Banks in Ho Chi Minh City are vying to increase interest rates on gold and deposits in unpopular foreign currencies, considering it as a solution to improve liquidity.

Sharp increases in the interest rate on gold deposits at local banks in recent days have ranged between 3 percent and 3.5 percent per annum, much higher than the level of 0.2 percent or 1 percent recorded in May.

The Vietnam Tin Nghia Joint-Stock Commercial Bank is offering an interest rate of 3.2 percent per annum for gold deposits with three and nine month terms, and the Sai Gon Joint-Stock Commercial Bank is paying a similar rate for gold deposits with terms from three to 11 months.

Many major commercial banks are also involved in the race. For instance, the highest interest rate on three-month gold deposits at the Vietnam Export-Import Joint Stock Commercial Bank is 2.2 percent, and the of rate on deposits with other terms average between 1.5 percent and 2.1 percent per year.

The Asia Commercial Bank (ACB) has increased its interest rate for certificates of one-and three–month gold deposits, with the highest level of 1.6 percent. Its interest rate for gold deposits of 10 taels or more will be 2.5 per cent per year.

While the highest gold interest rate at Dong A Joint Stock Commercial Bank stands at only 0.4 percent on three month-term deposits, the bank is ready to pay dividends equal to 3 percent per year to those who use the bank's gold-keeping service.

A similar situation is also seen with interest rates on deposits in less popular foreign currencies, according to independent market watchdogs.

Hongkong-Shanghai Banking Corporation has increased its interest rate on Australian dollar deposits to 4 percent per year.

The Vietnam Tin Nghia Joint-Stock Commerial Bank offers the highest interest rate of 3.2 percent per annum for euro deposits, with terms ranging from 12 to 24 months, and a 3.8 percent rate for AUD deposits.

However, the highest rate for euro deposits is seen at the Saigon Joint Stock Commercial Bank, with 4 percent paid for those with terms of between 12 and 24 months.

Explaining the recent changes, several bankers said the central bank has begun to exercise strict control over banks' application of interest rate caps on both Vietnamese dong and US dollar deposits.

Many banks has to increase deposit rates on gold and less foreign currencies to be able to raise more funds from the public and improve their liquidity.

An official of a commercial bank in the city, who declined to be named, said that many clients have withdrawn gold deposits before due date to sell and make a profit because market gold prices have gone up continuously.

This has resulted in a shortage of gold deposits. For the banks, gold deposits are important because they can use them as collateral security to get dong loans from other banks at lower interest rates.

So, the banks have had to raise their gold interest rates in hopes of mobilising more gold, he said.

At present, many commercial banks consider mobilisation of gold as a temporary measure to help them handle liquidity issues, according to senior financial expert Le Trong Nhi.

Nhi, however, said this measure will likely create risks for the banks when there are strong fluctuations in gold prices on the market.

He said it is expected to have an adverse impact on both the gold and foreign exchange markets.

According to analysts, when the interest rate of US-dollar deposits is capped, there will naturally be certain changes in the interest rate and exchange rate markets.

At this time, other strong foreign currencies like the euro, AUD and CAD will be chosen by many banks.

These moves will enable the banks to attract more foreign currency deposits from people's savings.

Then they can sell these mobilised foreign currencies to other banks or importing enterprises to receive dong or US dollars, they said./.