Defending the banking system restructure

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A customer at Joint-Stock Commercial Bank for Foreign Trade of Vietnam, or Vietcombank, counts dong bank notes prior to making a deposit in Hanoi

The State Bank of Vietnam has divided Vietnamese banks into four groups based on their strength. It will also assign loan growth limits of 17 percent, 15 percent, 8 percent and zero respectively, to each bank individually, depending on which category they fall into.

The idea has met criticism, but Can Van Luc, senior consultant at state-owned Bank for Investment and Development of Vietnam, says it has merit. He tells Vietweek that the central bank should guarantee the interests of depositors at weak banks and use mergers and acquisitions to save the weakest of the lot.

Vietweek: What do you think about the application of different credit caps on different banks this year?

Can Van Luc: This is a positive move, helping better manage credit in the banking system, which saw rapid growth over the past few years, excluding 2011. It will also help adjust credit growth in line with the management capacity and risk management capacity of each bank, contributing to dealing with liquidity issues.

Low lending growth, or even zero-percent growth, will be assigned to weak banks, reducing their capital demand. Thus, there will be less breaking of the interest rate cap to lure deposits, in line with the interest rate reduction roadmap worked out by the State Bank of Vietnam.

The division will also help accelerate the restructuring of banks. Strong banks will be allowed to operate normally, while weak ones have to adjust their business.

However, the gaps between the limits of the groups are large, showing that huge differences exist in terms of capabilities within the banking system.

The large gap will put pressure on weaker banks, forcing them to improve and increase their competitiveness, so that their levels could be promoted.

Most banks that are allocated big credit caps have announced their loan growth limits, so it is not difficult to recognize banks in the fourth category, which are not allowed to increase their loans. Does it cause disorder in the banking market?

Can Van Luc, senior consultant at state-owned Bank for Investment and Development of Vietnam
Yes, disorder may happen, as local people, who may worry about bankruptcy at banks, withdraw their deposits at banks. Meanwhile, bank investors could sell their shares en mass.

The central bank should be very cautious, and prepare scenarios to cope with the issue. It should guarantee the interests of depositors in every case, helping them feel safe when making deposits at commercial banks. Banks should restructure, focusing more on their retail services.

The central bank could also help some weak banks via mergers and acquisition.

But do these measures you've mentioned only benefit big banks?

No, they do not. The main purpose of these measures is to help the banking system develop in a sound manner. We need to restructure the whole banking system, including both big and small banks.

We should do it because the banking system now faces many problems, from broken interest rate caps to unsound competition, and local residents no longer have faith in the banking system.

Should the State Bank ban the banks in the fourth category from receiving more deposits in order to protect existing depositors?

It is impossible. Banks can do what the law allows. Now there are not any regulations banning banks from mobilizing capital. They receive deposits to meet their liquidity demands, and have a certain fund to guarantee their business in the future when the central bank promotes their level.

Being assigned zero-percent loan growth, will banks in the fourth category find it hard to meet criteria so that their level can be promoted in the next six months?

They have many ways to meet the criteria. They have to ensure a balance between debt collection and loan provision. They are allowed to collect debts, so they can lend as much as the debts they collect. The increase in debt collecting will help reduce their bad debt, while they can also try to increase their capital mobilization.

If their capital increases, helping improve their liquidity, and they meet some financial requirements set by the State Bank, the credit growth limits could be revised.

In the context that all banks are subject to the same interest rate cap, most customers will choose big banks to make their deposits, making deposits at small banks become thinner. Thus, is debt collection the sole measure to help the banks remain in business?

In fact, it is only one of the things they need to do. Banks must ensure all activities, from capital mobilization, loan provision, and other services.

The banks will also guarantee that depositors will not lose their deposits in any case, improve their service quality and boost their retail services.

There is an opinion that the central bank has not publicized the criteria for each category of bank. Thus, some banks don't agree with their assigned loan limits. What do you think about this?

In fact, the central bank has already announced some credit criteria when dividing banks into groups. The criteria are rather reasonable, complying with international practices. However, some other criteria implemented around the world have not yet reached Vietnam because the statistics and information on our banks are insufficient. In the context of Vietnam, we have to accept that some criteria such as those relating to the sensitivity to market risk, and quality management are not implemented.

There are opinions that some strong banks, which do not use up their lending quotas, could sell them to weaker banks. Can this happen?

It could not, as lending quotas are not goods. It also runs counter the policy of the state bank. Even if the quotas are sold to small banks, it still might not be easy for them to gain the growth they expect. Now, our legal framework for such debt sales is insufficient, so it can't happen.

Should the central bank strengthen its monitoring of banks to prevent such problems?

It is unnecessary, as big banks will not sell their debts. Meanwhile, small banks will ask for central bank support, or sign a cooperation deal with bigger ones, which could provide them credit quotas via open market operations.

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