HANOI, July 7 (Reuters) - Vietnam's central bank warned lenders on Thursday about offering depositors interest rates that are higher than it allows, saying it could fine offenders.
"Banks are racing to raise interest rates for residential deposits without taking into account the potential damage to the system," the State Bank of Vietnam said in a statement explaining a circular on unfair competition, which has to be approved by the government.
"This interest rate race is causing instability for the whole banking system," it said on its website.
The State Bank of Vietnam had been pushing up interest rates to fight inflation, which hit 20.8 percent in June, but it cut one benchmark rate, its open market operations rate, to 14 percent from 15 percent on Monday.
Analysts said that may have reflected liquidity flows rather than any let-up in the fight against inflation.
Banks have been offering to pay 20 percent to attract dong deposits, far above the central bank's deposit rate ceiling of 14 percent, Monday's official Lao Dong newspaper said, quoting a report by the National Assembly's Finance and Budgetary Committee.
They were charging companies around 25 percent for loans.
"Borrowing and lending interest rates are high and the competition in raising funds is not sound," Nguyen Van Binh, deputy governor of the State Bank of Vietnam, said in remarks to a World Bank workshop last week.
He said banks were competing to protect market share by paying high rates to depositors.
(Reporting by Tran Le Thuy; Editing by Alan Raybould)