Rural banks raise capital to compete

In an interview with Vietnam Investment Review, an official with Dong Thap Muoi rural bank, the weakest bank in the country’s banking system in terms of capital, confirmed the goal of his bank was to increase its total registered capital by at least ten times by the end of the year.
“Our bank’s chartered capital currently stands at VND5 billion ($323,000). This small amount is just enough for us to develop business in our main local area, that is Dong Thap province,” said Dong Thap Muoi general director Dinh Thanh Nghiep.
“If we wish to open branches and transaction sites in the neighbourhood areas in order to lure more customers, we surely need more capital and this is the only way out for us to cope with more and more competition from other rural banks and from various branches of the state-owned Bank for Agriculture and Rural Development in the same locality.”
Nghiep gave the thumbs down to the possibility his bank could ultimately merge with a big urban joint-stock bank in the manner of the recent merger between rural bank Tan Hiep and the urban joint-stock bank Eastern Asia Commercial Bank (EAB).
“That is probably the easiest way but certainly not the best choice,” Nghiep cited. “I doubt if bigger banks are eager to merge with us because we are so small and would add no weight to them.”
Dong Thap Muoi rural bank will endeavour to raise its chartered capital to around VND70 billion ($4.5 million), equal to the minimum required capital for a urban joint stock bank.
Facing the same difficulties as Dong Thap Muoi bank, Nhon Ai rural bank which currently holds VND12 billion ($775,000) of chartered capital decided to increase that amount 10-fold to $7.7 million, in the next few months.
Once that target is reached Nhon Ai bank’s board of directors will turn the institution into an urban bank, since rural banks currently operate under too many limitations.
“The country’s current law forbids rural banks to execute some banking services such as international and remittance payments, foreign currency and gold trading, fast-track money transfer,” Nhon Ai bank’s general-director Nguyen Van Le said.
“It would therefore be very difficult for us to gain much profit even when we have a large stock of capital unless we transform ourselves into an urban bank.”
Deputy director of the State Bank’s banks and non-bank credit institutions department, Tran Xuan Chau, admitted that some limitations imposed on rural banks make a difficult situation even more difficult.
“We acknowledge that rural banks are facing many difficulties, both in terms of market competition and legal rules, not to mention that farmers are the most risky borrowers,” said Chau. “However, we cannot ease the rules as these are necessary to protect those small banks from any possible banking risks.”
Figures from the Banking Institute show that the combined profit made by a total of 11 rural joint-stock commercial banks in the country last year stood at a modest VND12 billion ($775,000), ten times lower than the net profit of the state-owned Vietcombank in the same period.
All of the banks used up to 75 per cent of their incomes to cover their operating costs, leading to a very small profit.
The State Bank’s official said if rural banks wanted to stay buoyant and competitive they should look for more capital sources or try to merge with bigger banks, adding that the central bank would give no charity.