“The huge differential between dong and foreign currency interest rates have inspired more firms to borrow US dollars,” said Truong Hoang Luong, general director of Kien Long Bank.

The bank’s total dollar loans have seen a 5 percent month-on-month increase.

Commerical banks offer dollar loans at an average annual interest rate of only 6.4 percent, compared to 18.74 percent on dong loans, according to a recent report from the State Bank of Vietnam.

As of June 10, dong credits grew by 2.72 percent over the end of last year. During the same period, foreign currency loans rose by 22.21 percent.

“Interest rates on dong loans have begun to show signs of reduction. However, the rates are still too high, far beyond the firms’ financial capacity,” said Dao Duy Kha, vice general director of Vietnam Plastic Corporation. “Thus, borrowing dollars, especially in the short term, is now better than ever.”

Still cautious

Nguyen Hoang Minh, deputy director of the central bank’s Ho Chi Minh City branch, said firms should be cautious about borrowing dollars because of the foreign exchange rate fluctuation.

To minimize the risk, firms should buy insurance to protect against foreign exchange rate fluctuations, he said.

The dollar traded at between VND20,630 and VND20,650 at commercial banks on Thursday.

Economist Nguyen Minh Phong from the Hanoi Socioeconomic Research Institute said the dollar supply may be strained due to increasing demand from importers for the greenback starting late next quarter.

In addition, the State Bank of Vietnam recently lowered its rate cap on dollar deposits, reducing the foreign currency supplies of many commercial banks. On June 2, the central bank lowered its rate cap on individual dollar deposits from 3 to 2 percent and cut the cap for banks from 1 to 0.5 percent.

Luong, of Kien Long Bank, said the exchange rate may rise when the government begins buying up dollars to pay foreign debts and increase its foreign currency reserves between July and December.

A stabilized currency market has allowed the central bank to add US$1.2 billion, last month, to its foreign exchange reserves. The bank had already purchased $877 million during the first four months of 2011.

Difficult to access

Nguyen Ton Quyen, secretary general of the Vietnam Timber and Forest Products Association, said: “Local woodworkers who need to borrow some $1 billion each year to import materials have found it hard to access foreign currency loans.”

His company has to borrow Vietnamese dong and then buy dollars from commercial banks, Quyen said.

Trinh Van Tuan, general director of commercial bank Phuong Dong, said the central bank’s policies are aimed at reducing dollar credits to maintain a stable balance in foreign currency supply and demand.

Thus, his bank has carefully vetted its dollar loan applications, partly because of thinner foreign currency reserves.

According to a circular from the State Bank of Vietnam which went into effect last month only firms which take in dollars can borrow greenbacks from commercial banks.