Experts Review Vietnam’s Post-Overhaul Banking System

Tuan Minh

08:56 23/10/2015

BizLIVE - Vietnam’s eminent economist and central bank officials have gathered at a conference in Hanoi on Friday morning to discuss the outcomes of the revamp of the local banking system.

Experts Review Vietnam’s Post-Overhaul Banking System

The conference is organized by the Investment Forum newspaper (BizLIVE) and the Vietnam Institute of Economics.

The conference, entitled “Redefining the Post-restructuring Banking System”, is organized by the Investment Forum newspaper (BizLIVE) and the Vietnam Institute of Economics.
Experts and central bank officials will gather to take a look into how the thorny issues such as governance, cross-ownership and bad debt of credit institutions in Vietnam have been dealt with since 2012 when the restructuring plan was initiated.
In his keynote speech, Ph.D Tran Dinh Thien, director of the Vietnam Institute of Economics, has pointed out the results of the restructuring process of the banking system since 2012. The whole economy and banking system have paid ‘painful costs’ for the shortcomings and immaturity seen in the previous period.
Tran Dinh Thien, director of the Vietnam Institute of Economics.
Vietnam’s banking system has been hurt by the cross-holding, ‘easy’ loans, the political tasks assigned by the state and the implementation of administrative measures, which dominated market-oriented measures. Local banks have had to assumed functions that do not correspond to them.
The restructuring of the banking system cannot succeed without the consolidation of local enterprises, Mr. Thien stressed.
Speaking at the event, Dang Ngoc Duc, head of the Finance Banking Institute under the National Economics University, identified achievements gained in the overhaul of the domestic banking system.
Dang Ngoc Duc, head of the Finance Banking Institute under the National Economics University.
Among them, the State Bank of Vietnam (SBV) has eliminated risks of insolvency in the system, handled weak banks, reduced the cross-ownership, and settle non-performing loans.
Mr. Duc also pointed out problems that need further treatment. Spoiled loans have not been radically settled as non-performing loans (NPLs) have yet to be sold to local private investors as well as foreign investors.
In addition, the Vietnam Asset Management Company (VAMC) lack tools to deal with NPLs. The restructuring of the banking system has not closely matched the overhaul of public investment. The legal framework for the handling of bad debt and cross-holdings is not well built.
Tran Du Lich, member of the National Financial and Monetary Policy Advisory Council, proposed measures to help improve businesses’ health and accelerate the bad debt handling.
Tran Du Lich - member of the National Financial and Monetary Policy Advisory Council.
The master plan to restructure the banking system was initiated in 2012 when the Vietnamese government tightened control over public investment, resulting in a slowdown of bank loans and economic growth. Accordingly, local enterprises cut down operations and their payment capacity went down, leading to a surge in NPLs.
“The Vietnamese economy was found in a vicious cycle. The restructuring of the banking system needed to deal with a series of contradictory matters including taming inflation, reducing interest rates, boosting credit growth, reducing NPLs and stabilizing the USD/VND rate at the same time,” he noted.
The economist suggested the SBV act to reduce medium-term interest rates by two percentage points to around 7% per year because inflation expectations are seen below 2% for the whole 2015.
Le Xuan Nghia, director of the Business Development Institute, assessed that liquidity of the Vietnamese banking system is no longer a headache after a few years the overall restructuring plan has been implemented. “In the context of low interest rates, it’s a success keeping liquidity at the current level.”
Le Xuan Nghia, director of the Business Development Institute.
Some years ago, the International Monetary Fund recommended Vietnam maintain an annual credit growth rate of below 20% while lending expansion hovered around 30%. “Thus 17% credit growth [of the local banking system] is not high. This is what I appreciate the most,” Mr. Nghia said.
Banks’ asset quality is not a concern now although the VAMC now holds half of the 420 trillion dong (roughly $19 billion) in NPLs. It is understandable that VAMC has difficulty in settling bad loans in the context the legal framework is cumbersome.
Mr. Nghia noted the profitability of the banking system is low, half of the level previously, as lenders are allocating sizable resources to the solution of bad debt. Therefore, the banking regulator should prioritize improving the profit margin of local banks to help them consolidate.
“If banks’ financial capacity is weak, they can hardly beef up the technological application and may risk staying behind,” he added.
The SBV governor has said the recent outcomes will lay foundations for the upgrade of the banking system in line with Basel II and OECD standards, Mr. Nghia, also a member of the National Financial and Monetary Policy Advisory Council, tipped.
In the debate session, Truong Van Phuoc, vice chairman of the National Financial Supervisory Commission, the government’s financial watchdog, said that the health of banks subject to consolidation has improved much.
Truong Van Phuoc, vice chairman of the National Financial Supervisory Commission.
Those banks have seen their owner’s equity up 18%, mobilization up 147% and credit up 87% and their credit risk provision have jumped 146%, he collaborated.
Mr. Phuoc, who used to be general director of Vietnam Export Import JS Commercial Bank, explained why bad debt of the banking system has been rapidly tackled as the IMF and Moody’s questioned.
NPLs in Vietnam have been dealt with thanks to banks’ reduction in dividend, cut in salary payment for staff and the increase in provisions for credit risks.
“As much as 45% of NPLs has been held by VAMC, 28% has been handled with provisions and 27% through debt recoveries,” Mr. Phuoc noted.
He spoke out that the shortcomings of the legal framework have hindered foreign institutions from stepping in to purchase NPLs in Vietnam at market prices.
Out-of-date legal framework hinders bad debt handling
VAMC Chairman Nguyen Quoc Hung said that VAMC has helped removed NPLs from banks’ balance sheets, coupled with banks’ provisions for credit risks. 
He updated that the SBV-run company acquired 90.23 trillion dong worth of spoiled loans in book value for 82.73 trillion dong from credit institutions in the year to October 20 in exchange for special bonds. 
The accumulative amount of bad debt VAMC has purchased since its launch in 2013 totaled 225.6 trillion dong, above the firm’s plan set for the end of 2015. 
VAMC Chairman Nguyen Quoc Hung. 
VAMC has recoupled nearly 11 trillion dong worth of NPLs since the start of this year, exceeding this year’s target of 10 trillion dong. It has issued 82 trillion dong in special bonds in exchange for NPLs and plans to emit another 18 trillion dong in the remainder of 2015, the chairman said.
He noted that VAMC’s sluggish recovery of bad debt has been attributable to a lack of regulations that permit private and foreign investors to buy bad debt, and the out-of-date framework that lenghthens legal actions aimed to recoup mortgaged assets. 
In addition, only VAMC, the Finance Ministry-run DATA and asset management companies (AMCs) under the umbrella of banks are allowed to trade NPLs. 
The debt market needs more participants and the legal framework for bad debt settlement needs refining, he pointed out. 
VAMC aims to handle between 225 trillion dong and 250 trillion dong in 2016, he tipped.

TUAN MINH

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