Governor of the State Bank of Vietnam Nguyen Van Binh has committed to take more measures against cross ownership in local commercial banks to make the banking system safer.

In a document sent to voters, Binh said that the central bank would focus on verifying the financial status of shareholders when they contribute capital or buy stakes at banks.

Supervision and inspection on stakes in cross ownership between banks, its subsidiary companies and shareholders would be enhanced to timely deal with violations, he said.

The central bank will also work closely with the State Securities Commission to strictly monitor and supervise stake trading of banks in the stock market.

In addition, Binh said, the central bank was also continuously drafting a circular on capital adequacy ratios to ensure safety in the performance of banks, including regulations on limiting cross ownership in banks.

Under the draft circular, loans to contribute capital or buy stakes at banks must be separated from core capital when determining the minimum capital adequacy ratio to limit banks and its subsidiary companies from owning stakes at others.

In the document, the central bank admitted that cross ownership in banks raised a risk to the safety of the entire financial system as it created favourable conditions for tortuous capital transfer, helping banks raise charter capital unfairly.

Experts have so far also urged the Government to take bolder measures against cross ownership in banks, saying that cross ownership was one of the main reasons for the increasing bad debts in the country.

When banks have companies as major shareholders, they are likely to lend for their projects without assessing the risks carefully, the experts said.

The reason for the increasing cross ownership in the banking sector is the high demand for capital sparked by the transformation of 13 rural banks into urban commercial ones to serve the increasing demand for funds during the 2005-07 stock market bull run.

After the transformation, the banks had to increase their charter capital by 10-20 times to at least 3 trillion VND (142.9 million USD) by 2011, and had to solicit investment from State-owned and private firms.

To deal with cross ownership in banks, economist Nguyen Tri Hieu said banks should be allowed to accept deposits only for providing credit, not for investment, explaining that allowing banks to use deposits for both lending and investment is one of the reasons for the cross ownership. There are no restrictions on investments by banks now.

Many banks have invested in businesses like seafood processing and property, the stock market, and some risky asset classes, causing losses, he said.

Economist Dinh Tuan Minh said the measures to deal with cross ownership depends on the stake holders, adding if they are all credit organisations, the best way is to merge them; if non-financial firms are involved, the best way is for them to sell their stakes to financial organisations.

If banks own stakes in firms, they should sell out and the central bank should provide them with refinance, Minh said.

But the key factor is developing the capital market in a transparent manner and with low transaction costs, he said.-VNA