The State Bank of Vietnam said it supports banking mergers to enhance the competitiveness of local lenders and secure the national banking system.
As the government pursues economic stability and stable growth, the central bank said in a statement on Wednesday it would continue to tighten monetary policy.
"Beginning now, credit institutions need to map out suitable strategic plans and begin restructuring to improve their competitiveness, operate safely and achieve sustainable growth," the central bank said.
Mergers and acquisitions are effective restructuring measures, it 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.
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, the central bank said.
The oversupply of banks on the market has created harsh competition and pressure on banks to generate profits, forcing them to accept high risks, it said in the statement.
The State Bank's policy is 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, the central bank said, noting that the trend will gradually help strengthen the banking system.
The central bank's endorsement came amid concerns about the high level of bad debt in the banking system.
The bad debt ratio rose to 3.21 percent of outstanding loans at the end of August, compared to 2.53 percent the same month last year, according to statistics provided by a central bank agency. Bad debt has been rising gradually this year, it said.
Industry insiders said the ratio could be even higher in reality.
A banker speaking on the condition of anonymity told Thanh Nien that many banks' bad debt levels could be around 7 or 8 percent because they have offered a large amount of credit to the real estate sector.
The banking system must prevent the ratio from rising further and must restructure debts, the banker said.
State-owned lender Agribank's bad debt is now 6.67 percent of its total loans, even though the bank has set a target of controlling the ratio this year, general director Nguyen Ngoc Bao said. Most of the bad debt came from real estate loans offered in 2008 and 2009, mainly in Hanoi and Ho Chi Minh City.
The central bank needs to help banks deal with bad debt to ensure safety for the whole system, Bao said, adding that many banks are facing liquidity problems.
Fitch Ratings said in a report on October 9 that Vietnamese banks need to raise their capital. "In the near term, committed efforts by the government to bring more stability to the operating environment, such as reducing inflation, are crucial to the banks' financial profiles," the agency said.