Motorcyclists ride past the State Bank of Vietnam headquarters in downtown Hanoi. Vietnam's banking system is in bad shape and needs a boost, economist Bui Kien Thanh says.
The banking system may face a crisis in the coming years unless measures are taken to deal with bad debts, restructure banks, and improve human resources, economist Bui Kien Thanh tells Vietweek in an interview.
Vietweek: How do you assess the health of Vietnam's banking system?
Bui Kien Thanh: Non-performing loans have increased rapidly in the past two years. However, some commercial banks have not reported the situation honestly. Bad debts reported by the governor of the State Bank of Vietnam are some 8.8 percent of loans, but some foreign experts have estimated the ratio at 15 percent. The bad debts have not yet been fixed, so our banks are still faced with a crisis.
Businesses still face tough conditions, so they cannot repay banks loans. So bad debts could continue to rise, eroding some banks' capital. Banks now have chartered capital of VND220 trillion (US$10.5 billion), while loans are estimated at VND2,700 trillion, of which 15 percent is bad. In the coming time, a large part of the loans will become bad debts since firms are still faced with tough conditions. This will be very dangerous to the whole banking system.
The economy will continue to see difficulties, causing hardship for banks unless our policies are tweaked.
How about the stability and safety of Vietnam's banking system compared with that of other countries in Southeast Asia and the world?
International banks fulfill the banking safety criteria under BASEL III (a global regulatory standard on banks' capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11), under which banks are not allowed to operate if their bad debt ratio exceeds 2 percent. Meanwhile, our country has bad debts of 8.8 percent. Obviously, our banking system has not functioned well. Their risks have not been well managed. Many banks have operated like pawnshops. They have not focused on assessing projects before lending, just lent to firms based on their mortgage. Some firms not fully meeting requirements to get loans can still get them by bribing bank personnel. These issues have put the banking system at risk.
Banks in other countries have agencies to assess the feasibility of projects and repayment capacity, but our banks do not.
Our country has too many banks but lack qualified managers. Banks now compete with each other by offering high deposit interest rates, which have raised lending interest rates, killing firms and the economy.
Vietnam's banking system now is operating without close oversight by relevant agencies. If the bad debts situation is not resolved next year, many banks could not get their money back. They will no longer have a chartered capital.
There is an opinion that restructuring the banking system is an urgent need. But it has not been effectively implemented. What do you think about it?
Vietnam now has 49 commercial banks but only 10-12 of them, which account for 85 percent of the market share, operate effectively. The prime minister has ordered the central bank to restructure the banking system, but it has not implemented it.
The central bank has yet to properly implement its role as a central bank, which is to supply enough funds at reasonable interest rates for the whole economy to develop stably. It has not defined reasonable interest rates for the economy's development. Thus, commercial banks mobilize deposits at too high interest rates. The competition among small banks to raise deposit interest rates has caused trouble for the banking system.
Recently the State Bank regulated that deposit interest rates should be capped at 9 percent, but some banks exceeded the cap. They offered rates of 17-18 percent, and lending rates of over 20 percent, which have seriously hurt the economy. But the central bank could not control the issue.
In other countries, central banks operate independently, so they regulate monetary policies and implement them for the benefit of the economy, not the interest of the government.
"If the State Bank does not adopt suitable measures, the banking system could face a crisis in the coming years."
Bui Kien Thanh
What should Vietnam do to improve the stability of its banking system?
The number of commercial banks, 49, is too high in an economy with a population of 87 million. Small banks that cannot function efficiently, posing a threat to the banking system, should be liquidated. Customers' accounts in these banks should be shifted to stronger banks. The economy can operate quite well with just 20 banks.
The chartered capital of banks is also too small, not enough to ensure effective functioning. According to central bank regulations, commercial banks should have a registered capital of at least VND3 trillion by this year. However, many of them have not met the requirement. Foreign banks have a chartered capital of tens of trillions of dollars.
However, the most important things for banks are to have good management, risk management, and human resource training. One or two Vietnamese banks have tackled these issues well. They have cooperated closely with foreign partners for doing this. If banks do not have qualified staff, especially those who assess projects, they could face many risks.
To reduce bad debts, the central bank should offer commercial banks credit at 3-4 percent interest rates so that they could relend to firms at 7-8 percent. The central bank should also set up a fund to guarantee loans taken by firms to enable them to get bank loans.
If the State Bank does not adopt suitable measures, the banking system could face a crisis in the coming years.
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