October 29, 2010 / 5:03 AM / 9 years ago

UPDATE 1-Vietnam stops banks using gold deposits to fund loans

* New rule on gold in effect from Friday

* Outstanding deposits in gold total 92.6 tonnes (Updates with details, quotes, change attribution)

HANOI, Oct 29 (Reuters) - Vietnam's central bank has stopped banks selling gold deposited by customers and using the funds for loans or for converting into foreign currencies, partly to help take downward pressure off the dong VND=.

It is also concerned that, if the value of gold continues to soar, banks could suffer heavy losses when they have to buy gold back to repay depositors.

A State Bank of Vietnam circular issued on Friday also bans banks from lending gold for producing and trading small gold bars, Nguyen Ngoc Bao, head of the central bank’s Monetary Policy Department, said in an interview.

As of Friday, banks can lend gold only for producing and trading jewellery, he said in the interview, published on the central bank’s website (www.sbv.gov.vn).

Bao said that banks had until now been allowed to convert a maximum 30 percent of their gold deposits into dong.

A recent surge in the gold price has led to increased smuggling of the metal into Vietnam, fuelling demand for dollars to buy it and thus pushing the value of the dong down on the black market.

The authorities effectively banned gold imports in mid-2008 to help tackle the trade deficit and take pressure off the dong, although they have granted import quotas occasionally since then, most recently in early October. [ID:nSGE696038]

That has done little to reduce speculation the dong could be devalued for the fourth time since last November. [ID:nSGE69H06Z]

However, dealers said gold prices in Vietnam had softened in recent days and activity in the gold market had also subsided in anticipation of central bank measures to curb banks’ use of gold.

Small gold bars, sold by banks and private gold shops, are used widely in Vietnam instead of the dong as a savings vehicle and for real estate payments, for example.

The central bank’s Bao said an increase in gold deposits and lending had fuelled the dollarisation of the economy.

Bao said the new ruling was intended to limit the circulation of gold in the economy. It would also help curb gold smuggling and speculation, thus “contributing to stabilising the foreign exchange and currency markets”, he said.

At the end of September, 23 out of 44 Vietnamese banks had gold deposits totalling 92.6 tonnes, 60 percent of which had been lent on, central bank data shows.

The central bank has devalued the dong VND=SBVNVND=VN three times since November and speculation about another devaluation has been putting pressure on the currency, making businesses reluctant to sell dollars.

Governor Nguyen Van Giau was quoted on Oct. 19 in a state media report as saying the central bank had no plans to adjust the exchange rate. [ID:nHAN476861] (Reporting by John Ruwitch and Ho Binh Minh; Editing by Alan Raybould)

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