal with Circular 13/2010-TT-NHNN (defined on the rate of 

safety in the operation of credit institutions) Specific commercial banks will increase

deposit mobilization, and limit lending (debt reduction) to ensure credit rate compared to

mobilized capital that does not exceed 80 percent.

 Not stopping there, the above move by banks was to cover also the mobilization of 

capital that has been diminished due to deposits and loans of the State Treasury, loans of 

other credit institutions in the country, demand deposits will no longer be seen asmobilized funds from October 1, 2010. Restrictions on lending by commercial banks are

understandable because in the eight months of this year, the rate of loans on capital

mobilization in the city area has exceeded 91.1 percent.

III. Up coming interest rate policy

1. Orientation.

Characteristics: The credit market in our country is not homogeneous and rate differences

exist in many regions, due to different demands and supplies of credit. It has lead to

higher lending rates of banks in cities, simultaneously caused other banks to raise their interest rates to avoid losing deposit money. Our country recently has segmentations in

financial markets and currencies as the market for treasury bills of irregular activities,

supplying not enough bills for inter-bank market through little bidding. Interbank market

has long been established but almost has no activity and little banks borrow directly from

each other or through loans secured by treasury bills. Central Bank issued through the use

of credit capital by providing funds directly to the state banks to make these kinds of 

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 preferential loans. This is a huge obstacle for the formation of market interest rates is the

direction of the base rate. Securities market in Vietnam formed during the currency crisis

occurring in all continents and require reform the world financial markets that we must be

alert and cautious. Therefore, interest rate policy in Vietnam has to contribute in

overcoming the limitations of the credit market in Vietnam, in growing and developing

our economic.

Policy interest rates of bank credit in our country must head to the right direction to form

a currency market, create a fair and healthy competition between credit institutions,

eliminate interest rate differences between regions, promote flexible capital between

economic sectors, urban and rural areas in line with the development of financial markets

in our country.

Credit interest rates have to meet the need of flexible handling and the requirements of 

competition among entities involved in currency trading, to raise capital towards gradual

liberalization of interest rates, while ensure to be controlled by the central bank for the

currency markets to avoid the affection of banks’ increase in interest rates to the level of 

domestic investment and to limit the maximum level of risk and adverse impact of 

fluctuations in world money market.

Credit interest rates facilitate banks and customers to deposit loan, to select a flexibleinterest rate consistent with the characteristics of each region, the level of risk in lending

 period and object of loans, mobilization and expansion of medium and long term loans

with the goal of mobilizing most all idle capital in the population to meet the capital for 

industrialization and modernization of the country.

Moderate interest rate policy must meet the demand relations of economic capital, just to

create conditions to reduce the operating costs of credit, ensure that there is enough

difference in interest rates to maintain and develop economic activities business of credit

institutions, i.e. after offset operational costs, banks have earned a reasonable profit.

Interest rates, for bank credit, has stimulated domestic production to encourage the

development of external economic relations, i.e. the domestic interest rates should follow

the international market interest rate to match the degree of in financial markets and

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international sector, making the relationship between interest rates USD - exchange rate -

foreign currency interest rates more flexible, more accurately. Interest rates policies of 

 bank credit in our country must gradually meet the requirements, while ensure the control

over the market.

In recent years, we have carried out a policy to directly control interest rates. This policyhas several advantages such as easy to implement, consistent with a country with

 primitive financial markets and less competitive level without adequate tools to control

interest rates and limit indirectly Executive management capabilities. However, on the

other hand, the interest rate control policies also have some problems. Direct control over 

interest rates may lead to impairment of financial intermediation of the banking system,

as resource savings will flow into the financial market will be unorganized and

unmanaged. Control of interest rates also led to the imposition of interest rate structure,

as complex as there exist many types of ceiling interest rates, causing the poor 

 performance of the national monetary policy. Control interest rate is not conducive to

competition in the less efficient banks that can survive without having to work under 

 pressure of competition, making it harder to solve the difficulties of these institutions.

The difficulties associated with control of interest rates are the opposite problem selection

and moral hazard. These risks tend to raise interest rates and increase credit risk.

Choosing the opposite option reflects the fact that control of interest rates will attract

 business despite the risks and the possibility to pay one’ debts or not, to find every way to

 borrow capital from banks now, while moral hazard arises because the lender is not able

to control the use of borrowed capital. In this case, choosing the opposite option arises

 because credit was given to borrowers who have the highest risk and to those projects

most at risk. When choosing the opposite option becomes serious, healthy businesses and

 private enterprises will be removed from the credit markets because they are not willing

to pay higher interest rates as businesses struggling. Such direct control of interest rates

 proves to be ineffective in conducting monetary policy, credit allocation, leading to low

competitiveness on the currency markets, reducing financial intermediary function of the

 banking system due to the lack of flexible and rigid. On the other hand, previous

economic trends of economic integration require us to be linked to market interest rates.

Therefore, to overcome the limitations of the direct control of interest rates, we must

gradually build up necessary conditions, step by step towards the liberalization of interest

rates while ensuring the control of Central Bank over the money market to meet thedemands, integrating into the world economy.

2. Solution.

- It's important to have a reasonable interest rate policy, to both stimulate investment and

create conditions for credit institutions to operating, increasing competition, and

resolving the inadequacies of the policy interest rate that is to be aware of the nature of 

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the base rate, determining appropriate interest rates. To build a reasonable interest rate,

we must note that the adjustment of interest rates should be based on the orientation of 

monetary policy in each period.

When building interest in relation to the exchange rate of the USD comparing to the

strong currency in the world and the region, especially the dollar, euro, yen, ... Becauseinterest rates and exchange rates have organic relationship with each other, when there is

an increase or decrease, it will directly affect the operation export and import of the

economy.

The announcement of the base rate depends on the average profits of the society. The

average profit rate is formed in the process of competition between economies. This is

entirely consistent with theoretical Marxist economics: profits of lending capital is

always smaller than the average profits of capitalist production and it is part of the

surplus value by sector A production.

Interest rates must be set in relation to interest rates of treasury bills, treasury bonds so

we can make the most of all resources in society.

We need to consider the relationship between interest rates and securities companies to

determine interest rate policy. When the stock market active, maintaining a reasonable

interest rate is a necessary condition, with no changes in central bank interest rate policy

will inevitably lead to fluctuations in financial markets. Interest on the money market has

great influence on the issuance and sale of securities in financial markets. If the interest

rate banks pay the high savings, the sender would like to send money in the bank for high

interest rate and low risk, rather than buying stocks with low returns but high risks.

- We have to build an environment for the base rate to take effect.

First, there must be a banking system operating dynamically and competitively. In the

competitive environment, the interest rate banks will fluctuate with interest rates close to

the direction of the Central Bank. Moreover, in the competitive environment, the banking

system will serve economic and residential products and services better.

The banks need to raise the role the credit balance: Diversifying the types of credit-to-

credit growth by capital growth. Organizing the regulation of capital within the system of 

 branch banks to ensure funds is not stagnant, while taking advantage of low cost capitalin the market for interbank lending. Increase investment in other business activities to

support the credit growth.

Second, we must build an open money market and new development environment for the

 base rate to take effect.

Third, to have a good payment system, especially the new instant payment cost of 

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technical support and management, creating conditions favorable for a smooth operating

money market and interest rate basis is essential.

- Promote the development of domestic markets and foreign currencies to banks, take it

as a basis to build and set up in interest rates generally, as the basis for the free market

interest rates later.

- Improve and enhance the impact of Central Bank by using the tools of monetary policy,

especially adjusting the flexibility of commercial banks create money by limiting the use

of capital and the refinancing of the re- discount debt contract and mortgage credit for 

valuable papers to ensure quality.

- For central bank announcing interest rates for its basic and life can go on a favorable

 basis, they must resolve the old outstanding commercial bank system. One of the

measures to address delinquency system of commercial banks is that the government

should promote the establishment and putting into operation effective trading companiesoverdue.

- Currently, the financial instruments such as commercial paper and other short-term

valuable papers to implement the discount rediscount have not been popular. Therefore,

we must soon make commercial paper, bills of exchange into circulation to make the

discount rate and rediscount of commercial banks and central bank because it was

 popular financial instruments of market economy.

- Accelerate the equalization process as the basis for the introduction of the goods

exchanged on the stock market, creating an environment perfect competition among

entities related to the turnover of capital in the economy.

- Place sources of foreign loans for reinvestment by banks in the central bank's strict

censorship in order not to create passivity in the operating volume of central bank money.

- Create a legal environment to encourage healthy competition among commercial banks

and credit institutions that are consistent with economic development policies more

components of the Party and State.

- A very important issue for our country's economy is to gradually establish the

conditions necessary to gradually liberalize interest rates while ensuring the control of the

central bank to market currency. Liberalization of interest rates has many advantages.

Due to the liberalization of interest rates, fluctuations in the supply - demand for capital,

it can allocate scarce capital credit loans for thousands of competitive people, meet the

tastes of the borrowers and at the same time the most effective ensuring attraction of 

money between banks. Interest rate liberalization has regulatory flexibility to adapt to

changing conditions, and motivate financial growth. Liberalization of interest rates is also

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a fundamental part of the liberalization of financial help for the implementation of the

integration process the world economy.

Besides the advantages brought by liberalization are the very case in which liberalization

does not perform its role. To liberalize interest rates and round its functions, financial

markets should be strengthened and developed. To promote the advantages anddisadvantages of limiting interest rate liberalization, a country when implementing the

liberalization of interest rates must know: macroeconomic environment has stabilized and

is solid, the legal framework was relatively stable and complete, the banking system

stable and efficient operation, the financial markets (including money market and stock 

market) has been formed and has operated effective, these domestic resources are

distributed and used effectively, the economic organization will ensure the ability to use

capital efficiently and thoroughly.

The general views on economic development in many parts of goods, operating under the

market mechanism, are the management of State-oriented socialist views. Along withopen-door policy of the economy, the trend of integration and globalization becomes

necessary for us to accelerate the development of our economy. In such conditions and

context, the issue of financial liberalization and interest rate liberalization in Vietnam in

 particular is an inevitable trend.

When these conditions are met, we will move on to the mechanism of interest rate

liberalization. Central Bank, as the operator of the national monetary policy, will use the

rediscount rate and interest rate to refinance to participate indirectly in adjusting interest

rates in the market to promote the role of interest rates for the development of the

economy.