The information that the State Bank of Vietnam (SBV) is inspecting the cross-ownership status in 30 banks has heightened expectations for clear, transparent operation of banks which is not constricted by bad debts largely resulting from cross-ownerships.
According to the Law on State Bank and the Law on Credit Institutions, Vietnam now does not prohibit banks from holdings shares of other banks, and shareholders and affiliated persons of a bank from holding shares of many other banks. This is also the message Deputy Governor Dang Thanh Binh told the press. However, grave problems arise when bank shareholders or companies set up by banks borrow money from banks to invest in other banks and this approach engenders a complicated, interwoven ownership chain.
From what is defined
Dr Tran Vinh Du, an economist, said “bank manipulation” is in fact a relatively vague concept, although all nations in the world want to avoid this banking activity. Therefore, they limit shareholding ratios at banks to restrict their power of companies/shareholders on banks. Most recently, in 1997 when the Asian financial crisis broke out, one of underlying reasons was the excessively tight and uncontrollable relationship between production and consulting fields. Many banks owned by companies lent to corporations beyond their capacity and capital adequacy ratio. A typical example was the huge debt burden of South Korean economy at that time, mainly debts owed by banks to foreign creditors, and debts owed to banks powered up by the ripple strength of Chaebol model and caused by overlapping between credit and production.
According to Dr Vo Tri Thanh, Deputy Director of the Central Institute for Economic Management, cross-ownership not only heightens risks of banks’ financial system and that causes impacts on macroeconomic instability and, on micro level, trouble cash flows and narrow access of enterprises to credit flows but also adversely affects the social recognition, or in other words, relates to social issues.
to what really happens
Another question raised is whether the list of 30 banks that the central bank is is inspecting cross-ownership include State-owned banks and whether the cross-ownership is left out because the State is the largest shareholder in these banks. Cross-ownership is not only the cause of implications as analysed above by Dr Vo Tri Thanh and the typical case of commercial banks but this may happen to State-owned banks whose representatives can hold dominant stakes in commercial banks in the role of individual shareholder or a representative of a group of shareholders. Recently, Mr Le Hung Dung represented the State capital at Eximbank in the acquisition of Sacombank. Four largest State-owned banks are also shareholders in commercial banks.
Besides, in reality, it is not necessary that an individual or a group of shareholders can only control a bank if he or they must hold equity in that bank. Entrepreneur Dang Thanh Tam can control Western Bank and Nam Viet Bank directly or via his affiliated persons. In the third quarter of 2012, Kinh Bac City Development Share Holding Corporation (KBC) where Mr Tam is the CEO borrowed short and long-term loans from Western Bank and Nam Viet Bank with a huge value which accounted for over 50 per cent of KBC’s debts to credit institutions. He directly or indirectly holds shares in these two banks via his companies or his affiliated persons.
And how is ownership authorized
At present, enterprises, organisations and individuals authorised attorneys representing their stakes in banks to control banks and use banks as funding channel for their companies or personal relationships. However, this phenomenon only occurs in banks without the presence of foreign investment funds or foreign investors because ownership rooms imposed on foreign investors at credit institutions prevent them from forming a controlling ally.
According to experts, the "authorization" is very difficult to "inspect" to the root because it is never easy to monitor and distinguish “proper” authorisation and authorisation with “personal aims and motivations." For example, Sacombank issued two thirds of its shares to employees and the public. A person can gather a half of issued shares by means of attorney authorisation letters and he implicitly takes hold of the bank. This is the way former chairman of the board of directors of this bank applied but he failed while the opponent was successful with this method and won. After the power struggle ended, no one knew for sure who authorized them. Many wondered whether there was a “support” from other credit institutions. “Even current shareholders of Sacombank are not necessarily real shareholders but attorneys," said the expert.
Thus, inheritantly fragmented capital structure at Vietnamese banks tends to be broadened because of statutory equity increase and current regulations on bank ownerships, especially "ambiguity" in activities of investment banks and commercial banks where commercial banks are allowed to make public investments in other banks. This will be a huge obstacle to the overhaul of the banking system if it starts with cross-ownership inspection currently performed by the central bank. Perhaps, the matter will be much clear and more explicit when State management agencies are determined to completely separate investment banks and commercial banks. Accordingly, we will need new regulations on activities of credit institutions and change current operations of the banking system - a thing has not been mentioned in our banking system restructuring.
Dr Le Dang Doanh, former Director of the Central Institute of Economic Management (CIEM)
Cross-ownership in the banking system is very complex. This is the ownership of State-owned enterprises, shareholders of State-owned enterprises in banks and is capital contribution of banks to other banks when the latter raise equity capital in accordance with the Government’s Decree 141/2006/ND-CP. In addition, regulations on ownership limits stipulated by the Law on State Bank and the Law on Credit Institutions can be overcome. To restructure the banking system, it is necessary to handle cross-ownership of financial supervisory organisations, banks, real estate companies and securities companies, while synchronously reforming State institutions concerning management and supervision of the financial and banking system, to ensure the thorough supervision of banking, real estate and securities activities and prevent future formation of bank cross-ownership.
Dr Tran Vinh Du, Economist
This is a matter of ownership war and governance war. Theoretically, the good organisation of a credit institution to a certain degree will help it avoid non-governance motivation that may affect its governance. This requires the following principles: (1) guaranteed fair competition among banks, (2) bank leaders being accountable for their decisions and possibly being sacked and jailed if they manage banks poorly and cause capital loss, and (3) banks suffering loss and illiquidity over the long term should be proposed for immediate bankruptcy. To do so, apart from board members independent of the executive board, there is a need of close supervision on operations and risk management of banks from the State Bank of Vietnam. And finally, the most important factor is personnel – who run banks and apply business ethics.
L.M
Vietnamese
