Adopting international standards and limiting cross-ownership are amongkey measures that will ensure Vietnam's banking sector reforms areeffective, Michael Krakowski, Director and Chief Technical Advisor ofthe GIZ Macroeconomic Reform Programme, tells Vietnam News Agency’sEnglish-language daily Viet Nam News.
Q: Can you comment on Vietnam's bank restructuring efforts so far?
A:This is complicated task that takes time to plan and implement. Thebanking system can be considered the "blood vessel" for the wholeeconomy. So its restructuring should be considered within the frameworkof overall economic restructuring, macroeconomic stabilisation andinstitutional restructuring.
In the context of WTO accession in2007, increasing international economic integration and macroeconomicturbulences linked to decelerating economic growth since 2010, thenecessity of restructuring the economy in general, and the bankingsector in particular, has become critical.
Decision No. 257 aimsat fundamental, comprehensive banking system restructuring by 2020. Inthe first phase, by 2015, the plan is to strengthen and improve theefficiency and soundness of the system of credit institutions, and todeploy market principles.
This important decision has beenimplemented for two years now, but this period is too short to allow acomplete assessment. However, key milestones can be reviewed. Over thelast two years, Vietnam has completed restructuring or merging of ninesmall-sized banks and established the Vietnam Asset Management Company(VAMC).
The non-performing loan (NPL) ratio as officiallyreported by banks was reduced to 3.63 per cent as of the end of December2013. This is a modest initial outcome if we compare it with thetargets specified in Decision 254 issued by the Prime Minister.
Q: What are the key issues regulators should keep in mind this year and in coming years?
A:While there have been important achievements, there are still importantsteps to be taken in the financial sector restructuring process.State-owned commercial banks are still struggling with equitisation, andstill do not function in accordance with market-based principles.Joint-stock banks are strongly affected by cross ownership, and thepractices of bank management and risk management are not in compliancewith international standards.
NPLs of banks are still "suspended"without a fundamental solution approach, as there is no functional debtmarket. The central bank is trying to push the banking system to catchup with international standards and best practices. However, asufficient, systematic legal framework for this to happen does not existyet.
In order to achieve the goals of restructuring the creditinstitution system as specified in Decision 254, Vietnam would need totake several important steps quickly, including:
(1) Adopt andimplement in practice standards of Basel II; promulgate requirements onbank management and risk management in accordance with internationalstandards; apply international accounting and auditing standards forbanks in order to create a sound and strong legal basis for a functionalrestructured banking system;
(2) Commit to solve the NPL problemon the basis of the establishment of a debt market with the involvementof foreign investors;
(3) Complete the equitisation of SOBs by 2015 as targeted in the existing two-year privatisation plan; and
(4)Restructure big joint-stock private banks to limit cross ownership,internal credit and credit expansion to corporate groups.
Q: Thecentral bank plans to reduce the number of commercial banks from over 30at present to around 15-17. What is the best possible way to make ithappen?
A: M&A (mergers and acquisitions) is certainly theobvious one. M&As must be accompanied by improvements in managementand competence, create synergies and strengthen banking activities, butnot necessarily increase the wealth of certain shareholders who controlthe majority. Increasing the participation of foreign investors inaccordance with the openness of the economy to create a more competitiveenvironment in the banking sector is a measure worth considering.
Onother hand, it is important not to rule out the option of allowingbanks to go bankrupt to enforce market discipline. This point iscritical to enhancing competition and performance in the sector.
Currentlaws allow the State Bank of Vietnam to intervene in bank restructuringthrough participation in debt purchases and conversion into shares.This tool is not being used by the central bank at this moment, butcould be deployed in the restructuring of big and medium-sized banks.Nevertheless, I would suggest that this tool has to be viewed as a toolof last resort. The central bank would need to behave like a player inthe debt market when using this tool and to "withdraw" from it soon uponcompletion of its restructuring mission.
Q: How important are foreign banks in the restructuring process?
A:Foreign banks could play an important role in the process in terms of(1) providing bank management, risk management and technology expertise;(2) being strategic investors with capacity of international fundsraising; and (3) providing services of banking, M&A and investmentin accordance with international standards.
Foreign bankscurrently account for about 10 percent of total assets and capital ofthe banking system, which is rather small compared to other countries. Ahigher proportion of foreign banks would increase competitiveness ofthe local banking market in Vietnam, improve corporate governance,banking technology as well as international co-operation and integrationof the Vietnamese banking system.
Almost all big internationalbanks are represented in different ways to some degree in Vietnamalready. This means also that certain local knowledge, understanding andexperiences have been gathered and accumulated by these banks.
Therefore, the participation by foreign banks in the restructuring process would certainly be favourable.-VNA
Q: Can you comment on Vietnam's bank restructuring efforts so far?
A:This is complicated task that takes time to plan and implement. Thebanking system can be considered the "blood vessel" for the wholeeconomy. So its restructuring should be considered within the frameworkof overall economic restructuring, macroeconomic stabilisation andinstitutional restructuring.
In the context of WTO accession in2007, increasing international economic integration and macroeconomicturbulences linked to decelerating economic growth since 2010, thenecessity of restructuring the economy in general, and the bankingsector in particular, has become critical.
Decision No. 257 aimsat fundamental, comprehensive banking system restructuring by 2020. Inthe first phase, by 2015, the plan is to strengthen and improve theefficiency and soundness of the system of credit institutions, and todeploy market principles.
This important decision has beenimplemented for two years now, but this period is too short to allow acomplete assessment. However, key milestones can be reviewed. Over thelast two years, Vietnam has completed restructuring or merging of ninesmall-sized banks and established the Vietnam Asset Management Company(VAMC).
The non-performing loan (NPL) ratio as officiallyreported by banks was reduced to 3.63 per cent as of the end of December2013. This is a modest initial outcome if we compare it with thetargets specified in Decision 254 issued by the Prime Minister.
Q: What are the key issues regulators should keep in mind this year and in coming years?
A:While there have been important achievements, there are still importantsteps to be taken in the financial sector restructuring process.State-owned commercial banks are still struggling with equitisation, andstill do not function in accordance with market-based principles.Joint-stock banks are strongly affected by cross ownership, and thepractices of bank management and risk management are not in compliancewith international standards.
NPLs of banks are still "suspended"without a fundamental solution approach, as there is no functional debtmarket. The central bank is trying to push the banking system to catchup with international standards and best practices. However, asufficient, systematic legal framework for this to happen does not existyet.
In order to achieve the goals of restructuring the creditinstitution system as specified in Decision 254, Vietnam would need totake several important steps quickly, including:
(1) Adopt andimplement in practice standards of Basel II; promulgate requirements onbank management and risk management in accordance with internationalstandards; apply international accounting and auditing standards forbanks in order to create a sound and strong legal basis for a functionalrestructured banking system;
(2) Commit to solve the NPL problemon the basis of the establishment of a debt market with the involvementof foreign investors;
(3) Complete the equitisation of SOBs by 2015 as targeted in the existing two-year privatisation plan; and
(4)Restructure big joint-stock private banks to limit cross ownership,internal credit and credit expansion to corporate groups.
Q: Thecentral bank plans to reduce the number of commercial banks from over 30at present to around 15-17. What is the best possible way to make ithappen?
A: M&A (mergers and acquisitions) is certainly theobvious one. M&As must be accompanied by improvements in managementand competence, create synergies and strengthen banking activities, butnot necessarily increase the wealth of certain shareholders who controlthe majority. Increasing the participation of foreign investors inaccordance with the openness of the economy to create a more competitiveenvironment in the banking sector is a measure worth considering.
Onother hand, it is important not to rule out the option of allowingbanks to go bankrupt to enforce market discipline. This point iscritical to enhancing competition and performance in the sector.
Currentlaws allow the State Bank of Vietnam to intervene in bank restructuringthrough participation in debt purchases and conversion into shares.This tool is not being used by the central bank at this moment, butcould be deployed in the restructuring of big and medium-sized banks.Nevertheless, I would suggest that this tool has to be viewed as a toolof last resort. The central bank would need to behave like a player inthe debt market when using this tool and to "withdraw" from it soon uponcompletion of its restructuring mission.
Q: How important are foreign banks in the restructuring process?
A:Foreign banks could play an important role in the process in terms of(1) providing bank management, risk management and technology expertise;(2) being strategic investors with capacity of international fundsraising; and (3) providing services of banking, M&A and investmentin accordance with international standards.
Foreign bankscurrently account for about 10 percent of total assets and capital ofthe banking system, which is rather small compared to other countries. Ahigher proportion of foreign banks would increase competitiveness ofthe local banking market in Vietnam, improve corporate governance,banking technology as well as international co-operation and integrationof the Vietnamese banking system.
Almost all big internationalbanks are represented in different ways to some degree in Vietnamalready. This means also that certain local knowledge, understanding andexperiences have been gathered and accumulated by these banks.
Therefore, the participation by foreign banks in the restructuring process would certainly be favourable.-VNA
