Economists push Vietnam to use bankruptcy as restructuring tool for weak banks

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A file photo shows a teller counts money at a branch of Global Petroleum Bank (GPBank) in Hai Phong City. Local media reported in December 2013 that Singapore lender United Overseas Bank had begun due diligence on GPBank and wanted to wants to turn it into a 100 percent foreign-owned branch.

Vietnam should force weak commercial banks to declare bankruptcy and allow the full foreign ownership of banks in certain cases to more effectively restructure the financial system, economists say.

The Vietnam Association of Finance Investors has recently suggested that the country should keep only its 15 strongest banks in operation and eliminate cross-ownership in lending institutions.

There are now 40 domestic banks and many foreign and joint venture banks, aside form a host of other credit institutions, according to the central bank.

Weak banks should be shut down, according to the association, which suggested that the central bank raise the cap on the foreign ownership in a bank to 49 percent from the current 30 percent.

The association also recommended that the central bank allow foreign investors to buy 100-percent of the shares in struggling banks if they can buy at least 3 or more weak lenders at once.

A report submitted by the central bank to the legislature last November said there were 11 weak banks in Vietnam.

According to a government decree effective on February 20, foreign banks will be allowed to buy majority stakes in domestic lenders considered weak, and marginally greater shares than at present in stronger banks. It did not stipulate what constituted a "weak" bank.

The new decree said a single "strategic foreign investor" will be allowed a maximum 20 percent in a Vietnamese bank without government approval, up from 15 percent now. The 30 percent cap on total foreign ownership remains in place. The foreign ownership limit could be raised beyond the 30 percent limit if an overseas institutional investor wants to buy into a weak bank, according to the decree, which did not elaborate on the point any further.

Economist Bui Kien Thanh agreed with the association that weak banks should be eliminated. He said the central bank should let weak banks announce bankruptcy to reduce risks to the whole banking system.

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“It is the most effective way to restructure,” he said.

Merging a strong bank with a weak one cannot create a strong institution, he argued.

The central bank has said that it will not allow the “uncontrolled collapse” of financial institutions while the system undergoes ongoing restructuring that began in October, 2011. The collapse of a single bank might lead to a domino effect and threaten the entire system, according to the state lender.

Vietnam has been too slow in restructuring the banking system, said Thanh. But he also said the central bank has detected and dealt with nine weak banks by forcing self-restructuring and mergers.

However, he said the massive bad debts incurred by the sector and the frozen property market were major problems.

Non-performing debts reported by commercial lenders amounted to 3.79 percent of total loans at the end of December, said Le Duc Tho, chief administrator at the State Bank of Vietnam, on January 21.

Still, Vietnam’s economy is showing signs of improved health. The government projects that gross domestic product will climb 5.8 percent this year, compared with 5.42 percent last year and 5.25 percent in 2012..

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