While banks are banned from mobilising and lending gold, or in other words, gold business has no way-out, why are they competing with each other fiercely and using higher interest rates as an advantage to attract the precious metal?
Most of the time, interest rate race is ignited by small banks. When interest rates on dong deposits are put an upper limit, banks have started the race of gold certificates. In the past month, gold interest rates have risen continuously, from less than 1 percent per annum to 3 percent for short-term deposits.
Gold rush
Since early October, banks simultaneously pushed up interest rates on gold deposits. Saigon Commercial Joint Stock Bank (SCB) lifted its gold deposit rate to 1.8 percent per annum for one-month term, 2.2 percent for two-month period, and 2.5 percent for six- or nine-month term. Viet A Bank and Housing Development Bank (HDBank) also offered 2 - 2.2 percent rates on short-term gold deposit certificates. Many banks continued to apply higher rates to attract customers. In early November, SCB raised the rates to 3 percent per annum for deposit terms from three months to 364 days while the rates for one-month and two-month terms were 2.95 percent and 2.96 percent, respectively. Vietnam Tin Nghia Bank have also increased its rates to 2 - 2.7 percent from 1.6 - 2.2 percent earlier.
Notably, big banks have also followed steps of small lenders. Even banks which were assigned to sell gold to stabilise the gold market also jumped into the race. Asia Commercial Bank (ACB) launched the Gold Day promotion programme with interest rates on one, two and three-month gold deposits to 2 percent per annum from October 31. Eximbank also lifted gold deposit rates for one, two and three-month terms to 2 percent, 2.1 percent and 2.2 percent, respectively. Dong A Bank, one of banks that were assigned to stabilise domestic gold prices, also brought gold interest rates to 3 percent per annum for three-month or longer terms. Indeed, the actual interest rates for gold certificates are much lower and banks readily keep gold for customers for free.
While the interest rate on Vietnamese currency, dong, is sternly managed, [the State Bank of Vietnam] has not made any regulations on gold interest rates. For that reason, banks are quite free with this business to meet their needs.
Higher rates for a more stable market?
Director of a large commercial bank which, with other four banks, plays a big role in the gold price stabilising programme initiated by the State Bank, said: Raising the interest rates for gold deposit certificates is just to stabilise the market. This business is originated from the people’s demand, explaining that higher rates will help bring gold back to banks after it is sold to the market for the purpose of stabilisation. Otherwise, bullions will be kept at home.
However, banks are not allowed to lend gold; so, how can they pay interest rates as high as 3 percent per annum? It is impossible that banks will take their own money to offset this business.
In April, the central bank issued the Circular 11, requiring credit institutions to halt gold mobilisation and lending and banning them from converting gold into money. Looking back on gold price graphs, the circular has actually worked out and limited risks gold may cause to the economy, banks and gold borrowers. As a matter of fact, interest rates on gold dropped steeply to just 0.4 percent per annum at Eximbank or from 0.2 - 0.7 percent at ACB.
The most persuasive reason for the sudden surge in gold interest rates is the State Bank of Vietnam (SBV) allowed some banks which traded gold on margin to convert outstanding gold on their account into real gold, which can be converted into cash (local dong). The Circular 32 issued on October 6 permitted some banks to sell outstanding gold on account to stabilise the market and open foreign margin accounts to buy back gold to balance their accounts when necessary.
The time when gold deposit rates increased dramatically coincided with the time many banks faced draining liquidity. Interbank rates surged to over 20 percent per annum, and even 30 percent at some points of time. It is believed that gold, to a certain extent, is converted into cash to deal with waning liquidity at some banks.
Indeed, banks are very good at looking for policy loopholes and policymakers usually have to run after them to fix policy shortcomings. Some experts proposed the central bank allow banks to mobilise gold and cap deposit rates at 0.5 percent per annum because the current high interest rates may lead more people to buy gold to place at banks to enjoy the margin. But, when the bullion price increases strongly, they will convert gold into cash to take another margin. Then, regulating the gold market will be a much harder job for the central bank.
Mr Cao Sy Kiem, Former SBV Governor, said: Gold business needs to be managed to avoid unwanted impacts on the market.
In the latest development, the central bank issued the Document No. 8492 to inspect gold mobilisation situations at banks. Accordingly, domestic banks and foreign bank branches are not allowed to trade or supply gold derivatives, including futures, options and swaps, for customers without the permit [from the central bank]. Besides, gold mortgage and collateralisation will have to be reported to the central bank weekly. This agency reaffirmed that it did not encourage credit institutions to mortgage gold. By May 1, 2012, banks will have to stop issuing short-term gold certificates.
Le Minh
Vietnamese
