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Banks Forced to Reduce Interest Rates

A high number of deposits followed by a low number of loans have created a cash flood for banks, forcing them to lower their interest rates.

Since mid-2009, major banks have sought to increase the number of loans they give and decrease the amount of cash deposits they receive, or at least the interest they must pay out.

The increased liquidity produced by high numbers of depositors and low numbers of borrowers means the banks have not been able to earn revenue on loans and face higher risks from increased costs.

Acleda Bank, for example, saw a 40 percent increase in deposits in 2009 compared to the year before, for a total of $688 million. But as of January, the bank has lowered its interest rates on deposits to 5.75 percent, down from 7.5 percent in mid-2009. At the same, the bank has lowered its lending rate for medium-sized loans (between $20,000 and $1.5 million) from 15 percent to somewhere between 10 percent and 13 percent. Rates for small loans dropped from 28 percent to 26 percent.

“If the deposit growth is too fast like this, we have to lower the deposit rate, in order to reduce the amount of deposits,” said In Channy, Acleda’s chief executive officer. “Now we’ve already reduced it to a reasonable rate, and we’ve also reduced our lending rate. This can partly help grow credit.”

In another example, Malaysian-owned Cambodia Public Bank recently reduced its annual deposit interest rates to 4.75 percent and its interest rate on loans to between 11 percent and 12 percent. At one time, the bank charged the highest loan rates, at 15 percent, and offered the highest deposit rates, nearly 8 percent.

“I think the trend is probably still down,” said Phan Ying Tong, country head of Cambodia Public. “We are still looking at it now.”

Cambodian banks began heavily competing with each other in 2008, offering high rates in efforts to bring in customers, prior to the global financial crisis that began in 2008. Even after the crisis, rates continued to rise until they created the current liquidity problem.

The nation’s 33 commercial and specialized banks brought in $3.3 billion in deposits in 2009, an increase of nearly 33 percent from the year before, according to National Bank figures. But they were barely able to increase the amount of money they loaned, dispersing only $2.45 billion in 2009, a 3.2 percent increase from the year before.

The four largest banks—Acleda, Canadia, ANZ Royal and Cambodia Public—account for 70 percent of deposits and loans, and all four are facing high liquidity and slow lending growth, officials said.

ANZ Royal has reduced its annual deposit rates from 7 percent to 3.75 percent and is in the process of reducing its lending rates within the year.

But the bank’s chief executive officer, Stephen Higgins, said the interest rate reduction may not be able to help balance deposits with loans, as deposits remain high and lending remains low.

“All you can do with [the deposits] is give them to the central bank and earn something close to 0 percent on them,” he said. “We probably have over $200 million with the central bank. There is nothing else we can do with it. We can withdraw them back only we’ve got something better to do with it.”

Charles Vann, deputy director general of Canadia Bank, said his bank faces a similar problem, but it hasn’t taken any measures to reduce liquidity.

Tay Nay Im, director general of the National Bank, said the central bank has no measures to help ease liquidity. But she encouraged banks to reduce their interest rates, which could help them have a sustainable growth in the midst of the economic downturn.