Dose of good medicine for sick banks

Under the government’s recent September periodical meeting resolution, in 2013 the State Bank (SBV) will need to radically tackle underperformed banks.

Economic experts assumed Vietnam’s banking system was like an octopuses with multiple tentacles. With tangled cross-holding structure, these tentacles have dampened the economy which was also the main cause behind banks’ spiraling bad debt rates in recent years. Hence, restructuring banks must begin with tackling these tentacles.

Former Trade Minister and National Financial and Monetary Policy Advisory Council member Truong Dinh Tuyen put forward Korean case saying that in the past banks in South Korea also featured strong cross-holding structure. Many banks founded firms to inject capital, making the banking system almost paralysed due to bad debts.
 
Hence, when hooked into banking sector restructuring, the Korean government entirely banned cross-holding structure in the banking field and banks were forbidden to manage other businesses.

A National Assembly Economic Committee report shows that nearly 40 state and private businesses possess over 5 per cent stake at joint stock commercial banks currently. Besides, cross-holding structure among banks has made it easy for businesses having stakes in a bank to source capital without difficulties at another bank.

Senior economic expert Pham Do Chi assumed a significant bank cash flow was injected into companies founded by bank major shareholders at very low interest rates, or even zero per cent interest rate, so that unless cross-holding scheme was abolished, presenting bad debt trading plans alone would fail to address the root of the problem.

Economic expert Dr. Dinh Tuan Minh said: “Bank restructuring needs cost sharing between state budget, commercial banks and society. Bank’s main shareholders who incur bad debts would bear highest costs and that is justifiable.”

Industry insiders supposed soaring bad debts in the past months partly came as the economy fell into slump with scores of firms defaulting. However, looking into banks’ capital ownership structure it is apparent banks have pumped huge capital into main shareholder firms. Thereby, it is impartial when bank owners incur high costs in tackling bad debts.

However, the target of abrogating cross-holding structure in Vietnam could not be achieved overnight. In the near term, SBV may present some stopgap solutions to clear credit hurdles.

Head of National Financial Supervisory Commission’s Policy Study and Coordination Division Bui Huy Tho said: “It is important to soon establish a national bad debt treatment institution. Besides, quickly improving mechanism and enhancing credit guarantee capacity of the Vietnam Development Bank to benefit small- and medium-sized firms is a must.”

Tho said firms temporarily facing difficulties, but with production and consumption potential, should be supported with new loans to help them get through the current tough period.