Ineffective functioning at commercial banks

(ĐTTCO) - Some countries such as Vietnam have financial systems that rely heavily on commercial banks. In times of an economic crisis or in preparing for an economic recovery, the capital channel becomes the most important. However, access to capital has not been as smooth as desired from commercial banks in Vietnam.

Illustrative photo: Viet Chung.

Illustrative photo: Viet Chung.

Clarity in regulations

On 11 March 2020, when the World Health Organization (WHO) declared a global pandemic, many countries scrambled to quickly issue suitable economic policies to cope with this new and unpredictable situation, a move that called for joint decision by the Government and the Central Bank. Capital support for small and medium-sized enterprises (SMEs) was one of the top priorities of the State and was implemented through commercial banks. The main policies included debt rescheduling, interest rate reduction, government guarantees and loosening of loan conditions.

From the very beginning, when this pandemic crisis was just starting to spread, there were countries that maintained their financial momentum, such as Switzerland. Businesses in Switzerland only had to fill out one page request form, and the loan was guaranteed by the government at 0% interest rate or maximum 10% of revenue, and no more than CHF 500,000, and within 30 minutes the enterprise received the money in its account.

Meanwhile in the UK or France, because banks had to wait for specific policies from the government and the Central Bank there was a marked delay. In the UK, after more than one month, businesses still complained of the application process being too slow, and only about 10% of the documents being approved. Only when the action of the government and the Central Bank is specific, capital access for businesses is accelerated.

The situation was similar in France in the first month. The guidline procedures were not clear, and commercial banks were wary of unclear government regulations. There are commercial banks that have actively changed business policies to support their existing customers to the best of their ability, but still have to comply with the regulations of the Central Bank or are under the supervision of a regulatory authority. Many banks followed the Central Bank recommendations to not pay dividends in 2019 to increase capital, and use part of their profits to support customers.

Commercial banks follow SBV

Commercial banks operate for profit and when the economy is in a crisis, they are more or less involved when customers delay repayment, reduce borrowing needs and use banking services, or even declare bankruptcy. Commercial banks can also share difficulties with their customers but they also have limits, because they must ensure efficiency and must not cross the red line.

At this time, the decisive roles are fiscal policies of the government and the monetary policy of the Central Bank. Commercial banks only act as intermediaries for transmission, and this has contributed greatly to the success of the policy. For Vietnam, the story is in a different context. If in many economies, the Central Bank is independent of the government and these two institutions often insist on pursuing their own goals, leading to sometimes disagreements with each other, in Vietnam, the Government can direct the State Bank of Vietnam (SBV). In times of crisis or recovery, an existing harmony on both sides is an advantage.

The question now is how the coordination between fiscal policy of the government and monetary policy of the State Bank of Vietnam will combine to diffuse the situation. The writer offers the following possibilities:

Regarding monetary policy, although the State Bank of Vietnam has reduced interest rates twice since the outbreak of the Covid-19 pandemic, it is also possible to consider the possibility of further interest rate reduction to stimulate the economy. Compared to economies with extremely low interest rates that lasted and could not be reduced any further, Vietnam could still reduce to 0.25% to 0.5%, but must also consider inflation.

Recent information shows that many commercial banks are in surplus of loan capital, but many businesses still do not have access to capital. This shows that the criteria for loan application approval have not been loosened. Currently, the State Bank is collecting comments for the draft amendment of Circular 01/20202/TT-NHNN, but only focuses on debt classification, adjusting time-limit for repayment, and interest exemption or reduction of interest and fees. What is needed here is a criteria for loan application approval, as well as government-guaranteed loans.

Regarding fiscal policy, raising the ceiling on public debt is inevitable, as the government needs to boost public spending and investment to offset the decline in exports. Increasing the government deficit also increases the risk of inflation, but the government can also regulate through price stabilization. Thus, it can be seen that, besides commercial banks actively sharing difficulties with business customers, the role of the SBV and the government are the key. A good policy is meaningless, even counterproductive, in the absence of specific and timely actions.

The advantage of Vietnam's economic management is that the Government can direct the SBV to coordinate the implementation of its policies. In addition, this is the right time for four commercial banks with State capital to carry out their duties to support the fields that these banks were meant for, namely, Agriculture, Industry and Trade, Investment & Development, and Foreign Trade.

(*) Lecturer at Ho Chi Minh City University of Economics and IPAG Business School, Paris, and member of AVSE Global.

Dr. Vo Dinh Tri (*)

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