Vietnam’s drive to fix its weak banks could be stalling

May 4 (Reuters) – Moves to shrink the number of banks in Vietnam and reform its financial sector may be stalling, which could hurt efforts to put the country’s economy on a solid footing for the long-term.

Financial sector reform is one of three pillars in a program of economic restructuring Vietnam unveiled late last year, and on March 1 the government approved and published a broad plan for bank reform.

But banking reform could be stalling because authorities have higher priorities. The merger of up to eight banks, planned for the first quarter of this year, did not take place. The central bank changed the timeframe to the first half.

For the government, the focus has become stimulating economic growth. Such a shift occurred after first-quarter economic data showed gross domestic product growth at an alarming three-year low of 4 percent and that credit had shrunk from the end of 2011.

The central bank cut policy rates by 100 basis points in March and again in April, surprising the market, and has been encouraging commercial banks to lower lending rates. Restrictions on lending to the real estate sector and for consumption have been dropped.

Sanjay Kalra, the International Monetary Fund’s representative in Vietnam, said a failure to follow through on plans to fix the banks now would invite bigger headaches down the road. “Forbearance with the current problems in the banking system will only lead to an accumulation of problems,” he said.

According to an internal draft of the bank restructuring plan in circulation but not formally made public, government investigators put the non-performing loan rate at 6.6 percent last June. The draft said that if other loan classification standards were applied, the rate would be “in the double digits.” That is consistent with other estimates of non-performing loans, including 13 percent by the ratings agency Fitch.

“The bad debt is so serious that looking at the whole banking system it could technically wipe out all the equity and capital of the banks, if they would use bad debt criteria like in developed countries,” said the board member of a mid-sized Vietnamese bank.

‘SYSTEM HAS WEAKENED’

Vietnam’s banking system has weakened after years of overheating growth,” a report by the National Financial Supervisory Commission said.

During 2005-2007, amid excitement over Vietnam’s entering the World Trade Organisation and soaring foreign investment inflows, many banks opened. State-owned corporations expanded with gusto into non-core, finance businesses.

An environment of lax regulation, poor risk management, weak corporate governance, cronyism and corruption plus government policies to push growth and credit through the mid-2000s made bad loans inevitable.

Then four years of macroeconomic instability, coupled with policies to slow growth and rein in inflation, created a cash crunch.

REFORM PLAN

The sector reform plan approved on March 1 aims to group lenders into three categories, from healthy to weak.

By 2015, a targeted 15 banks will be in the top category and account for 80 percent of the market. A second group will include small lenders in healthy financial positions. Banks in difficult financial positions – the third group – are to undergo restructuring by changing ownership, merging into others or, as a last resort, being bought by the central bank.

“The SBV governor knows what he needs to get done, but it’s a question of whether or not he is allowed to,” said the foreign banker, adding he thought it would take a crisis to precipitate deep and thorough reforms.

The IMF’s Kalra said meaningful bank restructuring “is essential to creating a strong banking system to meet the needs of a growing economy and to catapult Vietnam into middle income status.”

Kalra said it’s “a little early to say” if Vietnam will make necessary changes, adding “The system has a bias toward growth that is a risk and the government needs to be careful. It needs to stand firm and show political will to sort out the banking problems.”

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