The gold deposit ban woes

Commercial banks’ gold lending will no longer be allowed as of the first of May. Banks are therefore forced to hammer out a way out for their gold deposit assets.
The central bank’s Circular 11 dated April 20, 2011, rules that credit institutions shall not give loans in gold to customers and counterparts, including gold in credit contracts which have been signed but yet to be executed. According to the new rule, a credit institution shall not be allowed to deposit gold at another or carry out other gold-denominated credit services.

An executive of a big commercial joint stock bank comments that this regulation has in fact blocked all the roads to banks’ making profit out of their gold assets.

With a gloomy future for gold looming large, banks which have mobilized great volumes of gold have tried their utmost to make new moves. DongA Bank, ACB and Viet A have cut gold interest rates effective as of May 5 down to between 0.1% and 1% per annum. Sacombank has opted for a more drastic cut at 0.01% as of the end of April, whereas Vietnam Eximbank has announced gold mobilization would be terminated as of May 4.

Banks are forced to stop gold mobilization because they have taken in great volumes of gold which now cannot be lent as per the central bank’s ban. At an April 23 meeting, Truong Van Phuoc, Vietnam Eximbank general director, said his bank was managing 13 tons of gold, including customers’ deposits and other sources. Only seven tons has been lent, Phuoc said.

Three days later, Ly Xuan Hai, ACB chief executive officer, told shareholders that ACB’s ratio of profitable assets this year may amount to 88%. However, this rate is vulnerable to policy changes. As the State has tightened its grip on gold trading, a considerable part of the mobilized assets, particularly gold, has to be put in stock out of the capital flow. By April, gold and U.S. dollars accounted for 25% of ACB’s total assets, said Hai.

Worries

Why do some banks continue to mobilize gold although the State Bank has banned gold lending?

A banker explains that banks still have a remarkable gold volume which has been lent and part of their gold assets has been changed to U.S. dollars or dong. Previously, there were times in which gold interest rates were only 1-2%. Gold was therefore converted into dong which was used to give loans to enable banks to enjoy a stunning interest rate of 17-18%. Few banks have been able to resist such a conversion.

If banks slash their gold deposit interest rates to zero, depositors will be likely to withdraw their assets, and the total asset value on banks’ balance sheets will fall drastically. Moreover, as a result of a quick and remarkable gold drain at banks while gold lending has not been refunded, banks’ ratio of lending to mobilization will soar. If this ratio surpasses the 80% cap, the bank in question will violate Circular 13, says the above banker.

Many banks will therefore continue to keep their gold deposit interest rate at acceptable levels to retain current customers. They will scale down the current gold mobilization only when their outstanding loans in gold have gone down significantly.

Sharing this same view, other bankers have said mobilized gold at extremely low interest rates can help support banks’ liquidity.

To avert falling assets possibly stemming from customers’ gold withdrawals, many banks have offered to buy gold at higher rates than the list price. To be eligible for this scheme, customers must have gold deposits at banks and they have to deposit the money in dong from the gold sale at the banks.

The one-year “grace” when banks’ gold services are totally banned will allow some time for bank to increase dong mobilization to fill the gap left behind by the gold lending ban on their balance sheets.

In last October, a central bank source said commercial banks had mobilized 90-91 tons of gold. During the recent April cabinet meeting, a State Bank representative said by the end of March, banks’ lending in gold had declined while their gold deposits had kept climbing. – Dtinews

Tags: vietnam gold, Vietnam gold prices