Commercial Banks Struggling in Search for Capital

Commercial Banks Struggling in Search for Capital

At present, the capital scale of the system of commercial banks in Vietnam remains too small in comparison with the market demand. In this context, authorised agencies and banks have to find solutions for effective mobilisation of capital. At a seminar entitled 'Promotion foreign investment in commercial banks in Vietnam' organised by the Vietnam Chamber of Commerce and Industry (VCCI) and VAFI in Hanoi on June 9, 2005, attendants proposed solutions to this issue.

Investment of foreign enterprises to joint stock commercial banks in Vietnam are subject to the Decision 228 dated December 1, 1993 by the State Bank of Vietnam, stipulating the buying of shares and contributing capital of foreign investors. At many previous seminars and symposiums, it was still controversial about capital contribution, operation duration and power of foreign investors. For example, it is stipulated that total charter capital of joint stock commercial banks in Vietnam, which is held by foreign investors, must not exceed 30 per cent. With a small stake, foreign investors cannot control or make bold decisions about development strategies of commercial banks.

There are two development ways in the banking industry, including organic growth and non-organic growth. In the organic growth way, banks must build their own business facilities, including infrastructure, human resources, equipment and network. As a result, all banks start with a modest scale. This is a traditional method, whose biggest difficulty is a long time and incapability of combining resources for investment. On the contrary, the second way has better specifications as it allows investors to take advantage of existing infrastructure facilities and business network to expand its operation much quickly than the first way. Therefore, the attraction of investment, especially foreign investment to Vietnamese commercial banks should be given with a careful attention.

However, so far, only some joint stock commercial banks in Vietnam have had foreign shareholders, mainly big financial organisations such as the Standard Chartered Bank, IFC or investment funds, including Dragon Capital. Some ideas in the seminar suggested that regulations of the local legal system on investment in the banking system had created certain barriers to foreign shareholders.

Talking about foreign capital, Bradle C.Lalonde, managing director of Vietnam Partners LLC, mentioned both financial and human capital. He said that there was no lack of capital for investment in Vietnam. Instead, he affirmed a lack of experience and well-trained staff members, capable of running modern financial organisations to compete with international financial organisations was the biggest difficulty.

Phung Dac Loc from the Vietnam Insurance Association
Insurance enterprises, apart from paying compensation for their customers when they face risks during their contract's duration, have to pay principal and dividend for their customers when their contracts end. To ensure the safety and profitability, insurance companies have to enter the banking and credit sector. Also, the establishment of commercial banks within commercial banks will benefit insurance companies as it will create the best channel for distributing insurance products when banks sell products and collect fees and make payments to customers. At present, many insurance corporations in the world have commercial banks and many banks have set up insurance companies to support each other in their business activities.
The Vietnamese insurance market is still fledgling, so it has a high growth rate and is attractive to foreign firms. The promotion of foreign investment in Vietnamese commercial banks should combine the granting of licences for insurance-bank corporations.

Nguyen Hoang Hai, general secretary of VAFI
I think that authorised agencies should develop a target of increasing charter capital for banks in the 2005-2010 period. Based on the mobilisation of capital of banks, and the existing policies and mechanisms, as well as favourable conditions for the banking industry, by 2015 Vietnam needs six commercial banks to have their own capital reaching over US$1 billion, and 10 joint stock commercial banks having their own capital reaching over US$100 million. Other joint stock commercial banks will have their own capital of over US$50 million. For joint stock banks, which face financial difficulties, their shareholders should decide to merge with larger banks and the joint stock commercial banks for rural areas should increase their capital to US$ 10 million each.

To promote the attraction of foreign investment, the State Bank of Vietnam should issue decision on the equitisation of State-owned commercial banks and amend the existing regulations in line with the international practice and Vietnam's conditions. Accordingly, a limit of percentage of share of Vietnamese shareholders should be removed while the stake of foreign investors should be increased. Also, procedures on the trading of bank shares of foreign investors should be reformed.

Lam Quynh Anh, representative from Freshfields Bruckhaus Deringer
Under Decision 228, foreign investors have to observe some principles when they invest in commercial banks. Accordingly, they cannot trade their shares within five years and a foreign organisation can hold maximally 10 per cent of charter capital of banks. I think that five years is a long time, so it will hamper capital flows. As a result, each foreign investor has to think carefully before making their investment decisions. However, they will be unable to predict all the financial developments in the next five years. Therefore, it will result in an increase of the reserves of fixed assets of the financial organisations for five years.

Ten per cent of charter capital of banks is too low to ensure the control of shareholders. With such a cap, investors will focus on large-sized banks. They are also reluctant to invest in unprofitable financial organisations because with such a low capital, they cannot control the organisations to make decisions on bank reform.

• Nguyen Thoa