Easing Cross-ownership

Although the financial market is in its fledging phase, cross-ownership at Vietnamese banks is rapidly tangled, complicated and lack of transparency, thus posing the system at risk. A popular form of cross-ownership in Vietnam is State-owned banks hold controlling shares in joint stock banks or joint venture banks. Most economic groups and large State-owned enterprises SOEs invest in joint stock commercial banks. Many banks are even controlled by an entity or person. Banks also invest in many securities companies and fund management companies.

 

Cross-ownership importantly resulted in the transformation of 13 rural banks into urban banks in 2005-2007. Before the conversion, these lenders only had small registered capital, but they had to rush to meet the mandatory registered capital of at least VND3 trillion 2011. They had to find ways to boast its owner’s equity by 10-20 times in just five years. To hugely increase the owner’s equity in a short time, these banks had to rely on State-owned and private-run corporations and they had to become their financing backyards. As of June 2012, 56 cases of bank-business cross-ownership were identified.

 

The nature of cross-ownership can be visualised by Nguyen Duc Kien’s legal case. Kien set up many financial investment companies and used these legal entities to borrow money from banks. He and his family members used this money to acquire shares in a second and used the shares to secure the loan at the first bank. Money ran from entity to entity with its true value much smaller than the figure inflated by complicated ownership relationships.

 

Looking back on the whole process of bank restructuring since 2012, the Government confirmed that the objective of Scheme 254 was basically achieved, according to the report on the implementation of the National Assembly’s resolutions concerning bank operations.

 

One of remarkable results of credit institution restructuring is a substantial reduction in cross-ownership and cross-investment in credit institutions. Governor Nguyen Van Binh of the State Bank of Vietnam (SBV) said ownerships of commercial banks were more transparent and public.

 

Cross-ownership of credit institutions was reduced from seven pairs in 2012 to only three now. Bank-business cross-ownership fell from 56 pairs in 2012 to 12 pairs now.

This was a result of non-core business divestment by SOEs. Commercial banks actively divested their stakes in companies to concentrate resources on core business activities. Credit institutions divested nearly VND8,800 billion from companies from 2012 to June 2015.

 

The process of stripping cross-ownership in the banking system was accelerated by quick transfers, divestments, mergers, consolidations and acquisitions. SBV established a regulatory system and system safety policy, particularly regulations on loan classification, provisioning and use of risk provisions, which completed a more important and reasonable step than international practices and standards and importantly contributed to preventing rising bad debts in the future, restricting cross-ownership and bank control by majority shareholders, limiting investments in potentially risky areas such as real estate and stocks, and enhancing the transparency of credit operations of credit institutions.

 

In spite of obtaining significant progress, it will still take a long time and much effort to enhance the publicity and transparency of ownership at commercial banks. According to bankers, this historical problem needs comprehensive, prudent solutions and appropriate roadmaps to gradually handle and control, and avoid disorderly operations.

 

According to a report submitted to the National Assembly, resulting credit institution restructuring in the 2011 - 2015 period laid an important foundation for the sustainable development of the banking system in the future.

 

According to experts, bank cross-ownership is essentially rooted from market weakness. Therefore, long-term preventive solutions need to focus on building a stronger, more transparent credit and capital markets where transaction costs are low. This is a future challenge for the Vietnamese banking system.