The State Bank of Vietnam (SBV
), at the helm of Governor Nguyen Van Binh
, has been fixing loopholes in the banking system and put the monetary policy at the service of the government’s pro-economic growth strategy.
After the global financial crisis in 2008, Vietnam’s banks were found in chaos, being shackled by with non-performing loans (NPLs) that have dragged on growth and caught in a race that pushed up interest rates to 30%-40% per year.
Dollarization and goldization was rampant as locals’ confidence in the Vietnamese dong and macroeconomic fundamentals was undermined amid soaring inflation.
Pulling down interest rates
The SBV started to set caps on deposit interest rates in 2010 and threatened to strictly handle those banks that breached the regulation. In July 2015, SBV Governor Binh requested banks to bring down annual interest rates on existing loans to below 15%. Consequently, rates of over 80% of loans were reduced to below that level three months later.
According to a government report submitted to the National Assembly in October 2015, interest rates now stay around 40% of those in the second half of 2011 and were lower than those in the 2005-2006 period when the Vietnamese economy was somehow stable.
Annual rates currently hover around 6%-9% for short-term loans, and 9%-11% for medium- and long-term loans. However, these rates are considered high in comparison with corporate profitability.
Taking reins of gold market
Facing speculation in the gold market and locals rushing to buy gold, to regain orders in this market, the SBV imposed a number of measures such as granting gold import quota and trimming the gold selling network.
Stepping further, the monetary regulator banned banks from mobilizing and lending in gold and forced them to close gold positions and shift from borrowing-lending relations to selling-buying ones. In addition, the SBV held auctions to pump gold into the market and regulate the supply.
The SBV’s measures have helped stabilize the gold market and dampen locals’ appetite for gold, indirectly easing pressures on the forex market. Nevertheless, the gap between domestic and global gold prices are yet to be narrowed as Mr. Binh promised.
Cleaning up problem loans
Resolving the bad debt issue has remained a chronic headache for the Vietnamese government. The Vietnam Asset Management Company (VAMC) was set up in July 2013 to help clean up NPLs, which locked up in real estate and other non-core businesses of many powerful state-owned enterprises.
VAMC had purchased a total of 201 trillion dong ($9 billion) worth of NPLs from local credit institutions as of September 2015. It has recouped less than 8% of the bad debt under its control.
Adding to banks’ credit risk provisions, bad debt purchased by VAMC has helped bring down the official rate of NPLs to 2.93% at the end of September 2015, from 4.2% reported by banks or some 17.2% three years earlier as monitored by the SBV.
Some 456 trillion dong ($21 billion) in troubled loans, or 98% of NPLs identified as of September 2015, has been resolved. Of the sum, up to 58% has been cleared with resources of banks and 42% via VAMC.
Some experts have opined that VAMC just buys time for banks and can hardly recoup the bad debt due to legal shortcomings and the absence of a debt market.
According to FT Confidential Research, an investment research service at the Financial Times, the roots of Vietnam’s bad debt problems are still not being properly addressed. The much-trumpeted fall in the official NPL figure mostly reflects the shuffling of bad debts from one balance sheet to another.
Removing troubled banks and tackling vested interests
With the first phase initiated in 2012, the overhaul aimed to handle the cross-ownership that pushed the Vietnamese banking system to the verge of collapse. The SBV has cut down the number of commercial banks in the country from 42 to 34 currently. The number is projected to fall to a half by 2017 by forcing takeovers of ailing banks by better-capitalized state-controlled lenders.
The number of wholly state-owned banks has expanded from one [Agribank] to four after the SBV took over three troubled banks namely Vietnam Construction Bank, OceanBank and GPBank earlier this year at zero cost.
These takeovers, or “nationalizations” as named by some observers, have stirred public debate, but the SBV has insisted that this is the optimal way to protect depositors’ rights and prevent a collapse of the system.
In addition, a number of small-sized lenders have been merged into larger one in a “voluntary” manner. The notable pairs are Maritime Bank-Mekong Development Bank, BIDV (BID)-Mekong Housing Bank, Sacombank-SouthernBank, PV Finance Corp-WesternBank, Saigon Hanoi Bank (SHB)-Habubank.
VietinBank is set to merge PGBank while Vietcombank
has been rumored to link with Saigonbank. Moreover, a number of financial companies have and will be merged into banks.
The government has adopted hardline policies to tackle hidden cross holdings and vested interests which have distorted the banking system. A number of high-profile bankers such as Nguyen Duc Kien at Asia Commercial Bank (ACB), Pham Cong Danh at Vietnam Construction Bank, Tram Be at Sacombank (STB) have either been convicted or forced to leave their posts.
Tran Tho Dat from Hanoi-based National Economics University recognized achievements of the banking revamp, but said that the cross-ownership is one of the toughest and most time-consuming issues to be solved.