Vietcombank is one of the first two banks to meet the requirements of Circular 41/2016/TT-NHNN issued by the State Bank of Vietnam (Photo: VNA)

Hanoi (VNA) – Some experts have said when a bank is unable to have a minimum capital adequacy ratio (CAR) of 8 percent for a long time, it could be put under special control by the central bank.

In recent times, the country’s banking sector has made efforts to control inflation and other issues, but an array of loopholes still exist, with scandals at the Asia Commercial Joint Stock Bank (ACB), OceanBank and the Vietnam Construction Bank, among others.

To improve the sector’s health and safety, the State Bank of Vietnam (SBV) has issued Circular 41/2016/TT-NHNN, which stipulates the CAR at banks and branches of foreign banks in Vietnam. Although this circular is the first step to implement Basel II standards, it is important for banks to enhance risk governance.

Experts said most banks are still applying Basel I standards, but they need to meet Basel II requirements to promote the system’s competitiveness and transparency.

Basel II requires banks to publicise information about their capital status and risks (including capital structure, capital adequacy level and credit risks, enabling investors, clients and credit rating agencies to assess their tolerance to risks and ability to fulfill financial obligations in relation to depositors and investors.

Realising the importance of Basel II and to enhance the banking system’s safety, the SBV has carried out a pilot scheme in which 10 banks, namely Vietcombank, VietinBank, BIDV, Sacombank, ACB, Techcombank, VPBank, VIB and MSB, must have charter capital meeting Basel II standards by the end of 2020. All 35 commercial banks must have finished this work by the end of 2025.

The application of Basel II standards is no longer an option but a must that has to be done sooner or later.

One of the key contents of Circular 41, which will take effect on January 1, 2020, is that banks and branches of foreign banks must ensure their CAR of at least 8 percent.

Experts have said if any banks fail to ensure the minimum CAR, they will be put under special control by the SBV.

Pressure

When asked about why the CAR must be 8 percent, financial-banking expert Nguyen Tri Hieu said: “I used to ask several foreign financial-banking experts the same question, they said 8 percent was based on experiences relevant to non-performing loans, and they thought that 8 percent was a reasonable figure. In every 100 VND of asset value, there must be at least 8 VND owned by banks while the remaining 92 VND is borrowed.”

“However, there haven’t been any surveys of countries and types of credit indicating that 8 percent is the safest level. Generally speaking, all financial experts believe 8 percent is a suitable CAR.”

At present, most banks are still complying with the central bank’s Circular 36/2014/TT-NHNN, which sets the CAR at 9 percent. When Circular 41 comes into force, banks must have their CAR of 8 percent to meet Basel II standards.

Hieu analysed that the method for calculating risk-weighted assets in Circular 41 is different from that in Circular 36. While Circular 36 only focuses on credit risks, under Circular 41, apart from credit risks, banks must also calculate assets with market- and operation- related risks.

He noted that in Circular 41, there are three types of risks. The first is loans that may be unable to be recovered; the second is that banks do not provide loans but their employees may not comply with regulations and, hence, cause losses to banks and risks to the whole system; the third is interest rate and exchange rate vagaries.

Ownership capital is the funding for purchasing fixed and long-term assets like information technology and infrastructure. The bigger banks’ “buffers” are, the more resilient they are to damage and risks, and the more their operations develop. The lower ownership capital is, the more risks will appear since a few large non-performing loans can cost them the entire ownership capital and end their existence.

That’s why the CAR is 9 percent in Circular 36 but is reduced to 8 percent in Circular 41. Although the banking system’s CAR is more than 11 percent at present, if statistics are calculated precisely, many banks still do not meet the 8-percent level in Circular 41.

Hieu added when a bank fails to have the minimum CAR of 8 percent for a long time, it could be put under special control by the SBV. If this ratio drops to a very low level, that bank could even be merged with another bank or go bankrupt.

Though Circular 41 covers just part of Basel II standards, to comply with regulations in this document, banks must make strong efforts.

Many banks are facing the CAR pressure (Photo: VietnamPlus)

Faster pace needed

According to the central bank, as of the end of April, the CAR of State-owned commercial banks was at 9.61 percent, a slight rise from the 9.52 percent in late 2018 but still the lowest in the banking system. Meanwhile, the CAR of joint stock commercial banks declined slightly from 11.24 percent to 11.1 percent.

If State-owned commercial banks fail to raise their charter capital soon, the safety of their operations could be affected. However, capital hikes depend on the State’s support for the implementation of their capital raising plans.

Dr Can Van Luc, a financial-banking expert, said most credit organisations are still applying Basel I standards, which means ownership capital is equivalent to credit risks, and they haven’t taken into account market- and operation-related risks. Their CAR was 11.1 percent by the end of April, but under Basel II standards, this figure was only 7 – 7.5 percent, much lower than the regional average of 10 – 12 percent.

“This is a critical issue because when international organisations or partners assess or analyse a bank, they pay special attention to the CAR. Meanwhile, commercial banks, particularly State-owned ones, are facing numerous difficulties in raising ownership capital,” he said.

Echoing this view, Nguyen Tri Hieu said to meet Basel II standards, aside from capital hike, banks also have to reduce risk-weighted assets. Given these issues, there remain a number of obstacles to banks’ satisfaction of Basel II requirements.-VNA