Over the past years, the Vietnamese economy had a high and stable growth, with an average GDP growth of 7.9 per cent in the 2002 - 2007 period. Especially, the growth peaked 8.5 per cent in 2007, the record high in five years. However, in 2008, the economy began encountering new difficulties and the banking industry also experienced a year of fluctuations and difficulties. The State Bank of Vietnam (SBV) introduced a number of measures to contain galloping inflation.
On March 17, 2008, the central bank required commercial banks to buy VND20,300 billion (US$1.2 billion) worth of treasury bills and increase compulsory reserve ratio from 10 per cent to 11 per cent, and maintain credit growth of commercial banks at a maximum of 30 per cent. Banks tightened lending to real estate and securities investment activities.
Ironclad measures, hardships against banks
A series of rigid measures to rein in inflation sent banks to difficulty.
The hardest difficulty against banks is the scarcity of cash. This forced banks to enter a race to increase deposit interest rates to enhance their liquidity. Deposit interest rate already touched 19.2 per cent for 13-month term, as seen at SeABank tariff. In addition, the prime rate set by the central bank frequently regulated, with peak of 14 per cent per annum in June 2008. With the base rate of 14 per cent, the ceiling lending interest rate was allowed to reach 21 per cent at commercial banks. Meanwhile, the deposit rate at many commercial banks was hiked to 18 per cent -19 per cent to raise capital. To widen the spread between deposit and lending to ensure profit, banks collected a so-called service fee, with many names at different banks like credit arrangement fee, examination fee, consulting fee. Even, borrowers were required to place deposits in cash for their lending. These actions sent the real lending rate to 24 per cent - 25 per cent per annum, thus, narrowing the access of enterprises to credit sources. To put an end to the collection of this kind of fee, the State Bank of Vietnam issued the Decision No. 16/2008/QD-NHNN dated May 16, /2008 requiring all credit institutions to stop collecting any fees concerning the lending. However, the interest rate of 21 per cent per annum was still an obstacle for enterprises. With less credit demand, banks’ operations have been hit hard.
Because of high interest rate and economic difficulties, many borrowers impossibly settled their loans. This increased the percentage of bad debts at banks, thus posing more risks against them. By November 2008, according to the statistics of the central bank, bad debts of the banking system amounted to VND35,000 billion (over US$2 billion), predicted at 2.92 per cent. However, the bad debt ratio would not exceed 4 per cent (the safety benchmark is 5 per cent)
With unpredictable economic movements, banks tended to hold capital to ensure the liquidity and avoid risks. This led to higher costs of banks because they still had to pay deposit interest rates while not lending the capital. As a result, profit targets were negatively affected. Initially, many banks set the higher profits in 2008 than a year earlier. For instance, ACB targeted at VND2,800 billion (US$164.7 million) in 2008, higher than the amount of VND800 billion it earned in 2007. (In 2007, ACB Group recorded VND2,000 billion profit before tax). Sacombank kept the ambition of VND2,500 billion pre-tax profit in 2008 while its earnings were VND1,450 billion in 2007. Vietnam Eximbank also eyed at VND1,500 billion profit for 2008, doubling the amount in 2007. With economic difficulties in the year, their initial targets will hardly reach.
Indirect impact from global economic crisis
In addition to immanent difficulties of the Vietnamese economy, the acceleration of the financial crisis storm, with the eye lying in the United States, swept out the world. Although the direct impact from this storm is not too heavy, its indirect effect is significant. The financial crisis directly reduces the export growth of Vietnam (export revenue accounts for 60 per cent of Vietnam’s GDP). According to statistics, export turnover fell 11.9 per cent in August because of the fall in quantity and price of several commodities. Particularly, crude oil export dropped 279,000 tonnes in volume and US$394 million in revenue; garment and textiles (down US$101 million); footwear (down US$72 million); rice (down US$39 million although the volume increased by 39,000 tonnes); and seafood (down US$33 million). These difficulties of enterprises caused outstanding loans at banks.
Besides, the collapse of world-leading banks like the bankruptcy of Lehman Brothers, the takeover of Bear Stearns (by Morgan Stanley) and Merrill Lynch (Bank of America) or the US government’s takeover of Fannie Mae, Freddie Mac, AIG and Citigroup prompted Vietnamese banks to be more careful in their business decisions, particularly their lending. They will seek measures to reduce the risks arising from the lending process. They will meticulously examine or turn down investment projects or loans where there is a high probability of bad debts. At the same time, they will focus on profit-taking loans but with high possibility of payback and bright prospect.
According to the WTO entry roadmap, foreign banks will be allowed to set up their wholly foreign-owned affiliates in Vietnam. Standard Chartered Bank, HSBC and ANZ Bank have been licensed to set up their wholly owned bank units in the Southeast Asian nation. The formation of affiliated banks will enable these banks to expand their networks in Vietnam and approach new customers. With their capital and governance advantages, these banks are forecast to easily increase their influence and scale up their operations. Domestic banks will face a hard competition from foreign rivals.
After two years joining the WTO, Vietnamese commercial banks have had a new face and grasped all opportunities of the integration process like the deployment of core banking technology (which enables banks to manage their data at their head offices and reduce operating risks) or introduction of new products and services such as consumer credit, payment card, phone banking and internet banking. At the same time, they also take the advantage on their home markets where they own large operating networks, understand local customers and business conditions, and have rich experience in the Vietnamese market. Therefore, commercial banks can still hold the control in providing traditional services like deposit and lending. To date, Vietnamese-owned commercial banks hold 90 per cent of deposits in Vietnam.
Forecasts for 2009
The inflation has been gradually tamed, proven by deflations in CPI index in October and November. Before this context, the State Bank has loosened monetary policies and reduced the prime rate to 8.5 per cent from December 22, 2008. With this move, enterprises have a wider access to credits at banks.
According to specialists, the credit interest rate will drop in 2009, facilitating enterprises to approach bank loans, thus enhancing the liquidity. There will be two new regimes of financing: credit guarantee for small-sized and medium-sized enterprises and negotiable interest for good-performing projects. These two new regimes will enable more borrowers to access bank cash.
However, the banks will be more careful with their lending, as a result from the US financial crisis.
The US financial crisis and tight monetary policies of the Vietnamese Government and the State Bank have sent many small banks into difficulty. In 2009, small and incapable banks will have to merge with other entities. The merger will bring in many benefits like consolidating their domestic banking systems, creating their new strengths, expanding the network and scope of operations, and facilitating the Government’s macro policies on bank management.
The picture of the banking sector in 2009 can be envisioned as follows: Bank services will be strengthened and retail banking services will be more developed. Credits for securities, gold or real estate trading will be more focused and developed. In addition, banks will provide better care for individual customers. The retail banking is the severest field of competition amongst commercial banks in 2009. A number of new products and services will be launched as large-scaled investments are posing more risks.
Nguyen Van Chien - Pham Minh Luan
Vietnamese
