Vietnam’s banking sector is being squeezed by a perfect storm of hostile market conditions. Dr. Andreas Stoffers, board member of German Business Association Vietnam (GBA) writes that the industry must undertake urgent restructuring if it is to keep its head above troubled waters.
Vietnam’s banking market is under pressure and restructuring is an urgent task for the country.
In the past few years, too many banks have been set up - some without sound financial and good management capacity. This led to unfair competition between banks and inflated the growth of banks, while they lack sustainable quality.
Banks are sometimes quite small, and sometimes - even when they are big (private or government-owned) - too weak to contribute reasonably to funding the economy. Moreover, it is getting more difficult for these credit institutions to attract liquidity. The coupling of loose supervision from the market watchdogs and weak enforcement of regulations has led to a risky situation for customers and the whole economy.
Vietnam’s local currency is under pressure, which is partly reflecting the lack of trust in the dong. In October, grey market trading of the USD was at a market rate well above the official interbank band. Meanwhile, dong devaluations loom large. For example, last month the grey market witnessed the dong’s 0.62 per cent loss against the USD while in the interbank market the loss was even higher at 1.72 per cent. Thanks to State Bank intervention this pressure eased a little at the end of October. However, existing high inflation, if uncontrollable, remains a risk for further dong devaluation and is subsequently still threatening the weak banking market.
The State Bank’s strict enforcement of a 14 per cent ceiling on dong denominated deposits in August made it more difficult to keep urgently needed assets within the banking system. It is understandable that Vietnamese savers are not satisfied with interest rates for their savings clearly below the inflation rate. They are losing money if they keep their savings in banks at the official interest rate. Thus, savers keep on looking for apparently more profitable investment alternatives such as real estate, foreign currencies and gold, especially because advanced investment products are not yet permitted in Vietnam’s banking market. Shrinking deposits also make it extremely difficult for banks to have reasonable funding for their credit business.
The current restriction on credit growth may be appropriate in the context of high inflation, but the application of the same lending expansion restriction to all institutions has favoured the larger institutions and penalised the smaller ones. Future restrictions on credit growth should allocate growth to strong institutions, not simply to the largest institutions. Many foreign banks brought in capital at the end of 2010 to comply with minimum capital rules and single borrower limits, just as restrictions on credit growth removed their ability to employ the capital productively. Authorities need to clearly recognise those institutions with strong balance sheets and governance, and then allocate credit growth to those institutions for the overall benefit of the Vietnamese economy.
Moreover, non-performing loans (NPLs), which are the inherent consequence of unfair competition between banks in the past couple of years as they tried to grow their balance sheet hastily, remain a big challenge for the banking industry.
Compared to 2010, several banks are seeing a clear increase in their NPL ratios. The primary reason is that many banks have low corporate governance capacity especially in risk management. Although some banks have started setting up a risk management function, they sometimes only focus on the framework while implementation capacity is not properly and adequately enhanced. Recently reported fraud cases in some banks are examples of weak operational risk management. Increasingly high NPLs, mainly being affected by the excessive credit to real estate sector - are the consequence of a poor credit portfolio management, without consideration of concentration risk.
Another problem could be illegal black market banks which promise higher interest rates for savers and loans for customers who do not receive them in the official system. Currently, the Chinese banking system is being deeply affected by the thunderstorm of collapsing black market banks. Such investments which have the character of dubious and illegal Ponzi schemes are also a threat for Vietnam’s regular financial industry.
To put it in a nutshell, Vietnam’s banking industry is under pressure. Besides internal and systemic problems, the global economy is still challenging. It is necessary to restructure banks and the banking industry to create an effective, robust and powerful partner for the economy and the rest of the society on Vietnam’s economic growth path.
Starting points for restructuring
It is not just individual banks which need to be restructured in Vietnam. In fact, the entire banking system has to be analysed first and then restructured.
First of all, it is essential to strengthen the role of the State Bank, as has already been the case in the last few months with Vietnamese banks becoming aware that the State Bank is not only preaching, but forcefully implementing its measures. In the past there have been several attempts by the State Bank to implement ceiling rates for deposits, but they were partly undermined by the banks.
With the new State Bank governor, however, there are positive signals. He seems to be committed to a change of mindset within the State Bank, which is in fact necessary. Therefore, his efforts are worth supporting. All in all, it is vital that the State Bank is a transparent, independent and powerful institution which serves the market and the national economy as a whole. Administrative rules and regulations must be strictly enforced by the authorities. There should be tougher supervision and enforcement of applicable requirements for qualifications and liabilities of senior executives of banks.
Creating transparency within the banking system is the core starting point for restructuring. Currently, it is not always clear which bank is sound and which bank has difficulties. The market has a right to get to know which banks are in trouble and which are not. Moreover ownership structures are often imbalanced and unclear. Only with transparency, adequate analysis could be made so as adequate merger or restructuring measures could be taken to rescue banks in trouble. Transparency should be a main focus in restructuring efforts. To put it succinctly, the State Bank has to be independent and powerful. Secondly, the entire banking system has to be operated in a transparent manner.
Restructuring of banks and the role of international best practice
An absolutely critical international practice reference point is a transparent banking system.
Vietnamese banks also need to be allowed to introduce advanced investment products to their customers. Investment products based on international standards could prevent savers from withdrawing money from the official sector to a risky and partly illegal asset allocation. Currently these products are missing in the market. Introducing these investment products could be a great boost to the bank restructuring process. Banks could attract and retain customers as well as diversify their revenues by increasing their fee and commission-based income.
Taking into account international practices and experiences would help Vietnam restructure its banking system. Foreign advisors as well as investors, especially banks can be very supportive in implementing internationally recognised good and efficient ideas, products, processes and regulations in the Vietnamese banking industry. Germany with its successfully working banking system, consisting of private owned banks, government owned banks, saving banks (Sparkassen) and mutual savings banks (Raiffeisenbanken) could serve as an example.
GBA and German companies believe in Vietnam and the Vietnamese people.
As of October, Germany and Vietnam are closely linked in a strategic partnership which was inked by Prime Minister Nguyen Tan Dung and Chancellor Angela Merkel. Both countries thus strengthened their ties. GBA would like to support Vietnam on its modernisation path. For German companies, Vietnam is a country with plenty of opportunities for investment. Nevertheless some essential steps have to be taken quickly and with a high commitment in order to further strengthen Vietnam’s competitiveness.
In every economy a strong and efficient banking system is the key factor for success. Thus, restructuring of the Vietnamese banking system - including transparency and international best practice standards - is a difficult, but inevitable task for Vietnam.
GBA, representing German companies, is always ready to assist as a matchmaker and source of expertise. Germany’s sound financial industry could be a pattern for Vietnam’s restructuring.