VietNamNet Bridge – Later this month, the State Bank of Viet Nam plans to submit its anti-dollarisation project to the Politburo for consideration. Under its proposal, the people's right to keep foreign currency will continue, but all activities related to foreign-currency lending will cease.

The new policy, outlined in Circular No. 03/2012/TT-NHNN issued on March 8 by the State Bank, regulates foreign-currency lending by domestic credit institutions and foreign bank branches. It will take effect by the end of December.

As stated in the circular, domestic credit institutions and branches of foreign banks with forex-service licenses will be permitted to extend short-, medium- and long-term loans in foreign currencies to companies that use funds to import goods and services for their production and trading purposes.

However, borrowers must show that they have sufficient foreign currency generated from their business activities to repay their loans.

The central bank has also decided to apply an interest-rate cap of only 2 per cent per year to foreign-currency deposits.

All of these decisions by the SBV are aimed to reduce dollarisation in the national economy.

The public's habit of storing and using dollars for making payments for goods has dollarised the national economy. For example, the price of imported automobiles, printers and electronics goods as well as high-end apartments and luxury hotels and restaurants are typically listed in both US dollars and Vietnamese dong. Major shopping centres also list prices in US dollars as well as dong.

In general, customers are often given incentives to make payments in US dollars. If they pay in dong, the price of goods will be based on the exchange rate between Vietnamese dong and the US dollar on that particular day.

Sellers, buyers and Government agencies have all publicly acknowledged that these practices exist and that they represent signs of dollarisation.

According to recent reports, the rate of dollarisation in Viet Nam is more than 20 per cent of total transaction payments.

The SBV's Foreign Exchange Management Department said the dollarisation boom was largely caused by loose regulations concerning the rights of individuals in the Ordinance on Foreign Exchange as well as by regulations on foreign-currency ownership of credit institutions and business organisations.

The central bank's new foreign-currency related regulations are viewed favourably by experts, who believe the new rules will contribute significantly to reducing US-dollar practices.

As a result, although some of the central bank's anti-dollarisation policies have not been implemented, activities related to depositing and lending foreign currency at HCM City commercial banks have diminished significantly in the last 11 months, compared with the corresponding period last year.

However, the anti-dollarisation measures have also created chaos on the market and caused new difficulties for enterprises, particularly those involved in export of agricultural, forestry and fishery products. The new policy has also limited enterprises' ability to access loans in foreign currency.

In particular, Circular No 03 is expected to create problems for agricultural product exporters who have been using foreign-currency loans to do business because interest rates on those loans are much lower than dong-denominated loans.

The current interest rate on foreign currency loans is between 6 and 7 per cent per year, while the interest rate on dong loans is 12 to 15 per cent per year. In addition, the exchange rate has been rather stable since the beginning of the year.

Many commercial banks have preferential lending packages with a dong loan rate of 11 per cent, but, in fact, only few exporters can access these soft loans.

Because of this gap, several exporters have taken out loans in foreign currency in order to reduce financial costs.

However, the SBV's new regulations on foreign-currency lending will prevent exporters of seafood, rice, rubber, coffee and cashew from accessing foreign-currency loans because they typically buy raw materials in Viet Nam for which payment is made in dong.

Vietnamese exporters of agricultural products are also coping with fierce competition on the international market and are in great need of foreign currency to ensure their growth targets by year-end.

In light of the situation, many exporters of agricultural products have asked the central bank to extend the deadline to borrow foreign currency to the end of 2013.

Most parties agree that the central bank's decision was a wise move to stop dollarisation but that the policy should be implemented step-by-step and should take into account exporters' and importers' business situations.

New ATM fees tipped

The State Bank of Viet Nam is drafting a circular that calls for regulations on fees for domestic bank cards.

One of the new circular provisions would be to charge fees on the withdrawal of money from internal ATM networks.

The fees would be increased yearly, possibly from VND1,000 in 2013 to VND3,000 in 2015 per internal ATM transaction.

Fees on each inter-bank ATM transaction will still be kept at VND3,000. Fees charged for fund transfers will be VND15,000 per transaction.

The new circular also changes other kinds of fees, including annual fees and complaint fees.

The central bank's new regulations will be used as a benchmark for card issuers to establish their own fees according to their business situations and business development strategies.

The central bank's new ATM fee policies are aimed to ensure a balance of interest between banks and their customers.

The money created from fee collections will be partly used for investments; the operation of banks' card-service systems; improvement of service quality; and development of card-payment services in Viet Nam.

Commercial banks expect that the money generated from the collection of fees on inter-bank or internal ATM transactions will help them make up for the high costs they have incurred to set up their extensive ATM systems.

Six major banks, Agribank, Vietinbank, Vietcombank, Dong A, BIDV and Techcombank, own 8,200 ATMs, accounting for 70 per cent of the total.

Most banks claim they have not earned profits from card services, while the cost of installing and maintaining ATMs has increased yearly. Annual maintenance costs VND500 million (US$24,000). Rental of data-transmission lines and costs related to check cashing are other expenses. Banks also have to pay millions of dong to rent a site to install an ATM.

However, data recently reported from the SBV and the Viet Nam Card Association showed that as of June this year the entire banking sector had issued a total of 37.7 million ATM cards, 90 per cent of which were domestic payment cards.

Most banks now have a higher volume of money deposited in individual accounts because the Government now requires state-owned companies and agencies to deposit employees' salaries directly into bank accounts (instead of paying by cash). This amount in bank accounts represents about VND70 trillion that can potentially be withdrawn via cards.

Issuers of cards now have to pay an interest rate of only 2 per cent per year for the money kept on cards, much lower than the current 9 per cent deposit interest rate cap.

This means that, with the interest rate of 2 per cent, all cardholders combined have suffered a huge loss of a total of VND4.9 trillion. However, the issuers of cards have earned high profits.

Bond-market boom

Commercial banks are vying with one another to pump money into the domestic bond market, and as result, the latter is growing strongly. This contrasts with previous years in which banks often had to seek money to improve their liquidity.

According to the Ha Noi Stock Exchange (HNX), in the second week of December, Government bonds worth a total of VND5.070 trillion (US$243.51 million) were issued via three auctions. Of that amount, treasury bonds with terms of two, three and five years were worth a total of VND3.4 trillion (US$163.3million).

The Viet Nam Development Bank has also successfully issued bonds with total value of VND1.1 trillion (US$52.83 million) out of its planned VND2 trillion.

A survey conducted by Rong Viet Securities Company showed that about one-third of the money that credit institutions had mobilised from the public since the beginning of the year had been invested in bonds.

By November 20, the banking sector's credit growth rate had reached only 4.15 per cent, while mobilised capital had increased by 15.98 per cent or VND444.085 trillion. The money supply on the market was up by 15.33 per cent.

Another survey also showed that 72 per cent of auctions for Government bonds were successful this year, and 90 per cent of bidders were credit institutions that spent VND117 trillion to buy bonds, 1.5 times higher than the figure in 2011.

The Bao Viet Securities Company said that this year Government bonds and guaranteed Government bonds that had been successfully issued were worth VND146.56 trillion. This included VND101.474 trillion in treasury bonds, VND29.560 trillion issued by the Viet Nam Development Bank, and VND15.530 trillion issued by the Viet Nam Bank for Social Policies.

In the remaining months of the year, credit institutions, including banks, have actively invested in bonds for several reasons.

At some major banks, liquidity is temporarily high, and the amount of mobilised capital has increased but credit growth has remained low. In addition, increasing risks due to bad debts and the central bank's close management have also encouraged credit institutions to inject their money into bonds. They consider the latter to be an effective tool to shield themselves from risks and to create liquidity as needed.

For 2013, credit growth in the banking sector remains uncertain. To ensure profits and balance capital costs, banks have had to purchase more Government bonds. Banks as well as other financial institutions are interested in bonds as the interest rates of bonds are higher than the current rate of deposits.

Source: VNS