Banking discussions focus on bad debts, foreign ownership

illustration photo

“Vietnam’s banking system is under tremendous pressure from bad debts and needs enormous capital amounts to spur restructuring,” said Dominic Scriven, a member of the Banking Working Group at the recent Vietnam Business Forum on November 3.

He said Vietnam’s current bad debt level was 4.6 per cent, but was in reality much higher if classified pursuant to a State Bank of Vietnam’s (SBV) circular on debt classification.

According to SBV Governor Nguyen Van Binh, bad debts represented around 8.6 per cent of total outstanding loans by the end of 2012.

“Our rough estimates show that if bad debts stood at 8.6 per cent, the banking sector would need $6 billion more to tackle the issue, bringing the capital adequacy ratio to around 13.8 per cent,” Scriven added.

The Banking Working Group said the creation of the Vietnam Asset Management Company was a good first step but noted that bad debts were a long term issue that were holding back the country’s overall growth.

In support of this, CEO of Standard Chartered Vietnam, Cambodia and Laos Nirukt Sapru said Vietnam was off to a good start in terms of restructuring and addressing bad debts, but as one of the greatest challenges to the economy, they would not be settled overnight.

Banking experts suggested introducing more extreme measures to attract foreign capital into the banking sector’s battle against bad debts.

Accordingly, the foreign holding cap on Vietnamese banks was suggested to be raised to 49 per cent, and even up to 100 per cent for underperforming banks.

They argued that the reality was that many Asian countries have successfully restructured banks through deep involvement of foreign entities.

One example given was foreign holdings in South Korean banks was hiked from 26 per cent in November 1997 to 55 per cent in December the same year, and to 100 per cent five months later.

In Indonesia the cap was raised from 85 to 99 per cent.

With the help of foreign investors, during a turbulent period these countries’ banking systems showed strong recovery.

Responding to the proposals, an SBV source said they submitted a draft decree regulating foreign investor shareholding in local banks that proposed allowing single entities to hold more than 20 per cent of local banks’ chartered capital.

SBV Chief Inspector Nguyen Huu Nghia noted that for underperforming banks the foreign shareholding cap could exceed the regulated cap which would be decided on a case-by-case basis.