Stronger financial foundation
Tran Dang Phi, Deputy Chief Inspector of Inspection and Supervision Agency of the State Bank of Vietnam (SBV) said that the SBV is instructing credit institutions (CIs) to comprehensively evaluate the results of the implementation of Project 1058 on restructuring the system associated with bad debt settlement in the period of 2016 — 2020, and develop a new scheme on restructuring CIs.
Preliminary report on the implementation of Project 1058, leader of the SBV said that by the end of March 2020, the charter capital of four state-owned banks (including Commercial Joint Stock Bank for Agriculture and Rural Development of Vietnam (Agribank), Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank) and Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) reached 145.1 trillion dong, accounting for 23.5 percent of the entire system. Their total assets were 5.213,4 trillion dong, accounting for 41.76 percent of the entire system, up by 37.01 percent compared to the end of 2016. In order to improve financial capacity for state-owned banks, ensure compliance with regulations on the minimum capital adequacy ratio (CAR) to meet the Basel II standards, the SBV has actively directed banks to synchronously carry out solutions to make up the shortage of capital.
Based on the urgent need to raise capital of state-owned banks, with the agreement with related ministries, the SBV has reported to the competent authorities the plan to increase charter capital of state-owned banks. Regarding the plan to increase charter capital for Agribank, the National Assembly has approved the above proposal of the SBV and officially allowed an additional 3.5 trillion dong of capital for Agribank.
For private joint stock banks, the SBV continues to supervise their implementation of the approved restructuring plans, at the same time requests some banks to review the implementation, propose amendments and supplements to the restructuring plan and submit to competent authorities for approval, in order to thoroughly overcome shortcomings and limitations in operation.
Private joint stock banks all focus on comprehensively consolidating and adjusting the financial, governance, and bad debt control aspects, and strengthening control measures to improve credit quality. By March 2020, the charter capital of private joint stock banks was 286.2 trillion dong, accounting for 46.6 percent of the entire system, up by 42.51 percent compared to the end of 2016. The total assets were 5.252,2 trillion dong, accounting for 42 percent of the entire system, up by 53.15 percent compared to the end of 2016.
Dr. Le Xuan Nghia, member of the National Financial and Monetary Policy Advisory Council (NFSC) assessed that the implementation of Project 1058 of the banking system has achieved positive results. In particular, the on-balance sheet bad debt ratio sharply declined to three percent. In two years of 2018 and 2019, some banks managed to handle a volume of bad debts equal to the previous five years.
This positive result, according to Dr. Nghia, is thanks to the drastic moves of banks resonated with the excitement in business activities of businesses, the warming real estate market has supported the handling of bad debts quite well. Another bright spot is that the system’s liquidity has been significantly strengthened with no signs of losing liquidity at any period. This is unprecedented in the history of Vietnam’s banking sector. Particularly, confidence of depositors in the banking system is high, especially through the recent Covid-19 pandemic which has created new trust of the public in general, depositors in particular for the banking system.
Another positive result is that the overall safety standards are well controlled and improved by the SBV.
In the next stage of the scheme to restructure CI system, according to experts, one of the obstacles which needs special attention in the next phase of the restructuring is dealing with bad debts.
According to assessment of the SBV’s leader, up to now, it is not possible to tell the developments of the pandemic in the world in the near future, while Vietnam’s economy has high degree of openness and other countries have not yet been able to control the epidemic, businesses encounter difficulties and are unable to repay loans, thus bad debt ratio will increase to over 3.67 percent in the end of 2020. The bad debt ratio can even be higher if businesses recover slowly and export market continues to disrupted. According to Dr. Nghia, settling bad debts and improving asset quality is the most important requirement for the Scheme of restructuring CIs in the new phase. Therefore, banks must take measures to basically overcome bad debt issue, including the bad debts left from the past and newly formed during the period when CIs are affected by the Covid-19 pandemic.
In order to cope with the increasing bad debt situation, economic experts recommended that in addition to focusing on providing support so that customers do not fall into bad debt group, banks must accept profit decline, and increase provisions for risks. At the same time, banks shall tighten the credit quality of new loans to avoid new bad debts. Dr. Nghia said that the speed of dealing with bad debts heavily depends on the recovery of the real estate market because the assets secured for loans are mainly real estate.
Another key requirement that needs to be included in the next phase Restructuring scheme is to fundamentally renovate the governance in the direction of digitalisation. According to Dr. Nghia, compared to the world, Vietnam’s banking system has been fairly slow in digitising its governance activities. This is a challenge for the sector because not only administration but also payment system, human resource retraining, etc. must operate on a digitalisation platform. “Only digitisation can create new labour productivity on one hand and cut operating costs on the other hand. Only cutting costs can reduce the burden of bad debts in the past and maintain a stable financial foundation in the future,” said Dr. Nghia, adding that the ratio of operating costs on total costs of the banking sector of Vietnam is still 16-18%. If digitisation is well implemented, this ratio can fall to a moderate level of 12-14%.
Regarding safety standards in general, according to a member of the NFSC, there is still gap with international standards. Typically, many banks have not satisfied the Capital Adequacy Ratio (CAR) under the Basel II standards. “if calculating specifically, the CAR of many banks is still low compared to the standards of Vietnam not to mention international standards. This ratio in state-owned banks is even lower. Dr. Nghia recommended that in the upcoming restructuring project, in addition to the regulation on meeting Tier-1 and Tier-2 capital requirement, there should be a requirement on financial buffer — a provisioning capital amount for banks.