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Banking & Finance

Eventful times

Released at: 23:56, 05/01/2015

Eventful times

Efforts by the SBV during 2014 to effectively manage monetary and credit policies as well as other regulations in the industry made the year one full of activity.

Ms. Thao Cao, Academy of Finance

2014 will remain in the minds of a lot of industry observers, operators and other stakeholders in the banking sector, considering the events that occurred over the course of the 12 months. Overall it was a better year for the banking sector than 2013, given that management by the State Bank of Vietnam (SBV) was key to achieving the current macro stability and cleaning up the banking system. Nevertheless, non-performing loans (NPLs) are still to be properly handled, casting a shadow over the bank restructuring process.

Stabilizing efforts

On a positive note, the past 12 months have seen the economy be in better shape, and while policy responses from the government are undoubtedly a factor it is also true that the efforts of the banking sector helped control inflation, support economic activities, and ensure financial stability. The country’s inflation rate hit just 4.09 per cent year-on-year in 2014 while GDP growth reached 5.93 per cent.  

As at December, credit had increased 11.8 per cent against late 2013 despite the fact that the mobilization rate stands at around 5.5 per cent, according to the SBV; the lowest level for the last three years. These increases helped the banking industry meet the targets set earlier. Banking industry insiders attribute the rapid increase in credit growth over the last few months to several factors, including the market’s increasing seasonal demand for funds and the impact of the government’s policies to boost the economy. “The early signs of an economic recovery also made a significant contribution to growth,” said Mr. Nguyen Tri Hieu, an independent analyst.

While there are remaining challenges, most observers share a positive outlook for 2015 and ratings for Vietnam’s banks by international rating agencies improved at year’s end. A combination of macroeconomic stability and improved governance in Vietnam prompted some credit differentiation among the country’s banks, as pointed out by the credit rating agency Moody’s, which rates nine banks in the country. The positive ratings, according to Mr. Eugene Tarzimanov, Vice President of Moody’s, are primarily driven by the stabilization of the operating environment, which will support recovery in their poor asset quality, provide stability to their deposit bases, and improve their business prospects. “Some Vietnamese banks have also improved their governance standards and lowered their risk appetite, thereby improving their credit underwriting standards,” he said. “Moody’s believe some of the banks have made more adjustments than others in response to the adverse market conditions since 2011.” 

Unlike 2013, when regulators paid greater attention to consolidating operations in the banking sector, the focus in 2014, especially in the second half, has largely been on how to strengthen the monetary market, stabilize the exchange rate, and increase foreign exchange reserves, Mr. Le Xuan Nghia, Director of the Business Development Institute (BID), pointed out.

A number of key measures were introduced during 2014 and proved effective. From early in the year SBV Governor Nguyen Van Binh gave a signal that the central bank would keep the exchange rate within a 2 per cent band to ensure stability in the country’s foreign exchange market. By mid-year the SBV had increased the VND/US dollar exchange rate by 1 per cent to boost exports in the second half. Overall, the SBV’s management of monetary policy has supported monetary and exchange rate stabilization and the successful stabilization of the gold market. Meanwhile, credit policy and a flexible debt resolution mechanism have provided enterprises with good business plans access to credit. Vietnam’s foreign exchange reserves reached a record high of $35 billion in September, increasing from around $7 billion in 2011.

Last year, as Mr. Nghia said, was also characterized by several policies from the SBV that put banks on a better footing. “For example, with Circular No.9 issued in March, banks can continue to restructure existing loans and keep them in the same debt group until April 1, 2015, instead of reclassifying them using more rigorous standards by June 1, 2014, as planned previously,” he said. Indeed, the postponement came as a big relief to commercial banks, because if the new debt classification standards were to be applied from June 1 then all debt balances and the value of off-balance sheet commitments (OBS) of a customer with a credit institution would be placed in the same debt group.

Meanwhile, Circular No.36 regulating prudential ratios for the operations of credit institutions and foreign bank branches was issued, with the aim of helping the sector to operate in a safer manner. Under the circular, a commercial bank can hold shares in a maximum of two other credit institutions, and its stake at each must not exceed 5 per cent of that institution’s total equity. The circular aimed to meet the government’s target of restructuring the banking sector and help credit institutions govern risks in accorda