Tightening Banking Operations

Banks are currently paying most attention to the SBV’s issuance of a new circular to replace Circular no.13/2010/TT-NHNN on appropriate ratios in credit institutions’ operations. It is expected that this April, new regulations in the new circular will affect comprehensively banks’ operations.

 

Circular no. 13 taking effect from October 1, 2010 had a strong effect on the whole banking system and the economy. Although several regulations of the Circular aimed to comply with world standards, they could not be practical at that time. Circular no. 13 was considered a sharp brake of monetary policy and influenced largely to operations of banking system and to capital flow of the economy.

 

In 2010, due to liquidity difficulties, banks completed with each other to borrow money in the inter-banking system, which was resulted in jumping up of overnight interest rate. Low liquidity was the result of sharp credit growth rate in previous years. The most shocking points in Circular no. 13 were regulations on raising the capital adequacy rate (CAR) and loan to deposit rate (LDR). The minimum CAR rose from 8 percent to 9 percent. LDR could not excess 80 percent, that means if a bank mobilizes VND100, it cannot give a loan of more than VND80.

 

Circular no. 13 revealed the determination of SBV in re-ordering the money market. Banks had too low liquidity and system risk was very high. However, many banks could not apply the new regulations because their LDR was even higher than 100 percent. Circular had a lateness of 5 months; however, even large commercial banks needed 2 years to have required CAR. As for LDR, banks were not capable of complying with this regulation and SBV had to delay its implementation at the end of 2011. The regulation was not wrong but it was not practical and timely.

 

It was only difficulty made to the banking system, it also had negative effect on the economy. The capital was suddenly withdrawn from the economy, which hindered the recovery and development of the economy.

 

The SBV wants to enhance more safety standards, which is the aim of Circular no.03 and the new Circular. After 3 years, the SBV has gathered experiences, including the time one. The banking system has been being restructured; weak banks have been improved and become capital abundant and more careful after many cases that cause thousand million of VND loss. The whole system has been improved toward new scheme in the interbank system, especially through stricter regulations of Circular no.02 on classifying loans and loans provisioning. In the second inspection plan in 2014, the SBV will inspect comprehensively credit institutions and branches of foreign banks, focusing on credit quality, bad debts and especially loans that have been restructured in duration and kept in the same loan group. Therefore, the system can upgrade safety standard to meet new requirement of the SBV.

 

The interbank system has currently become tranquil after Circular 21. The Circular 02 is being implemented and there is only 9 months left for banks to realise. The new Circular is expected to upgrade system safety ratios. According to a leader of banking system, in the future, besides regulations on safety ratios, SBV will also focus more on limiting cross- possession in the system, elaborate more sanctions and requirements on repairing consequences in commercial banks. One of the sanctions is to require shareholders and owners to supplement capital. The SBV will also limit several operations or area expansion of banks.

The requirement of shareholders and owners supplementing capital will help prevent from “virtual” chartered capital in several credit institutions, especially in case of M&A where actual value of chartered capital has been reduced due to losses and bad debts but is still calculated with the whole in the bank after M&A. In fact, in 2013, in the banking system chartered capital of some banks was reduced due to losses; even several banks were not capable of handling with bad debt.