VietNamNet Bridge – Experts have thrown support behind a forthcoming central bank circular that restricts banks from borrowing and lending gold and bans them from converting gold savings deposits into the Vietnamese dong to make loans.

Banks ponder a new burden: gold

Central bank ponders controversial halt on gold
Dinh Nho Bang, vice chairman of the Vietnam Gold Traders Association, said he had got some information about this circular from the State Bank of Vietnam and that it was expected to come out this week. This is a right policy to indirectly reduce gold savings deposits by individuals, he said, adding depositors of gold would have to pay a fee for banks.

The upcoming circular will restrict banks from lending the yellow metal to individuals and institutions. This is an attempt by the central bank to keep investors from borrowing gold from banks and selling it on to jewelry shops for a profit, and to pay back loans, these investors will have to wait for prices to decline to desired levels.

“This practice has caused gold market volatility,” Bang said.

A central bank source told the Daily that one of the circular’s purposes was to avoid putting the gold market at risk because any unexpected movements on this market could leave a negative impact on the foreign exchange market as had been seen in recent events of massive and chaotic gold buying.

Economist Nguyen Quang A also backs the policy, saying it was a correct thing to do but the central bank should also use other measures to supervise banks’ gold-related operations such as imposing a high tax on gold deposits, and lending gold. That will help to change the deep-rooted gold keeping habit of Vietnamese people.

A noted it was risky for banks to convert gold deposits into the local currency to meet hefty demand for dong loans as any gold price rise as had happened recently could put them at stake though the difference between gold and dong lending rates was up to 9 percentage points.

Most experts reached by the Daily support the central bank’s move to keep gold borrowing and lending operations in check. However, some are skeptical about this.

Tran Trong Quoc Khanh, director of the gold center of Asia Commercial Bank, said if the central bank disallowed banks to borrow and lend gold, a huge amount of gold, at 115 tons of gold or VND95 trillion worth as announced by the central bank, would be drained out of the banking system.

Commenting on risk associated with the practice of banks converting gold deposits into the local dong for lending, Khanh said risk management at banks must comply with regulations. The central bank can provide enough tools for banks to insure risks or adopt strict regulations on risk management at banks.

The circular is also aimed at preventing individuals from falling victim to gold speculation which is made possible through financial tools offered by banks. However, Khanh said if banks did not provide those financial services, other institutions would be ready to meet the demand.

It is much like the central bank ban on trades and payments using other currencies, but the unofficial money market is still out there, Khanh said.

According to a latest report by the central bank branch in HCMC, by late September, total gold savings deposits at banks in the city had amounted to over VND70 trillion equivalent and outstanding gold loans had reached VND40.5 trillion.

The amount of gold capital converted into dong accounted for 10.85% of total outstanding loans in the HCMC banking system, of which Asia Commercial Bank’s gold borrowing and lending made up the biggest part.

VietNamNet/SGT