Ironclad Tackle on Cross-ownership

The SBV issued Circular 06/2015/TT-NHNN, effective from July 15, 2015, requesting bank shareholders to reduce their ownership ratios to the allowed limit by the end of this year. This will be the basis for eradicating cross-ownership in the banking system. Arguably, this is a carefully calculated step of banking authorities after a long process of merging and consolidating banks owned by the same owners.

 

Circular 06/2015/TT-NHNN forced investors to reduce shares owned to the allowed limit, forced affiliated persons or proxies of such investors to withdraw from the Board of Directors or executive positions, and prohibited them from receiving cash dividend for the volume of excess shares owned. Banks with shareholders owning shares above the permitted limit must have a roadmap for the reduction to the limit, except for cases approved by the Prime Minister or the State Bank of Vietnam. By the end of 2015, banks with shareholders owning shares above the permitted limit must provide detailed information on the percentage of owned shares, enclosed ownership reduction roadmaps, to ensure compliance with the Law on Credit Institutions.

 

During the transition period from July 15 to December 31, 2015, shareholders and affiliated parties owning shares above the permitted limit may not increase their ownership ratio, except for such cases as bonus shares, dividend shares, and purchases at secondary public offering (given that the new shareholding ratio must be under the limit).

 

According to the law, the ownership limit for an individual is 5 percent, the limit for an organisation is 15 percent, and the limit for combined ownerships is 20 percent. According to the central bank, five out of 33 commercial banks violated ownership regulations while eight banks have combined ownership ratios of over 20 percent.

 

Cross-ownership is varied. Some individuals and their families have excess ownership ratios at two banks at the same time. For example, tycoon Tram Be and his family members own 20.8 percent of stake in Southern Bank and he keeps 6 percent of stake at Sacombank.

 

The next entities to be regulated are State-owned enterprises (SOEs), which failed to divest from banks as scheduled and requested by the Government. For example, Electricity of Vietnam (EVN) holds 16 percent of stake in ABBank and Vietnam National Oil and Gas Group possesses 52 percent of stake at PVcomBank.

 

Another form of cross-ownership is bank-in-bank. State-owned commercial banks only have interests in some joint stock commercial banks or joint venture banks and some State-owned commercial banks are owned by foreign banks. Typically, Vietcombank was assigned to take on Eximbank when it was in trouble in the late 1990s. Vietcombank also holds interests in some other banks, including Saigonbank.

 

Circular 05 is the strong message to cross-ownership in the banking system. This is a hard nut to crack in the Vietnamese banking system and a daunting challenge to the ongoing systematic restructuring process. The SBV is showing its resolution to rule out so-called interest groups and backyards that cause negative and dangerous impacts on the entire banking system and the economy as a whole.

 

Cross-ownership is proven to destabilise the monetary market. It creates virtual capital and ignites interest rate races, as in previous years when money was not channelled into production and business operations but moved among banks. Many banks are owned by family companies which use banks as instruments to acquire and appropriate other banks or other estates.

 

However, the deadline is perhaps quite short for them to cut their holdings because they need time to find buyers and negotiate prices, especially when bank shares are falling. Finding buyers is easier for shareholders of big banks but it is not the case for those owning small banks where bad debts tend to rise sharply.

 

To prevent the return of cross-ownership and the control of interest groups, the SBV necessarily introduces stricter regulations on capital rise and share ownership at banks. The central bank also needs to tighten its inspection and control to timely detect wrongdoings and prevent new cross-ownerships.