A series of full-year financial reports plus remuneration reduction plans indicate that the banking system has struggled to deal with bad loans by sacrificing the interests of shareholders and employees.
SBV Governor announces to regulate in the spirit of “economy keeps money, banks keep gold”.
Speaking on monetary policy in 2012, Governor Nguyen Van Binh of the State Bank of Vietnam (SBV) said, “I think that the SBV cautiously regulated monetary policies in 2012. As regards interest regulation mechanism, when there were signs of liquidity strains, the SBV applied administrative measures: Interest rate ceiling.”
System stability and bad debt settlement
In fact, the consumer price index (CPI) and expected inflation decelerated right in the first quarter of 2012 and the central bank started lowering policy rates and the interest rate ceiling. Liquidity at some large banks gradually improved, while gold and forex investment channels were no longer attracting cash flow.
Regulatory interest rates were slashed dramatically, but liquidity at banks improved. The balance of deposits was higher than mandatory reserve requirements, the ratio of credits to VND deposits reduced to 95 per cent; interbank rates dropped rapidly from 10-11 per cent at the end of 2011 to a very low, stable level in the present time.
What concerns us most now is the lower than expected credit growth, because bad debts rose and some banks did not strictly abide by deposit rate ceiling regulations of the SBV.
Because of low credit growth and congested capital inflows, businesses seriously lacked capital. Many reported huge inventories and cash demand thus fell. In addition, rising non-performing loans hindered access to fresh bank loans. Rising bad debts were resulted from repressed difficulties of the economy and inner problems of the banking system as well. Bad debt is becoming a problem that needs urgent and thorough settlement to make the financial system healthy.
SBV Governor Nguyen Van Binh confirmed: We admitted that bad debts increased, but the growth was marginal. In 2012, we witnessed a big change in profitability and performance rewards in the banking industry. No hefty profits have been reported. Or in other words, banks sacrificed profitability for risk provisioning against non-performing loans.
In practice, in some countries, the rapid handling of bad debts must be done by the Government by purchasing debts, but it is hard for Vietnam due to limited resources. If the central bank acts aggressively enough, bad debts will stay at VND250 trillion (US$12.5 billion), but if not, the amount will increase at least 8 per cent, said the governor. This was why not many reported decent profits in 2012. Many lowered dividend payout ratios or even slashed New Year bonuses to spare resources to handle non-performing loans. In previous years, staff cuts were counted at dozens or hundreds, but the firings were measured in a percentage of the workforce in 2012.
According to the SBV, in 2012, the risk reserve made by Vietnamese banks might reach VND90 trillion (US$4.5 billion), equivalent to nearly 4 per cent of bad debts. Lenders have handled some VND76 trillion, including VND12 - 15 trillion in the year to date. SBV will take firmer action on outstanding non-performing loan of the banking system in the coming time.
Widening credit access for manufacturing
Interest rates on Vietnamese dong loans have been brought down to support the manufacturing sector. The SBV took firm action to quickly lower interest rates, despite doubts cast over the recurrence of inflation. Since the start of 2012, the refinancing rate was decreased from 15 per cent to 10 per cent, the rediscount rate was cut from 13 per cent to 8 per cent, and the ceiling rate for short-term deposits was lowered from 14 per cent to 9 per cent.
The governor said, "Lending rates decreased steeply from the beginning of the year but the speed was quicker than expected to match macroeconomic development and inflation development."
Needless to say, close instructions of the central bank and prompt credit and rate solutions of credit institutions have eased borrowing costs of enterprises. As of end-December 2012, outstanding loans in Vietnamese dong bearing interest rates of over 15 per cent per annum accounted for 18.75 per cent, down from 65 per cent recorded on July 15, 2012. As of end-September 2012, banks adjusted maturity terms for VND252,159 billion.
Borrowing cost reduction is now an urgent requirement to support enterprises. According to the governor, the SBV played its proper role toward this direction. The gradual easing of borrowing interest burdens has set the stage for boosting production and business operations. For this reason, capital flows began to move in early January 2013.
To bring capital to the right address and support manufacturing activities, the central bank imposed a ceiling rate for four priority areas: agriculture and countryside development; export-driven production projects, projects of SMEs, and supporting industry development.
In 2013, the central bank will still cling to inflation to regulate rates. If inflation continues to fall, interest rates will be slashed from the current 8 per cent per annum. Accordingly, the central bank will continue keep the lid on credit growth to ensure safe and effective credit expansion.
Bao Chau
Vietnamese
