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‘Risk management comes first’ says banking system supervisor
The Deputy Chairman of Vietnam’s National Finance Supervision Committee expressed confidence that the Vietnamese banking system is sound and that individual banks can ably manage bad loans averaging three percent of the total.
The on-line journal VnEconomy’s dialogue with Deputy Chairman of the National Finance Supervision Committee Le Xuan Nghia:
VnE: Is it odd that Vietnamese banks are announcing rather substantial profits at a time that a lot of world-scale financial institutions have collapsed?
Nghia: A report by CommerzBank (Germany) showed that the return on equity capital (ROE) ratios of big financial institutions in the world [recently] are between plus 2 percent and minus 80 percent. Meanwhile, Vietnamese banks have been earning 14 or 15 percent, which shows their very high profitability.
There are significant differences between Vietnam’s banks and the banks in the world that have been influenced severely by the global crisis.
First of all, the confidence of Vietnamese people in Vietnam’s banking system was not damaged during this difficult period for the economy. Total deposits at credit institutions have been increasing steadily month on month. Second, unlike big banks in Europe or Japan, Vietnamese banks did not have any transactions relating to the ‘toxic’ assets that were related to subprime lending in the US.
VnE: However, the global financial crisis has still had negative effects on Vietnam’s banking system, in particular an increase in bad debts. Does that worry you?”
Nghia: The current bad debt ratio of the banking system now is reportedly three percent of total outstanding loans, which shows a little increase over a year ago.
That may worry many people, but I think three percent is really low compared the level at the time of the 1997-1998 Asian financial crisis. Then, the bad debt ratio of the banking system was very high at 14.7 percent. We had a hard time dealing with it because we had a relatively small budget and limited foreign aid. However, the bad impacts were resolved by 2005.
Therefore, I think a bad debt ratio of three percent is not a worrying problem at all in the current context. Our commercial banks have abetter financial capability, the State budget is larger, and foreign aid is more satisfactory. In fact, I think our banks could manage even a four or five percent bad debt ratio without much trouble.
VnE: Some experts say that the global crisis points to the need to restructure the banking system. Do you agree?
Nghia: That’s not a new idea. In fact, we’ve been carrying out a restructuring since 2001, and the situation of the banking system in general and of commercial banks in particular has been improved considerably.
The most important improvement is the application of new modern technologies. Banks have been forced to change their mode of management, emphasize labour force training and strengthen risk management. These changes have upgraded the competitiveness and corporate governance of banks.
The global financial crisis showed that the American financial supervision system neglected risk management, especially with respect to new financial products. We must not use a new financial product until we know how to manage the attendant risks.
Therefore, I think that we should return to the first principle of financial management: controlling risk is the most important thing. “Risk” here not only mean the risks for a financial institution or a bank, but the risks for depositors and investors as well, including investors in real estate and the stock market.
Modern finance is not just a matter of the benefit of financial institutions. We need to take account of the interests of investors, depositors and consumers as well. This is the new precept of modern financial supervision. If we restructure Vietnam’s finance and banking system further, that should be our basic principle.
Many banks have reported satisfactory business results for the first five months of the year despite the economic downturn.
DongA Bank reportedly earned a profit of 329 billion dong through May 2009, 43.9 percent of its full year 2009 target. Sacombank has reported pretax profits of 660 billion dong. TienPhong Bank and HDBank also reported satisfactory pretax profits of 133 billion dong and 75 billion dong, respectively
VietNamNet, TBKTVN
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