Vietnam ordered its banks to cut rates by up to 2 points: who pays, who benefits and what it means for the dong

Is Vietnam cutting interest rates? Yes, but not the way most central banks do it. Instead of lowering a policy rate, the State Bank of Vietnam has directly instructed commercial banks to cut what they pay depositors and charge borrowers. Banks must lower posted deposit rates for terms of six months or longer by at least 0.5 percentage points and cut lending rates for businesses and priority sectors by 1.5 to 2 percentage points, as reported by VietNamNet.

The directive shows how far Hanoi is willing to go to protect growth. Vietnam has set ambitious targets after a strong year, and borrowing costs remain a major barrier for businesses trying to invest and expand. It also shows a central bank that sees the banking system as an instrument of economic policy, with banks expected to share profits and cut costs to deliver cheaper credit.

What did the State Bank of Vietnam order?

On 18 October, the central bank issued Official Letter No. 9608/NHNN-CSTT, setting out measures for credit institutions to help maintain macroeconomic stability, control inflation, support growth and safeguard the financial system. A day later, it met commercial banks to reinforce the instructions and demand concrete action to bring borrowing costs down for businesses and households.

Banks are required to follow the interest rate policies of the government, the prime minister and the central bank, to proactively cut operating costs, to share profits and to implement coordinated measures to lower rates. The immediate steps are specific: deposit rates for terms of six months or longer must fall by at least 0.5 percentage points a year, and lending rates for production, business and priority sectors must fall by 1.5 to 2 percentage points.

The central bank also explicitly warned banks against competing aggressively to raise deposit rates, which it said could lead to unhealthy competition and destabilise the money market. Local media described two directives in four days, underlining the urgency.

How the big banks responded

State controlled BIDV moved first. Chairman Le Ngoc Lam said the bank would immediately launch a credit package worth about 100 trillion dong, or 3.8 billion dollars, offering loans of up to six months for production, business and priority sectors, according to VietNamNet. BIDV plans to cut lending rates by 1.5 to 2 points, bringing rates under the programme to 6 to 7 percent depending on maturity.

To fund it, BIDV will reduce operating expenses and deposit rates. Lam said the bank expects to forgo about 500 billion dong, roughly 19 million dollars, in income as a result. Private lender ACB said it had already adjusted deposit rates and was continuing preferential lending with reductions of 1.5 to 2 points, after an earlier programme with a one point reduction disbursed about 5 trillion dong.

In Vietnam, monetary policy does not just travel through markets. It travels through a phone call from the central bank to every lender.

An ACB representative described the possibility of reducing credit growth quotas for non compliant banks as a strong measure to reinforce market discipline. Credit growth quotas, which cap how much each bank can lend, give the central bank a powerful lever over lenders.

Why Vietnam wants cheaper credit now

Vietnam's economy has been one of Asia's fastest growing this year, as we covered in our report on Vietnam's near 10 percent third quarter growth. But the government wants to sustain that pace, and high borrowing costs remain a significant obstacle for businesses trying to recover, invest and expand.

Cheaper credit is meant to ease financial pressure on companies, improve access to funding and support investment and production. Economist Nguyen Tri Hieu said the cuts were necessary to support business activity and help Vietnam meet its growth objectives. The central bank's governor has also stressed that rate reductions should be focused and targeted, rather than a blanket easing.

The approach carries risks. Pushing rates down while inflation pressures rise globally, with oil near 117 dollars, could weaken the dong and stoke inflation. Directing banks to lend cheaply can also lead to poor credit decisions if loans flow to weak borrowers.

Who pays for cheaper loans?

The banks pay first. Lower lending rates reduce interest income, and cutting deposit rates only partly offsets that. Local media reported that Vietnamese banks have posted strong profits this year but that cash interest collections are lagging, a sign that some borrowers are struggling to pay. Squeezing margins at the same time could pressure bank earnings and capital.

Depositors pay too. A cut of at least 0.5 points on longer term deposits reduces returns for savers, who may look for alternatives such as gold, property or stocks. That could support asset prices but also add to financial risks. The key effects to watch include:

• Bank net interest margins and profit growth in the fourth quarter
• Credit quality as cheaper loans flow to businesses and priority sectors
• Savers shifting money into gold, property or the stock market
• The dong's exchange rate as Vietnamese rates fall relative to US rates
• Inflation, especially with energy prices elevated

What it means for investors

For equity investors, the directive is a double edged sword. Cheaper credit supports corporate earnings, construction, manufacturing and real estate, and lower deposit rates can push savings into the stock market. That fits the optimism around Vietnam's market upgrade prospects, which we covered in our report on Vietnam's FTSE emerging market upgrade.

For bank shareholders, the picture is less rosy. Banks are being asked to sacrifice income for national growth goals, and those that resist could see their lending quotas cut. Investors will watch fourth quarter results for the impact on margins and asset quality.

The bigger question is sustainability. Directed rate cuts can boost growth in the short term, but they work best when inflation is under control and banks are strong. Vietnam will need to balance its growth ambitions against the risks of cheap credit in a volatile global environment.

Vietnam's directive to cut rates shows a government determined to keep growth strong, even if banks and savers bear part of the cost. BIDV's rapid 100 trillion dong response suggests state lenders will fall in line, while private banks face pressure through lending quotas. The outcome will depend on whether cheaper credit fuels productive investment without stoking inflation or loading the banking system with new risks.