Vietnam steps up pressure on central bank to fix lenders

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Vietnam's Prime Minister Nguyen Tan Dung ordered the central bank to "solve" within the first quarter a shortage of funds among lenders, stepping up pressure on policy makers to fix banking risks threatening the economy.

The deadline to remedy "liquidity problems" in the banking system was given in a resolution on the government's website. The prime minister also instructed the central bank to closely monitor the market in order to reduce lending interest rates to "suitable" levels at a "suitable" time, according to the statement dated Wednesday.

"There are serious liquidity issues right now affecting from five to seven banks, and these banks should be isolated under some kind of special control by the central bank," said Ly Xuan Hai, chief executive of Asia Commercial Bank, the country's biggest non-state-owned lender. He declined to name the banks. "Trust within the banking system is not very high right now."

Vietnam's efforts to bolster investor confidence in its economy have been hampered by weak finances at banks, the highest inflation rate in Asia, a persistent trade deficit and slowing growth. The Southeast Asian nation's credit rating was downgraded by Fitch Ratings, Moody's Investors Service and Standard & Poor's in 2010, and the country devalued its currency 7 percent last year.

"˜Problem loans'

"The banking system ultimately feeds into the sovereign rating," said Mark Young, a Singapore-based managing director for financial institutions for the Asia-Pacific region for Fitch Ratings. "We view the Vietnamese banking system as undercapitalized, given the under-reporting of problem loans."

The weaknesses in the country's banking system prompted the ruling Communist Party in October to cite the restructuring of the country's financial services industry as an area of focus for the government over the next five years. The central bank in November unveiled plans to create a three-tiered financial industry, dominated by 15 major banks that would make up about 80 percent of the local market.

Credit Suisse Group AG said in August that Vietnam's economy is vulnerable to systemic risk resulting in part from undercapitalized banks, calling for the closure of some. Vietnamese banks are "highly exposed to external shocks," according to a Moody's report released this week.

The International Monetary Fund said in December that "vulnerabilities in the financial sector need to be addressed without delay," calling for re-capitalization and consolidation within the industry, while the World Bank warned that banks in the country are facing liquidity shortages.

Bigger banks

"The restructuring of the banking system and credit organizations will result in fewer but bigger banks providing better-quality loans," the government said in a report released in December for a conference.

Vietnam has struggled to contain inflation while trying to ensure sufficient credit flows to businesses to support economic growth. The central bank cut its repurchase rate to 14 percent from 15 percent in July last year after a series of increases to tackle inflation. It raised the refinancing rate to 15 percent by the end of 2011 from 9 percent at the end of 2010.

Last month, Vietnam's central bank signaled that it may cut rates after the first quarter, even after the IMF and the World Bank said the country must guard against loosening monetary policy too soon.

In this week's statement, Dung also asked ministries and provinces to take steps to help businesses boost growth this year. Vietnam's economic growth rate slowed to 5.89 percent last year from 6.78 percent in 2010.

"The central bank should get directly involved by injecting some money into the interbank market," Asia Commercial Bank's Hai said. "When the market begins operating normally, then the State Bank can try to reduce interest rates."

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