Access to foreign currency loans limited

The central bank has announced a number of monetary policies to curb soaring foreign credit and strengthen Vietnam dong lending, making access to dollar loans more difficult than before.
The State Bank of Vietnam said it would increase the required reserve ratio in foreign currency by one percentage point for credit institutions starting this month.

Accordingly, the ratio for non-term foreign currency deposits and those with terms up to 12 months would be 8 percent while the ratio for terms longer than 12 months would be raised to 6 percent.

This is the third increase by the central bank this year to discourage the use of dollars.

According to the central bank, the nation’s credit growth stood at only 7.57 percent as of July 20 while foreign credit grew around 24 percent.

The chairman of a commercial bank said he would increase dollar lending rates due to the higher reserve requirement.

But he said as businesses believe the central bank is going to keep exchange rate fluctuations under 1 percent in the final months of this year, they will still borrow dollars due to lower rates.

Unforeseen developments are expected for the forex market when dollar demand far exceeds supply. The chairman thus said if enterprises are not well prepared, they will probably face forex risks at the end of this year.

According to financial newswire Vietstock, the new reserve requirement will prompt credit institutions to cut deposit and raise lending rates in US dollar while enterprises will be hesitant in asking for dollar loans. The move will be more effective than previous reserve ratio increases as dong lending rates will be curbed in the coming months.

Vietstock said the higher reserve ratio will facilitate the central bank’s loosening dong supply. Otherwise, lower dong deposit rates will cause disadvantages to dong holders as the gap between dong and dollar rates will narrow.

It thus predicted that a huge dong supply will be launched following the decision to cut dong lending rates as projected by the central bank.

The central bank also released Circular 22 to remove the LDR (loan-to-deposit ratio) ceiling at 80% as set down in circulars 13 and 19 for now.

The circular also requires the risk weighting coefficient of dollar lending secured by valuable papers to be increased from 20% to 50% for CAR (capital adequacy ratio) calculation purposes.

Fiachra Mac Cana, Managing Director of HCM City Securities Corp., said this makes dollar lending much more expensive from a bank’s point of view in terms of the equity capital it will tie down.

The move will also help reduce the growth of dollar loans, which is expected to increase pressure on forex rates given gold price hikes.

The greenback in recent days has been sold at over 21,000 dong although it is fixed at 20,834 dong in commercial banks.

The central bank has also announced it decision to tighten dollar borrowing and inspect lenders with strong growth in dollar credit.

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial