Mr Vu Viet Ngoan, Chairman of the National Financial Supervisory Commission, spoke with VET's Minh Tien about the bank restructuring process.
What are the specific activities the government is undertaking to restructure and improve the banking system?
The current restructuring project is designed for the period from 2011 to 2015 and has three main purposes: stabilising liquidity, handling non-performing loans (NPLs), and restructuring the management and operation of the banking system.
The project contains the five following activities.
Firstly, it must function as a situational resolution in preventing financial instability by stabilising public confidence. The government has been extremely determined by announcing that it will not allow any bank to file for bankruptcy. The local banking sector has a deposit insurance mechanism but as the reserve is not much compared with aggregate deposits the government also announced a benefit guarantee for depositors. This is an essential element in stabilising public confidence in order to encourage people to continue their deposits rather than withdrawing their funds and causing a run on the banks. Interest rate ceilings and credit limits have also been applied.
Vu Viet Ngoan, Chairman of the National Financial Supervisory Commission
Secondly, weak and fragile banks have been identified and strictly supervised. These banks will have to either restructure or undergo a merger and acquisition (M&A). Some believe that this will worsen the critical cross-ownership issue, but this is not true. There are many factors in cross-ownership and M&A should not be blamed. This is a necessary remedy for the current circumstances.
Thirdly, the government has made remarkable policy modifications with a focus on stabilising the macro-economy. Investments in high-risk areas have been restricted to less than 16 per cent of total liabilities. Mobilising and lending in gold have been terminated. These movements have had significant positive impacts on the restructuring process.
Fourthly, financial safety standards have been enhanced. The capital adequacy ratio has been raised from 8 to 9 per cent and is now applied on all unified financial reports. The capital ownership ratio for individuals has been cut by half, from 10 to 5 per cent, and for legal entities are now 15 per cent instead of 20 per cent. Debt classification and provision for credit losses (PCL) are approaching international standards. Transparency is also being improved with stricter management and audits in addition to the publication of banks’ operations and performance.
Most importantly, NPLs have been partly handled with PCL and the situation has become even better with the establishment of the Vietnam Asset Management Company (VAMC).
How would you evaluate the effectiveness of the VAMC and its plans to buy NPLs at “market price” in the coming months?
I have no information at this time about the plans of VAMC to buy NPLs at “market price”. Regarding the effectiveness of VAMC, some are saying that it only helps to buy time until the economy gets better and enterprises will then make profits and see their loans settled. But if the economy does not get back on track as expected, this solution will create even greater risks. Personally, I believe that time is precious, especially with the current state of the economy and the existing conditions in the banking and finance sector. VAMC is a smart solution. If the economy does not improve over the next few years, others solutions and adjustments will have to be made.
The bank restructuring process has been implemented for more than two years now. What is your assessment so far?
There have been three major achievements.
First of all, liquidity in the banking market has been secured. The interbank interest rate has even surpassed 35 or 40 per cent per year at its peak. Not only the liquidity of several financial institutions but the liquidity of the entire banking system was under significant strain, with the possibility of insolvency. The loan-to-deposit ratio (LTD ratio) has fallen dramatically, from 98 per cent in 2011 to 92 per cent in 2012 and then 85 per cent in 2013. Meanwhile, customer deposits as a percentage of aggregate capital mobilised increased from 12.1 per cent in 2011 to 16 and more than 20 per cent in both 2012 and 2013. Therefore, the banking system is more independent from the interbank lending market. This can be seen from actual figures. Aggregate interbank lending to borrowing capital in 2011 was 21 per cent while the figure in 2013 was a modest 15 per cent. Moreover, the banking system is also more independent from the liquidity of the State Bank of Vietnam (SBV).
Secondly, asset quality has been enhanced as NPLs have been partly addressed. Of the VND133,000 billion ($6.25 billion) of bad debts handled, VND94,000 billion ($4.5 billion) have been settled with the PCL and VND39,000 billion ($1.8 billion) managed by VAMC. International rating agencies such as Fitch and Moody’s have reported a high rate of NPLs, of approximately 15 per cent, while the SBV’s estimate is 9 per cent. Whatever the actual figure, the situation has definitely improved. Along with the reduction of NPLs, the cross-ownership issue has also improved as the capital at banks in the stock market has been cut by a significant 57 per cent. The connections between banks and securities companies as well as some funds are tight. Previously, many accounts that were not allowed to be granted for loans had, by one way or another, been transferred to the funds. These impressive figures confirm the determination of the government. Last but not least, the banking system has seen some notable M&As and the effectiveness and efficiency of the new entity have been boosted.
Do M&As open up opportunities for foreign banks to contribute more to the bank restructuring process? What should authorities do to encourage them?
The ceiling on foreign ownership ratios has been lifted recently. Foreign banks and financial institutions certainly have a role to play in the restructuring process. But to what degree will be established by authorities on a case-by-case basis. This is not something where a general decree can simply be issued.
What needs to done in order to foster the restructuring process in the future?
There are a few things to do. The banking sector needs to improve its safety standards towards Basel, a voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk. It is also necessary to improve the legal framework and law enforcement along with improving the capability of the national financial supervisory system. Developing the capital market and the insurance market as well as implementing institutional reforms are also essential tasks for a successful bank restructuring process.