State Bank chief has full plate

Dr. Nguyen Tri Hieu

VIR’s Nguyen Hanh talks with banking and financial expert Dr. Nguyen Tri Hieu to find out how Binh can approach these tasks.

Bankers and enterprises now have their sights firmly set on the lending interest rate after Binh promised to bring the rates down to 17-19 per cent in September. Can the governor make good on his promise?

The promise the new governor made is encouraging, but I think it won’t be easy to put the plan into action and achieve the promised results. September is looming and we have only about a month to reduce the interest rate from the current level of 20-21 per cent to 17-19 per cent. For the banks, to change the interest rate structure in such a short period of time is a difficult task.

Secondly, gold and the US dollar prices are climbing. I expect the dollar rate will increase towards the year’s end and gold prices will continue to rise. In such a context, it’s very hard for banks to reduce interest rates given fears that once the deposit rate drops, depositors may withdraw their money from the banks and shift to the gold and dollar markets.

Third, it is going to be difficult for Vietnam to keep the inflation rate below 20 per cent for the whole year. With that expectation the deposit rate can hardly be set below the current market level of 17-18 per cent because people expect to be paid 3 per cent margin above the inflation rate. If the inflation rate is more than 20 per cent, depositors normally expect to see a deposit rate of 20-22 per cent. Right now the margin is already negative by 2-3 per cent, a further drop in deposit rates is hard to be swallowed for bank’s customers.

However, there are signs that the inflation rate is now declining. The monthly inflation rate for August is below 1 per cent which is a good sign. Some banks have reduced the interest rate by about 1 per cent over the last few weeks and the liquidity of the banks has improved. Besides, the banks are finding it difficult to make good loans. Since they are holding onto a large chunk of deposits and they cannot find good loans [though which] to use their funds, they will probably have to reduce the lending rate to attract good customers. And if that is the case, those banks will probably lead the way in reducing both the deposit and lending rates.

Briefly, I see favourable conditions but I see more challenges for the State Bank and the commercial banks to reduce rates.

Binh said stabilising the VND/USD exchange rate was a top priority and possible adjustment over the rest of the year would not exceed 1 per cent. Where do you predict the rate will stand at the end of the year?

I think the Vietnamese dong is still overvalued in light of the purchasing power parity (PPP). Being overvalued means the foreign exchange rate is still below the equilibrium point. We don’t know where that point may be but it appears to me the Vietnamese dong is moving towards that stabilisation point. Based on that theory, I think the foreign exchange rate will tend to increase in the next few months. However, we don’t know what the level of that increase may be. I won’t speculate as to how high the rate will be, particularly at this time with everyone apparently worrying we will enter the second phase of the international crisis.

During his term in office, former Governor Nguyen Van Giau introduced many administrative measures such as Circular 13 and Circular 19 which capped banks’ lending at 80 per cent of deposits and the regulatory ceiling deposit rate at 14 per cent. There is argument that those administrative measures are a setback for banking reforms in Vietnam. New Governor Binh said those circulars would be amended. What is your stance on those instruments?

I am an advocate for the market-oriented rate, not the regulated rate. The 14 per cent ceiling on the deposit rate proved to be unrealistic. The market is way above that. No one is adhering to that cap except for a few big banks which say publicly they are offering 14 per cent but are actually offering 14 per cent to very few customers. For most customers, they’re offering higher rates. They misrepresenting themselves and they are misleading the economy.

It is the same with the loan to deposit ratio of 80 per cent. The banks feel very restricted to manage their funds to lend out efficiently and profitably. Further, it’s quite hard to understand why the State Bank requires all the banks to have the minimum chartered capital of VND3 trillion, but then allows the banks to grow their loans only at maximum 20 per cent. Those banks who are able to get the money in can’t use the money because they are restricted by the credit growth cap among other restrictions such as the capital adequacy ratio (CAR) ratio and the loan to deposit ratio. It’s a paradox.

The State Bank should revise those measures. Administrative procedures should be used only minimally. I think the market could function even better if the State Bank was independent and made less use of administrative measures and let the market economy do the job by itself.

Binh also talked about the many banks in Vietnam. He said the banking system needed to be consolidated and that the central bank would “encourage” banking mergers. We have not seen a single banking merger in Vietnam ever. In what ways can mergers be “encouraged”?

We have a huge system with over 100 credit institutions including more than 40 privately-owned banks, more than 40 foreign bank branches, some joint venture banks and five wholly-owned foreign banks. I believe the number should be reduced by two-thirds over a period say 10 years.

As to how mergers can be carried out, first and foremost the State Bank can play the role of a facilitator. It could go to some weak banks and try to work out with those weak banks how to merge with stronger banks. Secondly, the central bank could use administrative regulations.

They can say “well, show me the books” and if you have a CAR ratio of less than 2 per cent, you have to merge. That’s what the Fed does in the US. Normally it requires 8 per cent and if the bank’s CAR slips to 5 per cent it gives the first warning. Then if the ratio goes down to 3 per cent it gives you a very strong warning and if the ratio goes to 2 per cent it will force the bank to close up shop or merge with another bank. That’s the way it protects the banking system. Vietnam can do the same.

But the State Bank seems terrified at the prospects even one single bank being in danger of failure because it is afraid of the public withdrawing money causing a domino effect in the banking system. The government has for a long time given the impression that it would bail out any bank in danger of failure. If that's the case banks will just hold on and there won't be any demand for a merger. Isn't that correct?

That’s correct and that’s why I have a theory. In the US there is a saying “too big to fail” but in Vietnam I think it’s more a case of “too small to fail”. “Too small to fail” means the smaller you are the better protection you have from the State Bank. The government and the State Bank are not worried about the big banks but they want to protect the small banks at any cost. That’s totally wrong.

It is the market economy; if you are small and you are weak you should go. Just like in the US, the State Bank of Vietnam can let a bank be liquidated while saying to the depositors “don’t worry we continue to insure you or will pay you out if you want. So stay on with the new bank is you will” so the depositors would feel secured as they know they are protected. Liquidation is another way of solving the problem. The central bank should have plans for when they have to do it forcefully but they can also use very soft tone in public to avert panic.

The first-half year profit statistics of local banks don’t offer a real picture of their performance, do they? Are local banks’ bad debt levels now at the alarming stage?

Over the last few weeks, we heard everywhere that the banks are making a lot of money and that the banks are showing wonderful profits. That’s misleading. We should wait to see the year-end statistics but I don’t think the banks are making lots of money this year. Like anyone else in the economy, banks are suffering and their bad debt situation is getting worse. The bad debt situation is alarming.

The State Bank said the bad debt ratio was now over 3 per cent. Fitch said few months ago that the bad debt ratio might be 12-13 per cent. The truth is anywhere between 3 per cent and 13 per cent. But assuming Fitch is right, the whole banking system in Vietnam is technically already bankrupt. Fitch ratio means the entire shareholder’s capital of the banks, which is about 8-9 per cent of the total assets, would have been wiped out.

Do you agree with Fitch and S&P’s recent downgrading of Vietnam?

I feel their downgrade in terms of foreign currency may not be entirely justified in light of the relative stability in the FX market, but it is surely a wake up call. We have to do some thing drastically to further reduce the trade deficit, the budget deficit and the public debt before another downgrading becomes immanent.

Dr.Nguyen Tri Hieu, a veteran banker from the US, has been in the banking business in California over the last 32 years. He graduated with a master’s degree and a doctoral degree from Ludwig-Maximilians University in Munich, Germany. Hieu currently joins a commercial bank in Hanoi as an independent member of its board of directors.