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Commercial banks need a strong revamp
The State Bank of Vietnam (SBV) has raised the registered capital level for establishing a bank to more than VND3,000 billion as a key solution to prevent the establishment of banks with limited capital flows and poor management.
According to the Head of the Department for Banking Development Strategy, Le Xuan Nghia, the SBV will issue a new decree to replace Decree 49 on business administration in the banking sector. The new decree is entirely based on WTO regulations and standards set by the Organisation for Economic Cooperation and Development (OECD) regarding business administration. This is seen as a real breakthrough in the banking industry.
Limiting the number of banks by their capital assets
It is noteworthy that the new decree regulates new standards for the establishment of domestic and foreign commercial banks in Vietnam, including wholly foreign-owned banks and representative offices. In the face of the situation, the SBV has tried to control the number of newly-established domestic and foreign banks.
“Under the new decree, in order to be established, a bank must have registered capital of VND3,000 billion and make a profit for three consecutive years and the founding shareholders are required to have VND500 billion or more in equity capital. Such regulations are too tough for Vietnamese enterprises. This will prevent State-run enterprises from setting up banks.” said Mr Nghia.
In Vietnam, there are hardly any private groups with VND500 billion capital. A bank’s operational quality is a decisive factor apart from their operational scale. Giant foreign banks such as Goldman Sachs and Morgan Stanley are facing the threat of bankruptcy, Mr Nghia said.
Coping with tougher competition is a major concern for domestic banks due to poor business administration, risk management and technology. Vietnamese banks will have difficulty competing against potential foreign banks capable of implementing their development plans rapidly.
Knowing oneself is true progress
Commercial banks are being confronted with the new challenges and unpredictable fluctuations of soaring inflation.
The President of the Executive Board of the Bank for Investment and Development of Vietnam (BIDV), Tran Bac Ha, said that the emergence of foreign banks with advanced risk management capacity, great potential for investment capital, high professional skills and diverse banking services have put a lot of competitive pressure on Vietnamese banks which are still weak in capital flows, liquidity and business administration.
In the first six months of this year, foreign and joint venture banks have had an asset growth rate of 33 percent and an outstanding account rate of nearly 50 percent, while the average rates for the whole banking system are just 8 percent and 20 percent, respectively. So far, these banks have accounted for only 9.3 percent of the total account outstanding loans in terms of both VND and USD, but they make up 29.5 percent of the total outstanding account loans in terms of USD for the whole banking system. Recently, the Hong Kong Shanghai Banking Corporation (HSBC) and Standard Chatered Bank were officially licensed to become wholly foreign-invested banks which can operate the same as local commercial banks.
According to Le Thi Lien, chairwoman of the administration board of the Maritime Commercial Joint Stock Bank, weak financial system, poor risk management and short-term investment have had a strong impact on long-term economic development.
The number of banks and financial companies in Vietnam is growing. However, after a few years of operation many of them have proved to be weak in managing risks when dealing with strong market fluctuations.
A common question has been raised about the capacity of Vietnamese commercial banks, which have a high rate of bad debt, both short-term and long-term.
Mr Nghia said that the highest rate of bad debt in some banks reached approximately 4.5 percent, and the lowest was estimated at 0.18 percent according to Vietnam’s accounting standards. State-owned commercial banks often have a high rate of bad debts as some of them use the international accounting standards, which can result in a higher rate of bad debt.
Mr Nghia analysed the US financial market to explain the reasons behind this phenomenon. He said it requires a strict monthly classification of assets and reappraisals of mortgage assets in a transparent manner. When the price of real estate goes down, business operations in commercial banks get worse everyday, he added.
Economists’ analysis puzzled investors and lowered the stock price (US real estate debt market has been listed on stock exchange). This may be the technical reason for the US investment banks’ rapid collapse.
In 2008, the global banking system has experienced a sharp decline in profit. The highest rate of net profit is about 6 percent, while the average rate of profit is just 3-4 percent. Many banks claim to have suffered losses.
In Vietnam, foreign-invested joint stock banks have achieved a net profit rate of 6-7 percent, while State-owned banks have recorded an average rate of 13-14 percent. These figures are different from those recorded in previous years when State-owned banks were much weaker than foreign-invested ones.
At the moment, even foreign and local joint stock banks face a lot of difficulties in liquidity as they have offered huge loans on the inter-bank monetary market. This demonstrates that both foreign and domestic banks are in the same boat.
VOV
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