Benefits from Higher Foreign Room

During the past global financial crisis (2007 - 2012), the Vietnamese economy was strongly affected with rising bad debts, sometimes-threatened liquidity of domestic banking system, and high but volatile interest rates. However, the foreign banking system in Vietnam was generally less affected by liquidity stress and did not widely breach regulations on VND deposit mobilisation.

 

Admittedly, foreign banks play extremely important roles in the Vietnamese economy. They lend foreign-invested and domestic companies, sometimes at low lending rates.

 

According to the Vietnam Association of Financial Investors (VAFI), foreign banks with powerful financial resources are allowed to acquire majority stake of domestic weak banks, there will be a big flow of equity capital pumped directly into weak banks to restructure weak financial positions and reduce nonperforming loans rapidly.

In addition, the liquidity of domestic banks will increase rapidly as a result and they will no longer fear about liquidity loss and will put an end to rate-driven deposit mobilisation competition. This in return will help the domestic banking system quickly lower interest rates. Together with capital injection, corporate governance will be fundamentally changed.

 

This will make the weak banks become stronger and generally strengthen the domestic banking system. This effect was demonstrated by the opening of the Asian banking market to deal with the consequences of the Asian financial crisis (1997 - 2002).

 

However, according to VAFI, foreign banks will not invest in weak banks at all costs because the root of bank infirmity grows from poor corporate governance. Foreign banks may provide financial supports or those banks can mobilise equity capital, they do not change in essence. It is not so easy to find out high-level personnel to run weak banks. Bad governance in couple with weak financial capacity will hardly produce good results.

 

Although they do not invest in weak banks at any costs, foreign lenders with their profuse capital plus good governance capacity can help fragile banks to change from the root and those weak banks will be never hurdles to the process of restructuring the banking system. VAFI said that if this solution is adopted on a wide scale (about 15 banks rated weak), Vietnamese enterprises will quickly enjoy lending interest rates as low as 8 per cent per annum.

 

According to VAFI’s analysis, developed countries in the world do not impose foreign ownership limit, they witness the appearance of giant banks - the result of merger of domestic and foreign banks.

 

More cautious countries usually have lower opening levels than the most developed countries in the world but their opening degrees are bigger than in Vietnam. For instance, in Thailand, foreign investors are not allowed to hold more than 49 per cent of ordinary shares but they can possess unlimited non-voting shares (NVS). Their definitions of foreign investors in other countries are also different from that in Vietnam. Many countries defined that foreign institutions set up business in accordance with their domestic laws, they are domestic investors.

 

According to VAFI, with restricted foreign ownership percentage, banks will hardly find powerful strategic partners or in other words they hardly mobilise capital from institutional investors. This will also lead to uninteresting shareholder structure primarily consisting individual shareholders. These shareholders lack many things to control founding shareholders who may abuse power, commit corruption, or infringe the rights and interests of shareholders and even depositors.