A customer stands next to bricks of dong bank notes lying on the floor as they prepare to deposit them at a local commercial bank in Hanoi
Cross ownership of banks poses a threat to the entire financial system, but authorities have done little to deal with the problem.
"[Pervasive] cross ownership involving state-owned, joint stock, and foreign banks, financial companies, and state-owned and private firms is complicated and becoming a serious problem in Vietnam," economist Dinh Tuan Minh said.
Economist Bui Kien Thanh said cross ownership is one of the main reasons for the increasing bad debts in Vietnam, which were at 8.6 percent of banks' total loans as of the end of March, according to the central bank. The issue is serious that it was included in the discussion agenda at a recent convention of the Communist Party's Central Committee.
When banks have companies as major shareholders, they are likely to lend for their projects without assessing the risks carefully, economist Minh said.
The issue should be resolved before restructuring the banking system, but authorities have yet to come out with specific measure to limit cross holdings, said experts.
Even their moves to assign state-owned banks to help with the restructure of weak banks seem to facilitate cross ownership, Nguyen Xuan Thanh, director of the Public Policy Program at the Ho Chi Minh City-based Fulbright School, said.
In 2011 the central bank had assigned the government's stake in a bank formed by the merger of three small banks mired in liquidity problems - Ficombank, Saigon Commercial Bank, and Vietnam Tin Nghia Bank - to the state-run Bank for Investment and Development of Vietnam.
The government should also order state-owned firms to speed up their pullout from banks by selling their stakes, he said.
Mergers and acquisitions (M&A) should be facilitated to reduce cross ownership, and the transparency of information should be improved to limit negative impacts, he said.
Nguyen Tri Hieu, also an economist, said banks should be allowed to accept deposits only for providing credit, not for investment. There are no restrictions on investments by banks now.
"[Allowing] banks to use deposits for both lending and investment is one of the reasons for the cross ownership," he said.
Many banks have invested in businesses like seafood processing and property, the stock market, and some risky asset classes, causing losses, he said.
Minh said the measures to deal with cross ownership depends on the stake holders: If they are all credit organizations, the best way is to merge them; if non-financial firms are involved, the best way is for them to sell their stakes to financial organizations.
If banks own stakes in firms, they should sell out and the central bank should provide them with refinance, he said.
But the key factor is developing the capital market in a transparent manner and with low transaction costs, he said.
"It is necessary for the government to cut cross ownership in the banking sector. However, it will take time to do it.
"The issue cannot be dealt with in one or two days since it depends on the development of the financial market."
It is difficult to entirely eliminate cross ownership, he said.
"We should accept the existence of cross ownership, but strengthen surveillance to prevent the risks is poses."
The reason for the increasing cross ownership in the banking sector is the high demand for capital sparked by the transformation of 13 rural banks into urban commercial ones to serve the increasing demand for funds during the 2005-07 stock market bull run.
After the transformation, the banks had to increase their chartered capital by 10-20 times to at least VND3 trillion ($142.9 million) by 2011, and had to solicit investment from state-owned and private firms.
But cross ownership need not always be detrimental. A recent report by the National Assembly's Economic Committee said that in some cases the involvement of foreign partners and funds in domestic banks could help them improve their management.
The State Bank of Vietnam also encourages banks to look for experienced foreign strategic partners, it noted.
But the report warned that when it comes to banks having stakes in other lenders the issue becomes tricky.
At least 10 banks are known to have stakes in others.
It also said that nearly 40 state and private companies each own more than a 5 percent stake in banks, with the relationships only complicating matters.
"Many banks are owned by family companies or by members of the same family who are managers at different companies.
"When state-owned banks are major shareholders in joint stock banks, they can sway the latter into giving loans to state-owned enterprises.
"When banks have companies as major shareholders, they will likely become the "˜backyard' of these companies and help the firms raise funds for their projects.
"Even though banks are not allowed to directly lend to shareholders, they can dodge the regulation by offering loans to subsidiaries of those companies.
"Similarly, cross ownership between two banks can allow shareholders of one bank to easily borrow from the other."
Le Xuan Nghia, a member of the Government Advisory Board, said the board has "proposed that the prime minister take stronger measures" to clear such banks from the financial system so as not to undermine the restructuring policy.
In other countries, cross ownership is strictly monitored, economist Thanh said, citing the example of Japanese groups like Mitsubishi and Sumitomo which own banks. The banks are allowed to lend the firms not more than 20 percent of their capital.
The biggest concern about cross ownership is the risk of collapse of the banking system when a bank goes bankrupt, economists said.
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