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.