Vietnam: Plenty to sell, not enough to lend

by **ADMIN** Mon Aug 01, 2011 7:43 am

Plenty to sell, not enough to lend

VietFinanceNews.com - Banks in VIetnam have stepped up sales of the dollar as they anticipate a move to reduce their dollar holdings, even as they compete to mobilize more of the greenback to meet increasing demand for dollar loans.

“Buying foreign currencies now is easier than ever,” said Dao Duy Kha, deputy general director of Vietnam Plastic Corporation. “Banks are able to meet our dollar demands at official foreign exchange rates.”

This is quite different from the situation several months ago, when many firms were unable to buy dollars from banks due to limited supply.

They had to purchase dollars from the black market which charged much higher rates than those at banks.

The exchange rate between the US dollar and the Vietnamese dong has stabilized at around VND20,608 per dollar this week. Many commercial banks, including Vietcombank, Techcombank and Agribank, on Wednesday even lowered their exchange rates by VND20-50 per dollar.

The general director of a bank in Hanoi said commercial banks were strengthening sales of the dollar as they prepare for a central bank’s draft circular that aims to reduce dollar holdings by commercial banks. The new rule would require banks to reduce their dollar holding ratios to 20 percent of their equity from the current 30 percent.

He said many banks have purchased dollars in big volumes and they are boosting sales of the foreign currency.

“Banks have abundant supply of dollars for selling as people have sought to convert their dollars to dong and earn more interest on their deposits,” said Nguyen Van Le, CEO of Saigon Hanoi Bank.

Annual interest rates on dong deposits have been capped at 14 percent, and those on dollar deposits at 2 percent.

Le said the State Bank of Vietnam’s regulation that 50-percent state-owned firms have to sell dollars to commercial banks from July 1 has also contributed to the increasing supply of the foreign currency.

Despite the 2 percent cap on dollar interest rates, some commercial banks are offering 2.5-4 percent for deposits of above US$10,000. As demand for dollar loans goes up, banks are trying to mobilize the foreign currency needed to meet it.

According to the central bank, dollar credit grew 23.4 percent by late June compared to the end of last year, far exceeding the growth in dollar deposits of 8.94 percent.

One bank director said it was difficult to mobilize dollar deposits now because of low interest rates. This and the rising demand for dollar loans were prompting lenders to break the interest cap on dollar deposits, he said.

Do Van Ve, deputy director of beverage maker Huong Sen, said: “In the current context of stable foreign exchange rates and low interest rates on dollar loans, it is better for firms to borrow in dollars than dong.”

Commercial banks are charging as much as 8 percent interest on dollar loans, compared with 25 percent for those in dong, according to a report on the central bank’s website July 19.

Duong Thu Huong, general secretary of the Vietnam Association of Banks said borrowing in foreign currencies could bring firms more benefits. “The difference between interest rates for dong and dollar loans can fetch firms taking dollar loans profits of up to 10 percent each year.”

If firms just borrow dollars and use the money to make dong deposits, they can earn a profit of 18 percent per year, she said.

But Huong warned that if dollar loans continue to grow at their current pace, there may be serious consequences in the next three to six months, threatening the balance in the banking system’s capital supply and credit.

Le Tham Duong, a professor at the Ho Chi Minh City Banking University, said banks which increase dollar credit could face loan default risks when foreign exchange rates increase.

The dong may fall at the end of this year when companies’ dollar loans come due, he said. “Pressure on foreign exchange rates may also weaken our efforts to reduce inflation.”

Policy makers may raise the compulsory reserve ratios for dollars at banks to reduce lending, he added.

http://www.vietfinancenews.com/2011/07/plenty-to-sell-not-enough-to-lend.html