Dr Michael Krakowski, Chief Technical Advisor of GIZ Macroeconomic Reform Programme, shared his assessment of the bank restructuring process with VET's Hai Bang.
What comment would you care to make on the results of Vietnam’s bank restructuring process to date?
Bank restructuring is a comprehensive and complicated programme that requires time for planning and implementation. Moreover, the banking system may be considered a “blood vessel” for the whole economy. For this reason, restructuring the banking system needs to be considered within the framework of overall economic restructuring, macroeconomic stabilisation and institutional restructuring. In the context of WTO accession in 2007 and increasing international economic integration and considering macroeconomic 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.
There are claims that the process of restructuring the financial system is behind schedule. Nevertheless, it is an appropriate decision and the plan was promulgated well in advance in comparison to the restructuring plans for other sectors.
Dr Michael Krakowski, Chief Technical Advisor of GIZ Macroeconomic Reform Programme
This important decision on banking system restructuring has now been implemented for two years. This period is still too short to allow for a complete assessment. However, key milestones that were achieved so far can be reviewed. Within this two-year period Vietnam has restructured or merged nine small-sized banks and established the Vietnam Asset Management Company (VAMC). The non-performing loan (NPL) ratio as officially reported by banks had been reduced to 3.63 per cent as at the end of December 2013, though this is just a modest initial outcome even if we compare it to the target specified in the Decision No 254 from the Prime Minister. And even if different estimates of the NPL ratio exist under different standards, the ratio certainly has decreased. In combination with the policy from the State Bank of Vietnam (SBV) to provide liquidity for the banking system and permit banks to use their provisions to write off and transfer NPLs, the risk of a contagious meltdown in the banking system can be avoided. In parallel to this stabilisation approach, the regulatory framework of the financial sector is strengthened, for example in risk management.
Despite these important achievements, there are still important steps to be taken in the financial sector restructuring process. State-owned commercial banks (SOCBs) are still struggling with equitisation, which means ownership restructuring, and still do not function in accordance with market-based principles. Joint stock banks are strongly affected by cross ownership and practices in bank management and risk management that are not in compliance with international standards. NPLs of banks remain “suspended” without a fundamental solution as there is no functional debt market. As mentioned above, the SBV is making efforts to make the banking system catch up with international standards and best practice. However, this process is not sufficiently completed to allow for the availability of an adequate, systematic legal framework to ensure the sound operations of a restructured banking system in accordance with international best practice.
In order to achieve the goals of credit institution restructuring as specified in Decision No 254, Vietnam will need to take important steps quickly. These steps are: (1) adopt and implement in practice the standards of Basel II; promulgate requirements on bank management and risk management in accordance with international standards; and 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 resolving NPL problems on the basis of the establishment of a debt market with the involvement of foreign investors; (3) complete the equitisation of SOCBs by 2015 as targeted in the existing two-year equitisation plan for 2014-2015; and (4) restructure large joint stock private banks to limit cross-ownership, internal credit granting, and credit expansion to group companies.
The SBV plans to cut the number of local banks from the existing 30 or more to around 15 to 17. What is the best possible way to make this happen?
Merger and acquisition (M&A) is certainly the obvious approach for the restructuring process. M&As must be accompanied by improvements in management and competence, creating synergies and strengthening banking activities while not necessarily increasing the wealth of certain shareholders who control the majority. It is worth considering increasing the permitted participation of foreign investors in accordance with the openness of the economy in order to create a more competitive environment in the banking sector.
On the other hand, it is important to not 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. According to the 2010 Law on the SBV and Decision No 254 issued in 2012, the SBV is allowed to intervene in bank restructuring through participation in debt purchases and conversion into shares. However, this tool is not being used by the central bank at this moment but in the case of restructuring large and medium-sized banks may be deployed. Nevertheless, I suggest that this tool has to be viewed as a tool of last resort. The SBV would need to behave like a player in the debt market when using this tool and to “withdraw” from it quickly upon the completion of its restructuring mission.
What are your thoughts on the VAMC? Is it really working and what can be done to make it more effective?
The establishment of the VAMC by the government and the SBV to contribute to the resolution of NPLs is an approach taken within the restrictions not to increase the government deficit or issue additional bank notes. This action could also be seen as an ongoing process, even if we compare it with stipulations in Decision No 254, which require banks to sell their NPLs to the Ministry of Finance’s Debt and Asset Trading Corporation (DATC). As at the end of 2013, after just a short period of time, the VAMC has used tools to help banks write off approximately VND40,000 billion ($1.9 billion) worth of NPLs and this figure is expected to increase to VND70,000 - VND100,000 billion ($3.3 - $4.7 billion) this year. Thanks to this, banks can reduce their NPL burden and provision expenses (except for compulsory provisioning of 20 per cent each year for five years, as stipulated by the SBV). Enterprises can also benefit from this scheme, as they are now eligible for new loans at significantly lower interest rates. However, this scheme consists of a simple transfer of NPLs from banks’ books to the VAMC, where they still exist. They actually do not disappear, but continue being a liability of the banks (as banks are required to make provisions of 20 per cent per year and to repossess NPLs in case of a failure to sell), and are the “temporarily suspended” debts of enterprises with additional debt management responsibility by the VAMC. In case of a resolution failure, these NPLs will be reverted to banks at book value. This option is the “safest” for the VAMC. However, it adds no value to the whole banking system, enterprises and the economy, except for the abovementioned period of temporary suspension.
Therefore, we would strongly recommend the quick development of a debt sale and purchase market, in which foreign investors are permitted to participate. It is also important for this market to ensure the availability of a transparent pricing mechanism and a legal framework that supports the transfer of ownership. Signs of recovery shown in the economy and the real estate market set favourable conditions for such a market.
In addition, it is important to create conditions for the establishment of a special bond market to avoid a concentration of these bonds at the SBV and having a negative effect on its monetary policy. The government bond market has experienced strong developments over the past four years, with significantly improved liquidity. This is a positive development for special bonds to be traded in this market. But one critical issue in debt management and resolution by the VAMC is transparent and market-relevant debt pricing. The SBV has promulgated regulations relating to the VAMC’s management. Auction, competitive bidding and authorising of professional appraisers to evaluate prior to approval may be the best way to improve the effectiveness and efficiency of the VAMC, to safeguard it from risks, including moral hazard.
How important are foreign banks in Vietnam’s bank restructuring process? Where may foreign banks struggle if they become more involved in the bank restructuring process?
As mentioned above, foreign banks could play an important role in the process of banking restructuring, in terms of (1) providing bank management, risk management and technological expertise; (2) being strategic investors with capacity in international fund raising; and (3) providing services in banking, M&A and investment that are in accordance with international standards.
Foreign banks currently account for about 10 per cent of total assets and capital in Vietnam’s banking system, which is rather small compared to other countries. A higher proportion of foreign banks would increase the competitiveness of the local banking market and improve corporate governance and banking technology as well as international cooperation and the integration of the banking system. Almost all large international banks are represented in different ways in Vietnam’s financial market to some degree already. This means that certain local knowledge, understanding and experience have been gathered and accumulated by these banks. Therefore, the participation by foreign banks in restructuring the banking system would certainly be favourable.