SBV’s decision brings difficulties to jewelry companies

The State Bank of Vietnam has decided that from May 1, 2011, commercial banks have to stop lending in gold, including the lending to fund the jewelry manufacturing. Jewelry companies have complained that the new decision has put big difficulties on them.

On April 29, 2011, Governor of the State Bank of Vietnam released a legal document, stipulating that commercial banks must stop lending capital in gold from May 1, 2011.

Credit institutions now are not allowed to lend in gold to clients and other credit institutions. They are now allowed to make disbursement for the credit contracts which have been signed between banks and clients, but banks have not been disbursed. Credit institutions are not allowed to deposit gold at other credit institutions. In general, they cannot provide credit in gold under any forms.

Regarding the capital mobilization in gold, commercial banks now are not allowed to mobilize capital in gold, while they are only allowed to issue short term certificates in gold in order to pay to clients, while the gold amounts in bank coffers are not big enough to pay. However, the certificate issue must be stopped by May 1, 2012, or one year earlier than the previously set deadline.

A manager of a big jewelry company said that the company had been borrowing gold from banks to make jewelries to sell on the domestic market, and that the loans from banks had been accounting for a big proportion in the total capital needed by the company. Therefore, he believes that the new decision by the central bank to stop providing loans to fund the jewelry processing will cause big difficulties to jewelry companies.

Nguyen Thi Cuc, Deputy General Director of the Phu Nhuan Jewelry Company PNJ also said the new decision will have impacts on the company’s operation. In general, jewelry companies have to “bury” capital for a long time at jewelry products, because it always takes a long time to display the products after the processing at shops for sale. Therefore, jewelry companies need to borrow gold from banks. In general, the gold capital had been lent at “reasonable” interest rates.

Cuc said that as the central bank has prohibited commercial banks to lend in gold, PNJ will have no other choice than arranging capital itself to maintain its business.

General Director of a joint stock bank whose headquarter is located in district 1 in HCM City, said that since jewelry companies cannot borrow in gold any more, they will have to borrow in dong and then use the dong to borrow gold to process. In this case, the production costs will be higher, because the dong lending interest rate is now relatively high, hovering around 20 percent per annum. Even if jewelry companies accept the high interest rate, they will still find it uneasy to access loans.

Since banks now cannot lend in gold, they all have slashed the gold deposit interest rates to very low levels at less than one percent per annum. The capital mobilization in gold through deposit certificate issue will still be allowed until May 1, 2012.

According to Nguyen Thi Kim Xuyen, Deputy General Director of Dong A Bank, the volume of gold mobilized these days from the public at a very low interest rate alone can help ensure the liquidity for banks. Xuyen also said recently, when the gold deposit interest rates have been going down, a lot of people have sold gold on their accounts to the bank to get dong.

Dong A now is offering the interest rates of 0.2-0.4 percent per annum for gold deposits, while clients are not allowed to withdraw deposits before they become mature. The low interest rates have been applied since May 4.

As banks also cannot sell gold for dong now, the banks which once had advantages in gold trading, will see their operation affected, because gold will be kept in coffers.

Truong Van Phuoc, General Director of Eximbank, said on April 23, that the bank was managing the volume of 13 tons of gold, of which 7 tons had been lent.- TBKTSG

Tags: vietnam gold, Vietnam gold market, Vietnam gold prices