The priority task when restructuring the commercial banks is to resolve the bad debts and simplify lending procedures, say economic analysts.

They explain that besides some certain successes in the integration process, Vietnam ’s commercial banks have several shortcomings in terms of administration, human resources, rising bad debts and a low level of liquidity.

Vietnam now has over 80 banks, an excessive number compared to the economic demand, which has resulted in some of the smaller banks facing serious shortages of capital and low liquidity levels.

According to Vu Thi Phuong Hoa from the Institute for Financial Strategies and Policies under the Ministry of Finance, Vietnam ’s financial system depends mainly on the banks, which along with non-banking credit organisations account for 75 percent of the financial sector’s total assets.

However, after recording some massive developments, some banks had breached principles of business administration and risk management, resulting in their increasing bad debts.

The current macroeconomic difficulties have raised business debt across the country while the stagnant stock market and the frozen real estate market have run up even more bad debt with the banks.

The State Bank of Vietnam (SBV) estimates that by the end of the first quarter of 2012, the bad debt rate stood at 3.6 percent, or over 85 trillion VND (4 billion USD). This figure also tends to increase due to the lack of transparency in financial reports.

Dang Duc Thanh, General Director of the company ‘Dream House’, says that the banks are stuck with a lot of bad debts and a lot of it is tied to real estate.

The General Director of Saigon Trade and Production Development, Tran Quoc Manh, emphasised the importance of solving bad debt before restructuring the banking system.

“It’s necessary to cross the ‘bad debt threshold’ before starting any restructuring and making the banking system healthy again”, said Manh, adding that “bad debts are due to weaknesses in both banks and businesses”.

Therefore, the State needs to buy bad debt back from the banks and businesses, he said, noting that the issue here is how to do this properly and effectively.

According to Manh, the State should buy bad debt using market mechanisms, analyse each one thoroughly and then verify the ‘health’ of each business through the level of debt.

However, many experts question the feasibility of the State buying back such a huge volume of bad debt to make the banking system healthy.

Bad debts are like “clots of blood” that block the economy’s flows of capital and despite lower interest rates, businesses still find it difficult to access capital. Solving bad debt is essential but the banks also need to remove obstacles for borrowers and “view’ businesses differently.

According to Thanh, in 2007, many oil, gas, and electricity companies also began to trade in real estate, leading to thousands of real estate companies.

“The most important thing now is to closely control monetary sources and regulate the banks more,” he stressed.

Pham Ngoc Hung, Vice President of Ho Chi Minh City’s Business Association, stated that restructuring should pay attention to how banks ‘look’ at businesses. The more difficulties the economy experiences, the more small businesses are affected and they find it even harder to access sources of capital.

The banks themselves say that they want to lend to businesses, based on their financial transparency and how feasible their projects are, but businesses’ financial reports are unreliable.

Vo Thanh Ly, Deputy General Director of the Mekong Housing Bank says that his bank is ready to share the economic burden when businesses meet all requirements laid down by the SBV and the MHB.-VNA