World Bank sees flaws in Vietnam bank overhaul plan

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Employees of a bank in Hanoi unload bags containing bricks of dong bank notes sent in from the central bank. Photo: AFP

Vietnam's plans to restructure its banks needs to overcome weaknesses such as a failure to perform audits of key financial institutions, the World Bank said days before a debt asset management company is due to start.

An asset management company that will help clean up almost $5 billion of bad debt at lenders is scheduled to begin operations mid-July, the State Bank of Vietnam said last month. The World Bank said in a report today that the government's bank restructuring plans are "considerably different from what is generally considered as good practice."

The "very small" level of capital assigned to the company, its lack of independence and plans to acquire debt at book value, are "not good practices," said Deepak Mishra, the World Bank's lead economist in Vietnam and co-author of the report.

Prime Minister Nguyen Tan Dung is under pressure to rejuvenate an economy that's seen expansion slow to less than 5 percent this year, after one of the highest bad-debt levels in Southeast Asia crimped credit to businesses. A failure to speed up structural reforms of banks and state companies may result in a prolonged period of slow growth, the World Bank said today.

Vietnam's strategy for its banks "stands little chance of being effective in isolation," and needs to be part of a broader financial restructuring such as reforming state-owned companies, given banks' exposure to loans to such companies, the Washington-based World Bank said.

"More than two years after the government set out to reform the state-owned enterprise sector, progress has been limited," the World Bank said, citing as an example a target of selling shares in 93 state companies last year against which "it seems" that shares were only sold in 12, according to the report.

It also identified the Vietnamese government's decision not to use taxpayers' money in the bank restructuring effort as a risk.

"Most banking-sector restructuring involves costs, which are absorbed into the government budget, often stretching over a number of years," the World Bank said. At the same time, "accurately measuring the size of the NPLs through special audits of banks and using them to estimate the recapitalization needs are important for a successful restructuring process," it said.

While the creation of the company signals that the government is "finally serious" about cleaning up the banking sector, the plan may hamper economic growth by taking several years to repair bank balance sheets, JPMorgan Chase & Co. said this month.

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