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Banking & Finance

Change in approach

Released at: 07:33, 25/07/2014

Change in approach

Assessing the management models of insurance companies in Vietnam in late 2013, Mr Prajeesh Mukudan, Ernst & Young's Director of Insurance Consulting, said bluntly that insurance companies could learn a great deal from banks. But what specifically, could they learn?

by Ngoc Anh

    Most insurance companies in Vietnam apply the “headquarter - branch” model, which means that the branch is an independent business unit with a range of powers. Apart from meeting business targets, the branch operates as an independent company, takes the initiative in all work and manages it own human resources and products.

    The strength of this model is that it helps branches be more active, but the risk to insurance companies is very high because branches can set their own targets, even competing with each other in localities and customers to reach their targets. “The headquarter - branch model has many weaknesses and has been eliminated by most banks and replaced by the model of banking operation,” said Mr Mukudan.

    Dr Le Xuan Nghia, Director of the Business Development Institute, said that many banks are facing problems in management but a few have invested significantly in improving their management under advanced models from around the world, even approaching the OECD’s recommendations and Basel II standards. In recognising that “banking is a risky business field, so good management is the foundation of a bank,” Techcombank was a pioneer in engaging a leading strategic consultant, MsKensey, when restructuring their whole system in 2009.

    The model of banking operation is the result of this consultation. The discretion of branches has been reduced. They now mainly focus on customer development, with operations management being moved to over ten different divisions at headquarters, including the risk management division, the wholesale trade division, the functional division, the human resources department, an individual banking services division, and so on. The title of deputy general director is now just an “honorary title”, replaced by “operations manager”. A representative from the bank said that “the reality of the restructuring process is that specialisation and professionalism helps banks’ services become better. The system restructuring not only helps improve management but also results in better customer service.”

    After five years of restructuring its management system, Techcombank’s total assets almost doubled, to about VND160,000 billion ($7.62 billion). This growth is similar in other criteria, such as equity, mobilised capital, and credit. In particular, the capital adequacy ratio (CAR) has remained at 13 per cent, which is much higher than the 9 per cent regulated by the State Bank of Vietnam. Each year Techcombank has received many domestic and international awards for its business segments, such as international clearing, commercial finance, retail sale, information technology, and customer service.

    The successful change in Techcombank created an example for other banks to follow. McKinsey and the Boston Consulting Group were recently engaged by VIB and Maritime Bank to consult on their restructuring. OCB, meanwhile, has recently signed a contract with KPMG to deploy a project converting its risk systems.

    Dr Nghia added that management restructuring at banks has been spoken of for a long time but not all are determined to do so out of a fear of change and the costly investment required. Past difficulties in the financial market presented challenges but also encouraged banks to adopt change. Banks whose management model was restructured early and successfully provide a good lesson for those coming later.

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