Four years of economic volatility and sky-high inflation, coupled with tumbling asset prices, have put the Vietnamese banking system under strain.
Last November, State Bank of Vietnam Governor Nguyen Van Binh said eight small banks were “unhealthy” while in January he said 10 percent of the country’s nearly 50 banks were “ailing.”
Financial sector reform is one of three pillars in a program of economic restructuring Vietnam unveiled late last year, and on March 1 the government approved and published a broad plan for bank reform.
But banking reform could be stalling because authorities have higher priorities.
The merger of up to eight banks, planned for the first quarter of this year, did not take place.
The central bank changed the timeframe to the first half.
For the government, the focus has become stimulating economic growth.
Such a shift occurred after first-quarter economic data showed gross domestic product growth at an alarming three-year low of 4 percent and that credit had shrunk from the end of 2011.
The central bank cut policy rates by 100 basis points in March and again in April, surprising the market, and has been encouraging commercial banks to lower lending rates.
Restrictions on lending to the real estate sector and for consumption have been dropped.
Raising the growth rate would alleviate some of the urgency for bank reform, while prolonged sluggishness would make banking weaknesses more acute.
“They are trying to grow their way out of the problem,” said Jonathan Pincus, dean of the Fulbright Economics Teaching Program inHo Chi Minh City.
A few months ago, restructuring and mergers were “a very hot issue,” said a board member of a mid-sized Vietnamese bank.
“But now everything has gone calm and the attention has turned to lending, interest rates and the number of businesses going out of business in Vietnam.”
Sanjay Kalra, the International Monetary Fund’s representative in Vietnam, said a failure to follow through on plans to fix the banks now would invite bigger headaches down the road.
‘ACCUMULATION OF PROBLEMS’
“Forbearance with the current problems in the banking system will only lead to an accumulation of problems,” he said.
Observers believe that nearly a dozen banks are imperilled, due to sizable non-performing loans and a woeful deposit base, with recent transfers to bigger banks and inability to attract new ones.
Restructuring the banking system will be costly.
Le Xuan Nghia, former deputy chairman of the National Financial Supervisory Commission, last month told a conference it would cost $3 billion-$4 billion, according to the state-run website VnExpress.
Deposit data is not public in Vietnam.
But citizens got an idea of banks’ relative strength early this year when the central bank divided them into four groups with different 2012 credit-growth ceilings, ranging from 17 percent to zero.
Banks with low percentages almost certainly lost deposits.
Nguyen Phuong Hoa is one citizen who took her savings elsewhere after learning from a niece that her bank had a low credit-growth cap.
“The small bank where I had deposited money was a weak one.
It’s best to move,” the 61-year-old retired accountant said.
She shifted her 500 million dong ($24,000) to Vietcombank, one of the country’s biggest financial institutions.
LIMITED DEPOSIT INSURANCE
Vietnam has deposit insurance, but it guarantees only 50 million dong, one-tenth of Hoa’s deposit.
The deposit insurance and a public pledge not to let any banks fail should help keep things calm.
But if Vietnam doesn’t deal with weak banks, that can damage a financial system that observers believe has more nonperforming loans than officially stated.
At the beginning of the year, the official non-performing loan ratio was 3.3 percent, but by the end of the first quarter the central bank’s Binh said it was 3.6 percent.
According to an internal draft of the bank restructuring plan in circulation but not formally made public, government investigators put the rate at 6.6 percent last June.
The draft said that if other loan classification standards were applied, the rate would be “in the double digits.”
That is consistent with other estimates of non-performing loans, including 13 percent by the ratings agency Fitch.
Provisions set aside by banks as of the end of September were enough to cover 48 percent of the amount of bad debt reported by banks, but just 27 percent of that calculated by investigators, the central bank’s draft report said.
“The bad debt is so serious that looking at the whole banking system it could technically wipe out all the equity and capital of the banks, if they would use bad debt criteria like in developed countries,” said the board member of a mid-sized Vietnamese bank.
A growing number of banks have inadequate capital-adequacy ratios.
‘SYSTEM HAS WEAKENED’
At the end of September 2011, 17 out of 42 banks investigated could not meet the central bank’s capital adequacy ratio, which is 9 percent, according to the National Financial Supervisory Commission.
Three months earlier, just two of 47 examined were unable to meet the requirement.
“Vietnam’s banking system has weakened after years of overheating growth,” a commission report said.
In the late 1980s, when the government launched “doi moi” reforms to revive the flatlining economy, it permitted state-run credit institutions and, later, partly-private joint-stock commercial banks.
During 2005-2007, amid excitement over Vietnam’s entering the World Trade Organisation and soaring foreign investment inflows, many banks opened.
State-owned corporations expanded with gusto into non-core, finance businesses.
Despite a proliferation of banks, only about 20 percent of Vietnam’s 87 million people have bank accounts.
An environment of lax regulation, poor risk management, weak corporate governance, cronyism and corruption plus government policies to push growth and credit through the mid-2000s made bad loans inevitable.
Then four years of macroeconomic instability, coupled with policies to slow growth and rein in inflation, created a cash crunch.
REFORM PLAN APPROVED
The sector reform plan approved on March 1 aims to group lenders into three categories, from healthy to weak.
By 2015, a targeted 15 banks will be in the top category and account for 80 percent of the market.
A second group will include small lenders in healthy financial positions.
Banks in difficult financial positions – the third group – are to undergo restructuring by changing ownership, merging into others or, as a last resort, being bought by the central bank.
The central bank has largely solved the liquidity crunch through open market operations and by coercing larger, liquid banks to lend to the small guys.
It has also been trying to broker what one analyst who has advised the government calls “voluntary-encouraged” mergers between good and bad banks, with limited success.
“The SBV governor knows what he needs to get done, but it’s a question of whether or not he is allowed to,” said the foreign banker, adding he thought it would take a crisis to precipitate deep and thorough reforms.
The IMF’s Kalra said meaningful bank restructuring “is essential to creating a strong banking system to meet the needs of a growing economy and to catapult Vietnam into middle income status.”
Kalra said it’s “a little early to say” if Vietnamwill make necessary changes, adding “The system has a bias toward growth that is a risk and the government needs to be careful.
It needs to stand firm and show political will to sort out the banking problems.”