The transmission from the interest rate policy of the State bank to the deposit and lending rates at Bank for Agriculture and Rural Development of Vietnam

NGUYEN THI MAI TRUC

TRANSFER FROM THE INTEREST RATE POLICY OF THE STATE BANK TO DEVELOPMENT RATES AND LOANS AT BANK FOR AGRICULTURE AND RURAL DEVELOPMENT OF VIETNAM

Major: Finance - Banking Code: 60340201

MASTER THESIS OF ECONOMY

SCIENCE INSTRUCTOR:

Dr. Than Thi Thu Thuy

Ho Chi Minh City – 2016

GUARANTEE

My name is Nguyen Thi Mai Truc, a graduate student majoring in Finance and Banking, class 23, University of Economics Ho Chi Minh City. I hereby declare that the thesis The transmission from interest rate policy of the State Bank to deposit interest rate and lending interest rate at Bank for Agriculture and Rural Development of Vietnam is my own research work. under the guidance of Dr. Than Thi Thu Thuy. The data in the thesis are used honestly, taken from many references and detailed notes on the source of information. The thesis is not copied from other scientific works.

City. Ho Chi Minh, date of 2016.

Student

Nguyen Thi Mai Truc.

TABLE OF CONTENTS

ADDENDUM COVER ASSESSMENT OF CONTENTS TABLE OF CONTENTS

LIST OF SIGNS, ABBREVIATIONS LIST OF TABLES

LIST OF DRAWERS

CHAPTER 1: OVERVIEW OF RESEARCH TOPIC 1

1.1 Reasons for choosing topic 1

1.2 Research objectives 2

1.3 Research question 2

1.4 Research object and research scope 3

1.5 Research Methods 3

1.6 Dissertation structure 4

CHAPTER 2: THEORETICAL BASIS OF TRANSFER FROM THE INTEREST POLICY OF THE CENTRAL BANK TO DEVELOPMENT RATES AND LIVING INTERESTS AT COMMERCIAL BANKS. 5

Chapter 2 Introduction 5

2.1 Deposit rate and lending rate 5

2.1.1 The concept of 5 . interest rate

2.1.2 Types of interest rates 7

2.1.3 Deposit rate 9

2.1.4 Loan interest rate 10

2.2 Central bank interest rate policy 12

2.3 Transmission from central bank interest rate policy to deposit and lending rates at commercial banks 12

2.3.1 The concept of 12 interest rate pass-through

2.3.2 Transmission from central bank interest rate policy to deposit and lending rates 13

2.3.3 Factors affecting interest rate pass-through

2.4 Previous studies on the pass-through from the central bank's interest rate policy to the deposit and lending rates at commercial banks 16

2.4.1 Research by Hannan and Berger (1991) and Neumark and Sharpe (1992) 16

2.4.2 Research by Scholnick (1996) 16

2.4.3 Bondt's Research (2002) 17

2.4.4 Research by Beng Soon Chong, Ming-Hua Liu, Keshab Shrestha (2005) 17

2.4.5 Research by Ming-Hua Liu, Dimitri Margaritis, Alireza Tourani-Rad (2007) 18

2.4.6 Research by Jamilov et al (2014) 19

2.4.7 Research by Dinh Thi Thu Hong and Phan Dinh Manh (2013) 19

2.4.1.8 Research by Nguyen Thi Ngoc Trang and Nguyen Huu Tuan (2014) 20

2.5 New contributions of the topic 22

Conclusion Chapter 2 23

CHAPTER 3: SITUATION OF TRANSFER FROM THE INTEREST RATE POLICY OF THE STATE BANK TO DEVELOPMENT RATES AND LOANS AT BANK FOR AGRICULTURE AND RURAL DEVELOPMENT OF VIETNAM 24

Chapter 3 Introduction 24

3.1 Introduction to Bank for Agriculture and Rural Development of Vietnam 24

3.1.1 History of establishment and development 24

3.1.2 Main business activities 25

3.1.3 Business results 26

3.2 Interest rate policy of the State Bank of Vietnam 28

3.3 Current status of deposit and lending interest rates at Bank for Agriculture and Rural Development of Vietnam 32

3.3.1 Actual situation of deposit interest rate 32

3.3.2 Actual situation of lending interest rate 34

3.4 Transmission from the State Bank's interest rate policy to deposit and lending rates at Bank for Agriculture and Rural Development of Vietnam 36

3.4.1 Transmission from refinancing rate to deposit rate and lending rate..36

3.4.2 Pass-through from rediscount rate to deposit and lending rates39

Conclusion Chapter 3 41

CHAPTER 4. METHODS, DATA AND RESEARCH RESULTS 42

Chapter 4 Introduction 42

4.1 ARDL 42 . delay distribution autoregressive model

4.2 Research methods 43

4.3 Data collection and processing 46

4.4 Data Descriptive Statistics 47

4.5 Testing of ARDL 49 . delay distribution autoregression model

4.5.1 Testing the stationarity of the data series through the 49 . unit root test

4.5.2 51 . Cointegration Test

4.5.3 Diagnostic and residual test 51

4.5.4 Choosing the optimal delay for the variables in the 53 . model

4.6 Research results 54

4.6.1 Transmission from refinancing interest rates to deposit and lending rates at Bank for Agriculture and Rural Development of Vietnam 54

4.6.2 Transmission from discount rate to deposit rate and lending rate at Bank for Agriculture and Rural Development of Vietnam 55

4.6.3 Asymmetry in interest rate pass-through 57

4.7 Discussing the research results on the actual transmission from the interest rate policy of the State Bank to the deposit and lending rates at Bank for Agriculture and Rural Development of Vietnam 58

Conclusion Chapter 4 61

CHAPTER 5. CONCLUSIONS AND SOLUTIONS ON INTEREST RATE MANAGEMENT OF BANK FOR AGRICULTURE AND RURAL DEVELOPMENT OF VIETNAM 62

Chapter 5 Introduction 62

5.1 Conclusion 62

5.2 Interest rate management policy of the State Bank 63

5.3 Solutions on interest rate management of Bank for Agriculture and Rural Development of Vietnam 64

5.3.1 Always monitor and forecast the movements of the SBV's interest rate policy 64

5.3.2 Accurate calculation of the delay in adjustment of the SBV's operating interest rates ..64

5.3.3 Taking advantage of the mobilization channel from rediscounting valuable papers 64

5.3.4 Diversify the structure of short-term mobilized capital 65

5.3.5 Develop a reasonable and flexible medium and long-term lending interest rate policy 65

5.3.6 Expansion of customers from all economic sectors 65

5.4 Support solution 66

5.4.1 Solutions from the State Bank 66

5.4.2 Solutions from the Government 67

5.5 Limitations of the topic and directions for further research 68

Conclusion Chapter 5 69

REFERENCES APPENDIX

LIST OF SIGNS, ARRIVALS

Contract 12M	12 month term deposit interest rate.
Contract 18M	18-month term deposit interest rate.
1 month contract	1-month term deposit interest rate.
HD24M	24 month term deposit interest rate
Contract 6M	6 month term deposit interest rate.
Agribank	Bank for Agriculture and Rural Development of Vietnam.
ARDL	Auto Regressive distributed lag, distributed delay autoregressive model.
CST	Monetary Policy
CVNH	Short-term liability.
CVTDH	Medium and long term loans.
ECM	Error-Correct model, error correction model.
LSCB	Basic interest rate
SBV	State bank
NH	Commercial Bank
NHITS	Central bank
TCK	Rediscount interest rate
TCV	Refinance interest rate
TTTC	Financial market
Stock market	Stock market

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Table 2.1 Summary of previous studies 21

Table 3.1: Funding results at Agribank in the period 2008-2015 26

Table 3.2: Credit performance at Agribank in the period 2008-2015 27

Table 3.3: Service performance at Agribank in the period 2008-2015 27

Table 3.4: Profit after tax at Agribank for the period 2008-2015 28

Table 4.1: Statistical results describing deposit and lending interest rates at Agribank in the period 2008-2015 47

Table 4.2: Statistical results describing the refinancing interest rate and rediscount interest rate of the State Bank of Vietnam in the period 2008-2015 47

Table 4.3: Correlation matrix between refinancing interest rate, rediscount interest rate and deposit and lending interest rates at Agribank for the period 2008-2015 48

Table 4.4: Results of testing the stationarity of the original series of deposit interest rates and lending rates using the ADF 50 method

Table 4.5: Results of testing the stationarity of the series of differences in deposit and lending interest rates by the ADF 50 method

Table 4.6: Result of 51 . contour test

Table 4.7: Diagnostic test and residual test 52

Table 4.8: Test of optimal delay 53

Table 4.9: Long-term interest rate pass-through from refinancing rates to deposit and lending rates at Agribank from 2008 to 2015 54

Table 4.10: Short-term pass-through from refinancing rates to deposit and lending rates at Agribank 2008-2015 55

Table 4.11: Long-term pass-through from discount rate to deposit and lending rates at Agribank 2008-2015 55

Table 4.12: Short-term pass-through from discount rate to deposit and lending rates at Agribank from 2008 to 2015 56

Table 4.13: Asymmetry test in 57 . transmission

Figure 3.1: Movements of basic interest rates, refinancing rates, and rediscount rates of the State Bank of Vietnam in the period 2008-2015. 29

Figure 3.2: Movement of deposit interest rates at Agribank in relation to base interest rates for the period 2008-2015 32

Figure 3.3: Movement of lending interest rates at Agribank in correlation with basic interest rates for the period 2008-2015 34

Figure 3.4: Correlation between refinancing interest rate and deposit interest rate at Agribank in the period 2008-2015 37

Figure 3.5: Correlation between refinancing interest rates and lending rates at Agribank in the period 2008-2015 38

Figure 3.6: Correlation between discount rate and deposit rate at Agribank in the period 2008-2015 39

Figure 3.7: Correlation between rediscount interest rate and lending interest rate at Agribank in the period 2008-2015 40

CHAPTER 1: OVERVIEW OF THE RESEARCH TOPIC

1.1 Reasons for choosing the topic

Monetary policy is an important macro policy in economic management of any country with the goals of maintaining stable prices, promoting economic growth, creating jobs and stabilizing the market. finance. In addition to determining priority targets and using appropriate tools in each period, the transmission of monetary policy to the economy plays a decisive role in achieving the above goals. Therefore, in order to have an appropriate monetary policy, policy makers must have a clear understanding of the transmission mechanism of monetary policy and the importance of different transmission channels such as credit, interest rates, etc. Due to the influence of the characteristics of each economy, financial markets and financial intermediaries are always moving, so the effectiveness of monetary policy transmission channels changes over time. time. Some studies show that the interest rate channel is often the most important transmission channel in developed countries with modern financial markets, whereas the credit channel and exchange rate channel are the main channels in the developed countries. developing countries. Interest rates are both a regulatory tool and a market-oriented signal generator. Interest rates are an important economic indicator for policymakers as well as the individual and business community interested in economic developments and the money market. Currently, in Vietnam, there have been many studies on the transmission mechanism of monetary policy in general, however, the transmission problem from the SBV's interest rate to the deposit and lending interest rates at a particular bank is difficult. little research. Based on a research paper by a group of 3 authors Ming Hua Liu,

State-owned banks in particular- Bank for Agriculture and Rural Development of Vietnam.

1.2 Research objectives

- Overall objectives:

The study examines the pass-through from the State Bank's interest rate policy to deposit and lending rates at Bank for Agriculture and Rural Development of Vietnam, specifically looking at the level of interest rate pass-through. in the long run and in the short run, consider the speed of adjustment to the long-run equilibrium of interest rates, consider whether there is asymmetry in interest rate pass-through, thereby suggesting a number of Agricultural Bank policies. and Rural Development Vietnam needs to change to be more flexible with the State Bank's policies to increase the level and speed of transmission.

- Detail goal:

+ Measure the pass-through from refinancing rates to deposit and lending rates at Bank for Agriculture and Rural Development of Vietnam.

+ Measure the pass-through from the discount rate to the deposit and lending rates at Bank for Agriculture and Rural Development of Vietnam.

+ Measuring the adjustment speed to the long-term equilibrium of deposit and lending rates in relation to refinancing and rediscount rates at Bank for Agriculture and Rural Development of Vietnam Male.

+ Examine whether or not there is asymmetry in interest rate pass-through at Bank for Agriculture and Rural Development of Vietnam.

+ Suggest some solutions on interest rate management at Bank for Agriculture and Rural Development of Vietnam.

1.3 Research questions

To achieve the research objective, the study aims to answer the following questions:

(1) What is the pass-through from refinancing and rediscount rates to deposit and lending rates at Bank for Agriculture and Rural Development of Vietnam?

(2) Is the adjustment speed of deposit and lending rates in relation to the refinancing rate, the rediscount interest rate when above equilibrium and below equilibrium level at the Bank? products of Agriculture and Rural Development in Vietnam?

(3) Is there asymmetry in the pass-through from refinancing and rediscount rates to deposit and lending rates at Bank for Agriculture and Rural Development of Vietnam?

(4) How to manage interest rates at Bank for Agriculture and Rural Development of Vietnam to increase the pass-through from the interest rate policy of the State Bank to deposit and lending rates ?

1.4 Research object and research scope

Research object: The transmission from interest rate policy of the State Bank to deposit and lending interest rates at Bank for Agriculture and Rural Development of Vietnam in the short and long term.

Research scope: Bank for Agriculture and Rural Development of Vietnam. The study period was from January 2008 to December 2015.

1.5 Research Methods

Research data:

The study uses the operating interest rate of the State Bank of Vietnam including refinancing interest rate, rediscount interest rate. The base interest rate is not used because the basic interest rate is the basis for the State Bank to guide monetary policy, so it is usually announced at a low level and only adjusted up and down with a small margin. to stabilize market interest rates and control inflation. At the same time, the basic interest rate is not divided into different interest rates to apply for different terms and different loan forms, so the basic interest rate is not market-oriented.

+ Deposit interest rates for terms of Bank for Agriculture and Rural Development of Vietnam include 1 month (1M), 6 months (6M), 12 months (12M), 18 months (18M), 24 months month (24M).

+ Loan interest rates of Bank for Agriculture and Rural Development of Vietnam include short-term lending rates, medium and long-term lending rates.

- Research Methods:

The methods used in this study include qualitative and quantitative analysis.

+ In qualitative analysis, using descriptive statistical methods, synthesizing, comparing and analyzing to study deposit rates, lending rates, refinancing rates, rediscount rates and the interest rate pass-through.

+ In quantitative analysis, using ARDL autoregressive lagging distribution model to study the pass-through from refinancing interest rate, rediscount interest rate to deposit interest rate and lending interest rate at Bank for Agriculture and Rural Development. and Rural Development in Vietnam in the short and long term.

1.6 Dissertation structure

The thesis is structured into 5 chapters:

Chapter 1: Overview of the research topic.

Chapter 2: Theoretical basis of the pass-through from the central bank's interest rate policy to the deposit and lending rates at commercial banks.

Chapter 3: Actual situation of transmission from interest rate policy of the State Bank to deposit and lending rates at Bank for Agriculture and Rural Development of Vietnam.

Chapter 4: Methods, data and research results.

Chapter 5: Conclusion and solutions on interest rate management at Bank for Agriculture and Rural Development of Vietnam.

CHAPTER 2: THEORETICAL BASIS OF TRANSFER FROM THE INTEREST POLICY OF THE CENTRAL BANK TO DIVING RATES AND LIVING INTERESTS AT COMMERCIAL BANKS.

Chapter 2 Introduction

To serve as a basis for selecting and building a research model that will be mentioned in Chapter 4, Chapter 2 presents the theoretical basis of interest rates, the operating mechanism of the central bank's interest rate policy, the factors that influence The effect on interest rate pass-through is to serve as a premise for empirical research on the transmission mechanism from the SBV's interest rate policy to deposit and lending rates. At the same time, some previous studies on interest rate pass-through are reviewed to provide concrete evidence for this study.

2.1 Deposit rates and lending rates

2.1.1 The concept of interest rate

According to Karl Marx: “Interest is the part of the surplus value which the productive capitalist has to pay to the money capitalist for the use of capital for a certain period of time.”

According to Keynes: “The interest rate is the payment for borrowed money, the reward for the preference for spending capital”. The analysis of the nature of interest rates above shows that if interest rates are low, the total demand for cash of the population exceeds the money supply, and if interest rates are high, there will be a surplus of cash then no one wants to keep money. .

According to the quantity demanded economists, “The interest rate is the basis for determining the opportunity cost of holding money.”

According to the World Bank: “Interest is the percentage of interest on capital.” According to modern economists: “Interest is the price of a loan, the cost of capital and other financial services.”

From the perspective of interest, it is the cost of capital: If the business is a borrower (demanding capital), the cost of capital is the interest rate. The cost of capital is the price to be paid for raising and using capital, including the cost of using debt and

equity sources. For sponsors (capital supply), the cost of capital is the required rate of return that investors in the market demand when investing in the company's securities. For business managers, the cost of capital is the minimum rate of return that the business will require when implementing a new investment project.

From the perspective of interest rate as a tool of monetary policy: Interest rate is one of the indirect tools for operating monetary policy. The Central Bank adopts this tool to control the money supply for the economy, in order to achieve the goal of controlling inflation and stabilizing the value of money. Interest is the most flexible, considered tool to use. Although each instrument has the characteristics and ability to affect the market in different ways and to varying degrees, regardless of the instrument, its final signal after being emitted also leads to to a change in price whether it is a change in the reserve requirement ratio or the purchase or sale of required bills… It can be said that, among interest rates, the interbank market interest rate gives a suitable signal. because this interest rate is not only influenced by capital supply and demand but also by the refinancing interest rate, central bank's rediscount rate. The interbank market interest rate is especially effective in the difficult liquidity situation of commercial banks. The famous American economist John Taylor came up with a way to calculate the appropriate nominal interest rate in the relationship between growth and inflation, known as Taylor's rule. This rule will help the Central Bank to determine the short-term interest rate when economic conditions change to achieve the two goals of economic stability in the short term and inflation control in the long term. To apply Taylor's rule, the central bank must determine a short-term real interest rate based on three factors: real versus target inflation, the difference between real and potential output, and the interest rate level. the short run at which the economy reaches full employment. Taylor rule recommends a relatively high interest rate (tight monetary policy) to reduce inflationary pressure when inflation is higher than inflation target and vice versa. For the ratio a to be greater than 0, Taylor's rule states that a 1% increase in inflation requires the central bank to raise the nominal interest rate by more than 1% (i.e. 1+aπ), which implies that when inflation is high