Financial institutions need revamping


After the recently held Annual Vietnam Business Forum 2019, in collaboration with the Ministry of Planning & Investment and the World Bank, which was aimed at a high level dialogue between the Government of Vietnam and the business community, Dr. Can Van Luc, an expert on banking and finance, commented on the current financial issues facing the country:

The banking system is getting healthier, but still has difficulty in raising capital.

The banking system is getting healthier, but still has difficulty in raising capital.

Better resisting ability

In 2019, Vietnam's financial market developed positively across three fields, namely, banking, securities and insurance. On an average, the market size increased by more than 12% and all these three fields showed robust results and improved standards of functioning, which were according to international standards. Bank stocks and insurance in the stock market increased by about 17%, much higher than the market average of 7.7%.

In 2019, the securities sector was much more refined and more businesses raised capital from the stock market. Capital mobilization through corporate bonds reached around VND 250,000 bn, up by 7% compared to 2018, and via the stock market about VND 300,000 bn, up 12% from the previous year. The credit banking sector increased by 13.7%, a relatively appropriate increase, as we are now looking to gradually reduce large scale credit and also increase quality and efficiency of credit.

In a report published by the World Economic Forum in October 2019, Vietnam went up 10 levels compared to the previous year, from 70th position to 60th position out of 141 countries that were assessed based on nine criteria. Laws such as the Securities Law and Insurance Business Law have been amended. The State Bank has also issued important circulars related to interest rates and credit flow diversification.

In 2019, the financial and banking sectors played an important role in macro-economic stability. The coordination of monetary and fiscal policy was also smoother than before, ensuring very low inflation rate of 2.79%. In addition, the economy resisted to outside forces much better, due to improved involvement  of the market and institutions within the market. Foreign exchange reserves reached USD 79 bn, equivalent to 3.7 months of imports to Vietnam. This level was not high, but is a record in recent times. The exchange rate continued to be stable, and the central rate increased only 1.45% compared to the beginning of the year.

Interbank interest rates in the past year were generally stable with a downward trend. Prime lending rate was stable, and deposit rates increased slightly in the first ten months of the year and also decreased slightly after the State Bank lowered the ceiling interest rate in November. Credit increased by 13.7%, showing a relatively positive growth. The adjustment in the credit growth span in 2019 is considered necessary after many years of growth, with an average increase of 15-16% per year and the credit/GDP ratio at 133% by the end of 2018. This is relatively high compared to the size of the economy as well as the growth rate of the economy.

The quality of the financial-banking system is also improving. Non-performing loans on the balance sheet of commercial banks were at 1.89% at the end of 2019, and gross NPLs were at about 4.6%. The State Bank and the Government wanting to push this ratio to 3% by 2020 is feasible. The banking system is far more healthy, safer, and with better standards in place that are closer to international practices. Now, there are 18 joint stock commercial banks that have met Basel II standards on capital adequacy ratio required by the State Bank. The SBV has issued Circular 22/2019 to align credit flow to a healthier estate market, closer to real demand and tighter credit liquidity management.

Many challenges ahead

There are still many challenges, such as the financial market is still unbalanced; the credit sector still accounts for a large portion of the total assets and plays a main role in providing capital to the economy, leading to potential risks during the period of credit liquidity. This is due to huge credit and nearly 50% of medium and long-term funding still comes from the credit system.

We need to urgently improve our financial institutions, make the financial market in 2020 more active and healthy, thereby make an important contribution towards the development of the economy. Though the banking system is increasingly becoming more robust, it is proving to be still very difficult to increase capital.
Currently, there is no decree on the debt trading market, while we need to diversify investors and financial institutions in order to reasonably allocate risks. The problems related to the resolution of disputes under simplified procedures, different interpretations and applications in the trial and judgment execution under Resolution 42 of the National Assembly, make the process of handling non-performing loans and auction of security assets, still face many difficulties.

Commercial banks still have difficulty in raising capital. Capital adequacy ratio (CAR) of the whole system has not reached the safety standards yet. From 2020, when commercial banks must comply with the Circular 41/2016 of the SBV, the CAR should be fully calculated according to Basel II as the CAR ratio of commercial banks will be much lower. Meanwhile, many banks face big challenges in raising capital.

In 2020, Vietnam needs to urgently improve and revamp the financial institutions, focus on issuing a decree on the debt trading market, and remove problems related to dealing with non-performing loans in accordance with Resolution 42 of the National Assembly.

In particular, it is necessary to drastically implement measures to remove difficulties in equity for commercial banks, especially state-owned banks, and minimize administrative procedures in approval of semi-strategic plans, allowing to retain dividends, and issue stocks for staff.

In addition, it is necessary to develop a long-term mechanism for raising capital for commercial banks, instead of yearly, and minimize administrative procedures. We also need a specific policy framework and measures to limit systemic risks, and increase resilience of the financial system to external shocks, especially in foreign exchange reserves. We need to also speed up bad debt management, as well as instill risk management in accordance with international standards.

 Dr. Can Van Luc

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