Vietnam says it has averted risk to safety of banking system

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Vietnam's government said it has averted risks to the safety of the nation's banks, even as the World Bank said concerns about the sector are increasing.

The central bank's objective in its attempts to restructure the banking system is to avoid a collapse, guaranteeing liquidity with full and timely access to deposits when needed, the government said in a report prepared for an annual meeting in Hanoi with agencies and countries that provide grants and loans to Vietnam. The "danger and risk" of damage to the safety of the system has been averted, the government said.

While Vietnam's government has encouraged banks to cut lending rates to help businesses and support growth, rising levels of bad debt has made them reluctant to do so, crimping corporate growth and domestic spending. The government expects gross domestic product to increase by about 5.2 percent this year, the slowest pace of expansion since 1999.

"We are not going to go back to 6 percent, 7 percent growth, until we fix some of the structural issues, banking being perhaps the most important of them," Deepak Mishra, the Hanoi-based lead economist for the World Bank, said in an interview today. "The point is whether the banks are ready to cut, even if policy rates are coming down."

The State Bank of Vietnam has lowered its refinancing rate to 10 percent from 15 percent at the start of the year. It said today it wants to lower borrowing costs in line with inflation, even as the World Bank said the country faces the risk of easing monetary policy prematurely, triggering price pressure.

Danger prevented

Consumer prices rose to a six-month high in November. Vietnam still faces "persistently high" core inflation, and should keep its policy rate at the current level "for some time to come," the International Monetary Fund said today.

Moody's Investors Service cited concerns that weaknesses in the banking system might damage the government's balance sheet and hurt growth in downgrading the country's credit rating in September. The arrest in August of Asia Commercial Bank founder Nguyen Duc Kien, one of the country's wealthiest men, prompted a run on deposits at the nation's largest non-state-owned bank.

"By now, liquidity of commercial banks in particular and of all credit institutions in general has been basically guaranteed," the government said today. "The danger and risk of losing safety of the system has been prevented."

The government is considering the establishment of an asset management company to handle bad debt on a large scale, which would focus on resolving non-performing loans backed by property as collateral, it said.

More cautious

Still, asset quality is deteriorating and the pace of bank restructuring is slow, according to a World Bank report today. The "delayed and inadequate implementation" of the overhaul of the industry is affecting investor confidence, it said.

Vietnamese bank "balance sheets are impaired," said Mishra. "The problem is not necessarily that they don't have access to cheaper credit to pass it on to the consumer, but they've become much more cautious, they are much less willing to overextend themselves."

Non-performing loans as reported by Vietnam's lenders are at about 4.5 percent, while the central bank's estimate is about 8.75 percent, the IMF said today, pointing to "confusion" over bad-debt levels.

"A realistic resolution plan based on thorough on-site bank examinations, which should reveal the true extent of the damage and recapitalization requirements, is urgently needed," Sanjay Kalra, the IMF's Hanoi-based resident representative, said in a statement. "Further delays in banking reform will raise the likelihood of increased contingent liabilities and pose risks for public debt sustainability."

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