SBV halts lending against gold collateral

Under circular No 22/2010, which took effect immediately yesterday, gold which has been given in security for loans must be redeemed and the loans repaid no later than June 30 of next year.

Previous regulations allowed commercial banks to loan up to 30 per cent of the value of gold in cash.

The practice became a major profit centre for banks, which paid interest of just one per cent on gold deposits, while charging interest on the cash loans of at least 12 per cent. It was estimated that gold trading accounted for up to half of the profits for some banks.

"This kind of business poses huge risks to the banking system due to the fluctuations in gold prices," said the head of monetary policy for the State Bank of Vietnam Nguyen Ngoc Bao.

"Some credit institutions also spent surpluses from gold trading to further speculate in gold and foreign currencies, creating negative impacts on foreign exchange rates."

Bao added that the development of gold mobilising and lending for non-manufacture sector, which the State Bank does not encourage, raised the dollarisation in the economy.

"The State Bank applied the new regulation to stabilise the gold market, confront the dollarisation of the economy and minimise risks for commercial banks arising out of the gold business," he said.

The new circular still allows credit institutions to offer commercial paper in exchange for gold, but the banks are only allowed to make loans in gold needed for processing or jewellery trading, and not for trading in gold bars.

"Absolutely our business will be affected." said Nguyen Thanh Toai, deputy director of Asia Commercial Bank, one of the busiest gold lenders in the system. "We will stop, of course, and think of other ways to make a profit."

An estimated 92.6 tonnes of gold, worth $4 billion, is currently deposited with commercial banks. If the central bank were to limit the banks' ability to profit from these deposits, a large volume of gold was likely to be unleashed on the market, helping lower prices while easing pressures on the foreign exchange market.

A recent surge in the gold price has led to increased smuggling of the metal into Vietnam, fuelling demand for the dollar to buy it and thus pushing up the value of the US dollar on the black market.

"Taking into account the current economic panorama and people's expectations about inflation and the value of the dollar, I would guess that this decision is very prudent," a senior capital manager of a State-owned bank.

Vietnam banned gold imports in mid-2008 to help tackle the trade deficit and take pressure off the dong, although they have allowed imports under quota of about 10 tonnes since then, most recently in early October.

In a great attempt to stabilise the gold and forex markets, the central bank earlier this year shut down gold trading floors, suppressed gold trading accounts abroad, disallowed gold imports and worked with police and customs to prevent gold smuggling.

The central bank said it would keep a close eye on the markets' responses to the new regulation in order to shift policy in the direction of a narrower role for gold trading in the economy.

Domestic gold prices yesterday increased by VND170,000 against Thursday to match a record high of around VND33.1 million ($1,655) per tael set earlier this month. A tael is equal to 1.2 ounces.

Gold-selling districts in Hanoi and Ho Chi Minh City saw prices change at least three times in the morning and early afternoon, with Sai Gon Jewellery Co, Sacombank Jewellery Co, Bao Tin Minh Chau, Agribank Jewelry Co and Phu Nhuan Jewellery Co each quoting buy/sell prices at VND32.93-33.1 million per tael.

The US dollar also moved up yesterday to about VND22,300-20,360 on the black market.