Vietnam has yet to resolve the "dire situation" facing its weakest banks and deposit-rate cuts will make it more difficult for such lenders to attract funds, the International Monetary Fund said.
The government should separate bad assets of weaker lenders as part of its restructuring plan, and consider selling the holdings to a private or public asset management company, Masato Miyazaki, the IMF's chief for the country said in a telephone interview in Hanoi on Monday. A failure to resolve bad debts may erode confidence in the banking industry, he said.
Questions about the health of Vietnam's lenders are underpinning concerns over the economy's stability, with the nation stepping up efforts to fix the banking system. Prime Minister Nguyen Tan Dung approved a bank restructuring plan this month and measures may include government purchases of collateralized bad-debt from commercial banks and greater foreign ownership in weak lenders.
"Overall I don't think the situation of Vietnam's banking industry has improved yet," Washington-based Miyazaki said during a trip to Hanoi. "The understanding of the problem on the part of the authorities has improved, but the dire situation facing the weak banks hasn't improved."
Rapid credit growth in recent years has fueled a trade deficit and Asia's fastest inflation, prompting depositors to favor short-term savings and crimping funding for long-term loans.
The State Bank of Vietnam said it's lowering the dong deposit cap for terms of one month and above to 13 percent from 14 percent from today. The cut in the deposit rate cap may put the smaller and weaker banks in a more difficult position, Miyazaki said.
"They can't mobilize funds from depositors even at the 14 percent rate, given their well-known weaknesses," he said. "At a 13 percent deposit rate, they will find it even more difficult. That would drive them even more toward liquidity support" from the central bank, he said.
The shares of all five banks listed on the Ho Chi Minh City Stock Exchange (VNINDEX) rose Tuesday, with the Joint-Stock Commercial Bank for Foreign Trade of Vietnam, known as Vietcombank, climbing 1.1 percent to 27,100 dong, and Vietnam Joint-Stock Commercial Bank for Industry & Trade gaining 1.7 percent to 24,700 dong.
The bad-debt ratio at Vietnam's commercial banks was predicted by central bank Governor Nguyen Van Binh in November to reach as high as 3.8 percent in December from 3.3 percent the previous month. The level may exceed official figures by as much as four times, Fitch Ratings said in a report last week, as it warned bank asset quality may deteriorate further and the government's capacity to absorb bad debts is unclear.
Policy makers must act "to prevent liquidity problems from turning into solvency problems, if a deposit-rate cut forces weak banks even more into the arms of the State Bank of Vietnam," Miyazaki said.
The lack of liquidity at small banks is unlikely to cause a system-wide panic in Vietnam, he said.
"But if they don't take steps to resolve the bad debts, we may see some erosion of confidence in the banking industry down the road," Miyazaki said.