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State Bank tackles risks management
Thoi Bao Kinh Te Viet Nam (Vietnam Economic Times) spoke with Pham Huyen Anh, deputy director of the Banking Department under the State Bank of Viet Nam, on managing risks at credit organisations.
Why have commercial banks delayed the classification of their debts and setting up provision funds to deal with risk as dictated by the State Bank of Viet Nam (SBV) ? Does that mean the SBV is ignoring the issue?
According to Decision No 493/2005/QD-NHNN, credit institutions must classify debts and put aside provision funds in accordance with either Article 6 or Article 7 of the decision. The two approaches may lead to different results for bad debt.
The debt classifying method stipulated in Article 7 sets much stricter requirements. This is the core classifying method that international banks and institutions are using. It allows banks to get a more accurate assessment of their clients and the banks’ credit quality.
The new debt classification and provision fund must apply an internal credit ranking system. This new method not only helps commercial banks define debt more honestly and properly, but also helps managers develop business strategies.
However, debt classification based on an internal credit ranking system is not simple because it is still new in Vietnam. It is necessary to have a good database so that we can easily update customer information.
At present, commercial banks classify debt based on Article 7 and report the process regularly to the State Bank. Some commercial banks haven’t completely followed regulations, and the State Bank of course has other methods to enforce the process.
Some commercial banks complain that debt classification under the new standards may lead to unfavourable debt ratios because they give more honest figures about bad debts. As a result, commercial banks have difficulties expanding their business, as management agencies assess the bad debts. What do you think about this?
In fact, debt is a criteria in considering whether a commercial bank can expand its operation or not.
However, how the bank deals with bad debt is the most important factor in making the final decision.
Before, the bank management agency didn’t follow international regulations. Now we have to gradually apply them.
The management agency is now being stricter so that commercial banks can better control risk and ensure security for the whole system.
The State Bank’s function is to ensure security of the entire system. Warning and discovering bad debt is a way to improve management, not a way to prevent development.
It is being said that small-scale banks with low liquidity should merge with big banks. What is your opinion about this?
There are many opinions when it comes to mergers between small banks and big banks. The State Bank is carefully considering this problem. Vietnam now has a lot of small credit organisations. How to ensure safety for these organisations and ensure the system develops remains unsolved.
In the short term, it is better to first ensure the safety of these small credit organisations.
At present, the State allows foreign investors to buy stock and become shareholders of banks in the country. This is the necessary foundation for credit organisations to improve their management and competitive capacities.
We need more time to study whether we should let small banks merge with big ones or not.
Many banks use short term loans to make long term loans, which affects liquidity. What do you think about this?
Under stable conditions and controlled inflation, many commercial banks use short term loans to help with long term loans, and credit organisations still exist and manage to stabilise their liquidity.
VNN
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