The ratio of outstanding loans in gold to collateral is usually fixed at 50-60%. However, this ratio is not ensured when the gold price goes up and thus banks would have their clients supplement deposits or mortgage.

Within five days from August 6-11, the local gold price became feverish after surging by 10% to VND46 million, putting many borrowers in the hot water as they had to increase collateral as required or saw their mortgage liquidated. In fact, many banks were forced to sell the collateral for debt recovery.

Still, there are banks softening this requirement for their corporate clients.

A banker in HCMC said his bank would wait for the gold loan to collateral ratio to reach some 85-90% to decide on those failing to meet the requirement.

The general director of a HCMC-based bank, known for its financial strength with gold, said the bank had warned clients of the rising gold price and advised them to have plans for gold risk management.

“However they refused to switch from gold loans to Vietnam dong loans because the former carries a lower interest rate,” he said. The annual gold lending rate is 4% at this bank, compared to the lending rate for Vietnam dong loans at over 20%.

To help borrowers reduce losses in gold lending, many banks have converted a proportion of outstanding loans to Vietnam dong and continually offer a loan extension.

Currently, many banks are struggling with their debt collection of gold loans due to the gold price hike. Many loans have already been listed as bad debts of such banks.

Not only gold borrowers but several banks also failed to retrieve the amount of gold that has been converted into Vietnam dong. Earlier, many banks facing the liquidity problem for Vietnam dong has converted gold deposited at their institutions into the local currency.

The central State Bank of Vietnam has ordered financial institutions to accomplish this back-conversion in June 2011 but there are still four or five banks that failed to do so, said Ho Huu Hanh, director of the central bank’s HCMC branch.

Hanh said he has reported the situation to the central bank and has yet to receive any instruction on this subject.

Under the current regulation of the central bank, gold lending is prohibited but banks can still issue gold deposit certificates until May 2012. Thereafter, gold mobilization and lending will be completely banned.

As of end-June, 14 banks in HCMC were still mobilization and lending gold with total mobilization of 2.43 million taels and total outstanding loans of 1.12 million taels.