Banks to face a big stick

Under a new draft decree, fine levels spiked from current less than VND20 million ($950) to VND2 billion ($95,000) for such offences.

From September 2012, mobilising rate hike race among banks reportedly became a fact of life again, with the mobilising rate of dollar-denominated loans doubling against regulated level reaching 4-5 per cent, per year whereas that of dong-denominated loans came to 11-12 per cent per year, or even 13 per cent per year against regulated ceiling 9 per cent, per year.

Under the new draft decree, violation to regulated ceiling rates would incur up to a VND1 billion ($47,000) fine.  

A deputy director of a commercial joint stock bank assumed such sanctions were fairly strong, but “impinging on regulated ceiling rates has become widespread and would linger as long as regulated ceiling regime still exists”.

Advocating the idea, economic expert Le Tham Duong assumed banks offering depositors higher-than-regulated rates would still exist when ceiling rate scheme was in place. Thereby, parallel to higher fines, it is important to present stronger sanctions such as dismissing top leaders at violated banks and the State Bank must be resolute and consistent in the drive.

Banks not making full provisions as required are also subject to heavier fines. Under the new draft decree such violation incurs paying up to VND2 billion in fine against previous VND12 million ($570).

Albeit most banks delivered ‘fine’ bad debt rates of less than 3 per cent of their total outstanding loans as required, actual rates are believed to be much higher, meaning banks did not make full provisions for their bad debts.

State Bank governor Nguyen Van Binh acknowledged scores of banks were detected to incur 30-60 per cent bad debt rates versus reported rate of only 2.5 per cent after being inspected.

Chief of office at State Bank’s bank inspection supervision body Truong Ngoc Anh admitted there were VND200 trillion ($9.5 billion) in non-performing loans at banks and only VND70 trillion ($3.3 billion) was fully provisioned, while the remaining VND130 trillion ($6.2 billion) had collateral (mostly in property) whose value sharply plunged in the past year.

While fine levels towards deliberately impinging on ceiling rate and not making full provision violations are regarded as justifiable, most economic experts assumed the sanction level of VND1-2 billion ($47,000-$95,000) to cross-holding violations was rather low as they argued the benefits bank major shareholders gained from cross-holding scheme would amount to several hundreds of  billions of dong.

Experts assumed to avert cross-holding violations there needed to be a specific regulation forbidding authorised capital contributions, a factor which was considered a loophole and a cause leading to the cross-holding dilemma.