Banks ponder a new burden: gold

Before speculative trading in gold was banned, lending gold was a big profit maker for banks. Now it has become a burden on the banks and a hindrance to efforts to maintain a stable national currency.

On April 12, 2010, reports VietNam Express, Agribank Jewelry Company (AJC) stopped raising capital in gold for Agribank, its state-owned parent company. Customers who came in to roll over time deposits were angry that they had to wrap up their gold bars and take them home.

AJC General Director Nguyen Thanh Truc said that the company was following Agribank’s instruction after the State Bank (SBV) let it be known that it is considering a ban on deposits of gold and gold-based lending throughout the whole banking system. Truc regrets this, explaining that the demand for gold loans is increasing. As the interest rate on gold loans is only about a quarter of the interest rate on dong loans, businesses like to borrow gold and then sell it as they need dong in their business operations.

Other joint stock banks are still accepting gold deposits, but they feel worried after hearing that AJC has stopped doing so. The banks now find it difficult to find customers who will borrow in gold. Only businesses which accept currency risks will borrow in gold and then convert it as necessary into dong.

The State Bank’s rumored move against the common practice of holding monetary assets as gold follows by a few months its decision to shut down speculative ‘gold trading floors’ and ban settlement of foreign transactions in gold, in-kind gold transactions on the domestic market have decreased, while the volume of gold kept as bank deposits remains relatively large.

Viet A Bank reports that gold accounts for 30 percent of its total assets, while at ACB and Eximbank, gold deposits are over 10 percent of assets. These high figures give headaches to banks because they could create liquidity problems.

A representative of Viet A Bank told the press that the amount of capital represented by gold deposits has decreased from the beginning of the year. However, as banks find difficult to find the borrowers of gold, the bank is considering further slashing deposit interest rates for gold, though they are low already.

According to Eximbank, the interest rate on gold loans has fallen by half since mid-2009, to around three percent. However, it is still difficult to find gold borrowers. Meanwhile, the gold deposits rising though the interest paid on them has fallen nearly to zero.

Though the State bank of Vietnam has not made a final decision on whether to ban banks from borrowing and lending in gold, experts believe this is highly possible. Lending in gold puts pressure on the exchange rate, and stabilizing the dong against world currencies is a major concern at present.

According to Huynh Trung Khanh, Deputy Chairman of the Vietnam Gold Business Association, most of the gold deposits that commercial banks now hold are in individuals’ accounts. It is estimated that Vietnamese private individuals are holding altogether 400 to 500 tons of gold, of which 10 to 20 percent has been deposited at banks.

Tags: vietnam bank, vietnam gold, Vietnam gold market, Vietnam gold trading