A shake-up of Vietnam’s banking sector may come into force next year, as hinted at by Prime Minister Nguyen Tan Dung two months ago. Chairing a meeting between government members and a group of economic experts in late August, the PM stressed that one of the country’s top priorities in the time to come was to restructure its banking sector.

Never has the country seen such a consensus of opinion on restructuring the banking system as it has now. The 11th Party Central Committee last month also considered the restructuring of public investment and the financial market, especially the banking system and financial organisations, as one of country’s major orientations.

Pressing ahead

The difficult economic climate has laid bare the serious shortcomings in Vietnam’s banking system. After failing to allocate capital properly, the country’s banks have found themselves under severe pressure from mountains of non-performing loans. Sooner or later the painful but necessary restructuring process must begin.

Clearing up the mess in the banking system is certain to cost money and lots of it. “Restructuring the banking system is a major plan and requires major funding,” said Mr Le Xuan Nghia, Deputy Chairman of the National Financial Supervisory Commission. But money must go hand-in-hand with other things.

The government, Mr Nghia said, should give full power to a special commission to handle the important task. “Vietnam desperately needs to clear its bad debts,” he said. “One clear solution is to write off non-performing loans with fresh funds from the budget. We should also force banks to increase their capital.”
To avoid creating new bad debts, banks must insist on far-reaching governance.

At major banks’ headquarters there are a number of senior managers armed with modern risk management systems. But their attention does not reach down to small branches, where the problems can begin. According to Mr Vo Tri Thanh, Deputy President of the Central Institute for Economic Management, having too many small branches can damage large banks.

 “A large bank with many branches could face the same problems as a small economy with a number of small banks,” he said. “The point here is that the country should determine their scope of activities depending on the capability of each bank. For example, rural commercial banks should only operate in rural areas and so on.”

Mr Thanh may have a point, as the transformation of rural commercial banks into urban commercial banks presents a major problem for the whole system. The World Bank said that credit growth at rural commercial banks is too high while the level of credit risk management at these banks remains quite low.

Unless the government takes action, there is little reason to believe that tomorrow’s loans will turn out better than yesterday’s.

Another way to promote the restructuring process would be to stop the use of banks as cash cows for unprofitable State-owned enterprises (SOEs). One possibility bank regulators should carefully consider is to restrict the participation of large SOEs in banks.

It is ludicrous that some large SOEs can hold major stakes in banks and then use money from these banks to finance their enterprises and affiliations. The banking law in 2010 stipulated that an individual’s stake in a bank should not exceed 5 per cent and also includes provisions banning lending to major shareholders and related members, while also limiting the maximum credit a customer can borrow. These provisions are designed to limit risks from lending to just a few customers.

Ironically, the law has not been fully implemented and this makes the bad debt problem become worse and creates chaos in the monetary market.

M&A a solution

Analysts are now talking about quickly merging small and weak banks into larger banks. Doing this requires large banks to spend money and raises two questions: can the large banks do it, and do they really want to spend money on buying small banks.

With the first question, one opinion being floated is that State-owned banks could use State funds to buy small banks. This must be reconsidered, as the performance of some State-owned banks leaves a lot to be desired.

With the second question, it’s true that large banks are interested in small banks, but only those that have their own advantages are on the radar. If conditions permit, large banks will choose small banks that are performing acceptably but would prefer not put themselves at risk from taking on too much bad debt.

If large State-owned banks are unlikely to provide help, the government may have to do it itself. One possibility is for the State Bank of Vietnam (SBV) to purchase stakes in weak banks to gain control. But there are differing opinions on this solution.

Mr Cao Sy Kiem, former Governor of the SBV, believes that the government should extend a helping hand to these weak banks, while Mr Bui Kien Thanh, an independent financial expert, believes there is no need to do so and that Vietnam should simply allow these weak banks to head into bankruptcy.

Given the current conditions, encouraging direct investment by foreign banks in local banks and allowing them to compete equally with local banks that prefer to remain completely domestic could be a boost to the reform process. The country’s bankers could learn an enormous amount from foreign bankers, both as partners and rivals. But instead of welcoming foreign involvement in banking, Vietnam continues to drag its feet.

Restructuring the banking system will inevitably pose certain risks, and any drastic changes carried out by the State will be painful for the country’s banks. But such changes must be made sooner rather than later.

Source: VNEconomy.