But mergers and acquisitions may not be the perfect answer
A customer uses an ATM in Hanoi. Vietnam said it would restructure the banking system over the next five years to enhance competitiveness of local lenders.
While there is a growing consensus that a series of mergers and acquisitions would bring much needed stability to the Vietnamese banking system, some are advising caution.
The critics say that while mergers sound good and rational, their advisability for the local industry is based on conclusions about small banks that may not hold true in many instances.
However, increasing bad debts and low liquidity at commercial banks are imparting some urgency to the central bank's plan to restructure the banking system.
The State Bank of Vietnam had said it would restructure the banking system over the next five years to enhance the competitiveness of local lenders and lend greater security to the national banking system. Mergers and acquisitions are effective restructuring measures, it said.
Tran Hoang Ngan, member of the National Assembly's Economic Committee, said the restructuring of the banking system now is an urgent issue, as commercial banks were experiencing very low operational effectiveness as seen in high lending interest rates that were placing a big burden on the economy.
Tran Bac Ha, chairman of BIDV, one of Vietnam's biggest lenders, said the restructuring of the banking system is "quite necessary."
"It should have been done some years ago. It is not normal that a country has too many credit institutions," he said.
The oversupply of banks could lend some chaos to the economy, affecting the implementation of the state's monetary policy, he said. With the large number of banks, the competition gets fierce and they take higher risks, he said.
According to the central bank, the banking system now has 52 commercial banks, 51 branches of foreign banks, and many other non-bank credit institutions.
Economist Le Dang Doanh said despite high number of banks, their quality was still limited.
"The number of local residents with bank accounts is still small, and so are payments via the banking system," Doanh said. "Thus, it is important to improve the operations as well as technology of banks."
Some banks in rural regions have boosted their credit growth too rapidly, despite shortcomings in their management, which could cause many risks, he said. "I think the banks should be merged."
While local banks have played an important role in attracting and supplying capital for the economy, they have many weaknesses that include limited financial capacity, inadequate management, and a narrow range of services, said the central bank.
Former governor Cao Sy Kiem said that after the central bank took strict measures to maintain a deposit ceiling at 14 percent, some banks have borrowed capital at any cost to ensure their liquidity.
One-week lending rates soared to between 17 and 19 percent in mid-October.
Some banks accepted any interest rates offered by stronger lenders in the interbank market, raising alarms about the safety of the system, Kiem said, adding dozens of banks need to be restructured.
Meanwhile, bad debts are increasing as commercial banks fail to recoup their loans. With deposits falling, it could cause difficulties for the banks in ensuring liquidity. If the problem is not dealt with soon, the banking system's safety will be threatened, experts say.
Industry insiders note the bad debt levels at many banks could be around 7 or 8 percent because they have offered a large amount of credit to the real estate sector.
Thus, mergers or acquisitions among banks would help improve the liquidity of the banking system, as lenders would not compete too fiercely in mobilizing capital to ensure their liquidity, they argue.
The State Bank's policy is designed to encourage credit institutions to merge with or acquire other entities of their own accord. Assistance will be offered to ensure successful M&A deals, it has said.
The plan has raised concerns that small banks do not want to be merged and dependent on larger ones.
However, Le Xuan Nghia, vice chairman of the National Financial Supervisory Committee, said the restructuring plan does not focus on small commercial banks, but those whose operations are unsafe and management is weak.
For example, a small bank in Vietnam has a capital of some $100 million, while one in the US has some US$10-15 million. Thus, small banks in Vietnam are not really small compared to other countries, he said.
The general director of a small bank headquartered in a southern province said his bank does not worry about the plan. "It is not that large banks are strong, and small banks are weak. Small banks also have their own customers, and their own market segment."
He said mergers and acquisitions are not easily conducted, as it is difficult for small banks to find the right partners. Negotiations over rights and benefits after the merger would be also very difficult, he said.
However, there is a possibility that some strong banks may cut their loans to those that rumors say will be merged, he said, adding such rumors could cause customers to withdraw their deposits.
"The strain on the banking system's liquidity cannot be improved, unless the information about the mergers is clearer," he said.
"Depositors are very sensitive to changes in the banking system. It must be ensured that any restructuring effort does not affect normal functioning as well as the stability of the system as a whole," he said.