Vietnam's central bank vowed to crack down on violations stemming from small groups of shareholders who control Vietnamese banks, calling them the "biggest obstacle" to reforming the financial system.
"Interest groups" have emerged at Vietnamese banks and some lenders are controlled by only one or two individual shareholders, Governor Nguyen Van Binh said in a television interview posted on the government website last Sunday. At some banks, 70 percent to 90 percent of outstanding loans are made to "serve those shareholders," he said.
Some of the groups are working against the government's banking reforms, Binh said.
"They may manipulate operations at one bank and affect the whole system," Binh said in an interview with state-run Vietnam Television. "Leaders at the central bank are acutely aware that group interests are the biggest obstacle in the entire Vietnam banking system restructuring process."
The government has pledged to bolster the country's undercapitalized banks, saddled with the highest level of bad debt in Southeast Asia. Moody's Investors Service cut Vietnam's government bond rating on September 28, citing risks to the state balance sheet from "weaknesses" in the banking system and lower growth prospects.
"It's good to get it officially acknowledged that this is a major problem," said Jonathan Pincus, a Ho Chi Minh City- based economist at the Harvard Kennedy School's Vietnam program. "The next step is to act and enforce the existing rules so that this kind of thing doesn't happen. Hopefully this means there will be action."
Rules to prevent individual shareholders from controlling banks are widely circumvented, Pincus said. Powerful individuals and groups who control banks often use the lenders as sources of credit for their own businesses, he said.
The shareholder groups "have not used funds efficiently and have caused the loss of bank funds, forcing banks to restructure," Binh said.
"They have spread false information, smeared leaders of the party and state, distorted the facts about the banking system restructuring process to cause public panic," he said.
Loose and inefficient monitoring of commercial lenders, coupled with their fast development, have led to "consequences" that need to be fixed, including the issue of group interests, Binh said in the interview.
The UK-based Economist Intelligence Unit said in a note Monday that the interview represented "the most detailed glimpse" of what has gone wrong in the Vietnamese banking sector.
"It is also encouraging that the government is willing to broadcast this information, as it indicates that there is a will to push through reforms, despite the concurrent negative publicity."
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