More Debate over Vietnamese Banking System
Debate over the future of local banking sector has hardly been a new thing here. Back in late 1990s, when sky-high NPL faced the banking firms, everyone heard about words like restructuring, revamping, even reducing the size of the sector and population of banks. After a while, banks received a shot in the arm with new money injected through sales of shares, renewed round of capital investments by some 15 world major banking firms, including big names such as HSBC, Standard Chartered Bank, Mizuho, Deustsche Bank, etc. Increasing size has delayed the exposition of the local banking sector, due largely to fast-declining NPL to capital base (or assets) ratio.
The problem is no increase, especially in equity size, will be forever. The world financial turmoil in the 2007-09 period served a blow to the local banking sector, forcing many banks to turn to local investors for added need of equity. Banks’ shares plummeted. The State Bank of Vietnam also demanded commercial banks to aim higher – or shoot a moving target, if you like – in terms of new capital adequacy requirement, with “statutory capital” being raised to a minimum of VND 3,000 billion (US$142 million) – an overwhelming task for the majority of smaller banks. And this had to be done in a short period of time, roughly 2 years.
Still, most banks are lucky to have survived the liquidity crunch and persistent high inflation period starting in 2007, which has not ended yet today. The central bank and government’s tacit guarantee of “no bank failure” has been a pivotal backup for the banking sector to keep running as normal, in good time or bad.
Depositors appeared to set their expectation of absolute safety with this government’s guarantee and the deposit insurance provided by Deposit Insurance of Vietnam – a government agency established by the banking laws.
But this year’s debate on the banking system could change things in a big way. Recurring problems of inflation and credit crunch, overshooting interbank lending rates (very short-term) at some point in time reaching as high as 40% p.a., have forced the economy to adjust and the government to implement a series of monetary policy moves to first contain inflation.
But reigning in inflation by monetary policy clearly means to curb the flow of money to the economy, and mostly money to highly speculative assets market. The property market has been quivering after the strong blow of prohibitively high lending rates.
Banks’ lending portfolios start worrying not only policy-makers, banking executives but also normal people who had though putting money in housing and land properties could hedge themselves from any other risk out there in the marketplace. It turned out that now properties investors have been the hardest hit ones. They grudgingly looked at banks’ accounting profits, which were reported to have continued to rise – at least according to their book figures.
When deposit rates were mandated to be capped by the central bank, large depositors turned their back on banking firms, and at the same time credit black market emerged. More Ponzi games collapsed, not without some bankers’ involvements. The most noisy one was uncovered in Oct 2011, when a couple who had mobilized some $200 million in personal capacity – promising to pay a monthly interest rate of up to 7% – over just 2 years went belly up. Almost everyday local media reporters keep informing the public of new cases found elsewhere, including rural areas that news readers rarely heard of the name or involving even army officers who had previously nothing to deal with financial assets.
Now that policymakers and lawmakers are both worried about the situation getting out of control.
The word of restructuring the banking sector becomes essential. It looks like the determination has already been there, among politicians and professional central bankers. But that’s still an easy part. The hard part has not been dealt with as yet: How should Vietnamese go for that? Well, it takes a while to list down sensible measures, and another longer while to get a consensus, and little while to learn about the gap between anticipated impact and the real ones, and so on.
These could go on wrong tracks too. A current debate touched on issues of whether or not bank deposits in US Dollars and gold should be insured. To dedollarize the economy, they should not. To stabilize the banks’ balance sheets, they should. So, to be or not to be?
Also, the insured amount of deposited money is highly questionable. The maximum of insurance for a depositor at a single bank is only VND 30 million ($1,400) – which is expected to be raised to VND 50 million (less than $2,400), still very low.
People could still accept this given the government’s guarantee of “no bank failure.” But this umbrella appears to be take away in the near future, since economists, bankers and policymakers started their debate over how to let go smaller and weaker banks – which served to be liabilities to the economy, and not assets. If this could possibly be happening, some argued “why bother depositing money at banks?” The consequence of that could go far beyond any of Vietnamese anticipation or imagination.
It seems increasingly apparent that not only the market happenings but also policy debates – which deeply touch on normal people’s financial decisions – could push the fledgling market economy of Vietnam into an uncharted territory, where Schumpeter’s Creative Destruction would tell that destruction may arrive first and creation is hard to tell.
The final question remains to be seen – very worthwhile – is: “Who should pay the price, rich bankers or normal salary-earner mostly poor and unprotected?” The answer to this may even lead to changes of the whole destiny of the economy, not just the banking sector, where the process of restructuring starts.
