Adopting international standards and limiting cross-ownership are among key measures that will ensure Viet Nam's banking sector reforms are effective, Michael Krakowski, Director and Chief Technical Advisor of the GIZ Macroeconomic Reform Programme, tells Viet Nam News.
Can you comment on Viet Nam's bank restructuring efforts so far?
This is complicated task that takes time to plan and implement. The banking system can be considered the "blood vessel" for the whole economy. So its restructuring should be considered within the framework of overall economic restructuring, macroeconomic stabilisation and institutional restructuring.
In the context of WTO accession in 2007, increasing international economic integration and cmacroeconomic turbulences linked to decelerating economic growth since 2010, the necessity of restructuring the economy in general, and the banking sector in particular, has become critical.
Decision No. 257 aims at fundamental, comprehensive banking system restructuring by 2020. In the first phase, by 2015, the plan is to strengthen and improve the efficiency and soundness of the system of credit institutions, and to deploy market principles.
This important decision has been implemented for two years now, but this period is too short to allow a complete assessment. However, key milestones can be reviewed. Over the last two years, Viet Nam has completed restructuring or merging of nine small-sized banks and established Viet Nam Asset Management Company (VAMC).
The non-performing loan (NPL) ratio as officially reported by banks was reduced to 3.63 per cent as of the end of December 2013. This is a modest initial outcome if we compare it with the targets specified in Decision 254 issued by the Prime Minister.
What are the key issues regulators should keep in mind this year and in coming years?
While there have been important achievements, there are still important steps to be taken in the financial sector restructuring process. State-owned commercial banks are still struggling with equitisation, and still do not function in accordance with market-based principles. Joint-stock banks are strongly affected by cross ownership, and the practices of bank management and risk management are not in compliance with international standards.
NPLs of banks are still "suspended" without a fundamental solution approach, as there is no functional debt market. The central bank is trying to push the banking system to catch up with international standards and best practices. However, a sufficient, systematic legal framework for this to happen does not exist yet.
In order to achieve the goals of restructuring the credit institution system as specified in Decision 254, Viet Nam would need to take several important steps quickly, including:
(1) Adopt and implement in practice standards of Basel II; promulgate requirements on bank management and risk management in accordance with international standards; apply international accounting and auditing standards for banks in order to create a sound and strong legal basis for a functional restructured banking system;
(2) Commit to solve the NPL problem on the basis of the establishment of a debt market with the involvement of foreign investors;
(3) Complete the equitisation of SOBs by 2015 as targeted in the existing two-year privatisation plan;
(4) Restructure big joint-stock private banks to limit cross ownership, internal credit and credit expansion to corporate groups.
The central bank plans to reduce the number of commercial banks from over 30 at present to around 15-17. What is the best possible way to make it happen?
M&A (Mergers and Acquisitions) is certainly the obvious one. M&As must be accompanied by improvements in management and competence, create synergies and strengthen banking activities, but not necessarily increase the wealth of certain shareholders who control the majority. Increasing the participation of foreign investors in accordance with the openness of the economy to create a more competitive environment in the banking sector is a measure worth considering.
On other hand, it is important not to rule out the option of allowing banks to go bankrupt to enforce market discipline. This point is critical to enhancing competition and performance in the sector.
Current laws allow the State Bank of Viet Nam to intervene in bank restructuring through participation in debt purchases and conversion into shares. This tool is not being used by the central bank at this moment, but could be deployed in the restructuring of big and medium-sized banks. Nevertheless, I would suggest that this tool has to be viewed as a tool of last resort. The central bank would need to behave like a player in the debt market when using this tool and to "withdraw" from it soon upon completion of its restructuring mission.
How important are foreign banks in the restructuring process?
Foreign banks could play an important role in the process in terms of (1) providing bank management, risk management and technology expertise; (2) being strategic investors with capacity of international funds raising; and (3) providing services of banking, M&A and investment in accordance with international standards.
Foreign banks currently account for about 10 per cent of total assets and capital of the banking system, which is rather small compared to other countries. A higher proportion of foreign banks would increase competitiveness of the local banking market in Viet Nam, improve corporate governance, banking technology as well as international co-operation and integration of the Vietnamese banking system.
Almost all big international banks are represented in different ways to some degree in Viet Nam already. This means also that certain local knowledge, understanding and experiences have been gathered and accumulated by these banks.
Therefore, the participation by foreign banks in the restructuring process would certainly be favourable. — VNS