Challenges of Vietnamese Banks amidst Int'l Integration

 

Since 90s of the 20^th century when Vietnam started opening the banking service market to foreign financial suppliers, Vietnam has so far homed four joint venture banks, 33 branches of foreign banks.

 

Following routines of opening the banking service market and integrating into the international economy under the international commitments, the country from now until 2010 is required to loosen restrictions levied foreign banks on receiving deposits, gradually remove regulations on foreign ownership ratio in domestic banks, services, the number of banking service suppliers and others.

 

This will create a level playing field for foreign banks. Also, protection of banking services for local commercial banks will be cut down. Foreign banks will be direct competitors of Vietnamese banks.

 

Presently, the country has some 968 credit organizations including five state owned commercial banks, 50 commercial joint stock banks, 900 people’s credit funds, five financial companies, eight financial leasing companies.

 

The state run commercial banks account for some 75 per cent of the credit market share and own some VND15.5 trillion or $1 billion. This figure is too modest compared to the average capital scope of regional banks. Of banks’ equity, some a half is nominal capital financed by the Ministry of Finance by special bonds.

 

Generally speaking, Vietnamese ailing banking system has weak competitiveness whereby they have not yet well prepared for international integration.

 

Currently, Vietnamese banks record big bad debts. According to the State Bank of Vietnam, total non-performing loans (NPLs) of state owned commercial banks in 2005 was VND57.6 trillion dong, making up 20.7 per cent of total outstanding loans, up by 9.62 per cent against 2004.

 

Although having undergone a long time of restructuring, state owned commercial banks have not yet taken any efficient measures to prevent bad loans.

 

To date, fourteen commercial joint stock banks have been merged or withdrawn licenses due to big bad debts and inefficient performance.

 

Items	2000	2001	2002	2003	2004	2005
Total assets	215.9	238.5	266.5	300.9	337.2	379
Total outstanding loans	131.7	152.3	177	206.6	239.3	278.2
Total bad debts	38.93	41.5	44.6	48.4	52.5	57.6
Total bad debts/total outstanding loans	29.6 per cent	27.3 per cent	25.2 per cent	23.4 per cent	22 per cent	20.7 per cent

 

Additionally, the return on assets (ROA) of Vietnamese banks averages 0.65 per cent while this ratio is 0.94 per cent in Asia-Pacific countries and 0.77 per cent in Southeast Asian countries. The average ROA of Vietnamese banks is equal to only 38 per cent of the international required ratio.

 

The average return on equity (ROE) is also very low, standing at 6.54 per cent compared to the international rate of 15 per cent.

 

The capital adequacy ratio (CAR) of domestic banks averages only 4.5 per cent while the minimum international standard is 8 per cent. Meanwhile, the CAR of Asia-Pacific countries and Southeast Asian countries (for example: Thailand, Malaysia, Philippines) is 13.1 per cent and 12.3 per cent respectively.

 

According to economists, five state run commercial banks alone, in order to reach the minimum international CAR of 8 per cent in 2010, must have additional VND65-70 trillion.

 

Over the last years, Vietnamese commercial banks have flocked to push up their chartered capital however capital scope remain low. As for state owned banks, the Ministry of Finance has made great efforts to scale up their capital by convertible bonds but that is only nominal capital. Thus, it takes Vietnamese banks much time to catch up with regional banks.

 

Reportedly, medium, long term lending ratio and short term lending ratio is not proper. The SBV reported that the medium and long term loans by 2004 accounted for 42.7 per cent of total outstanding loans. Banks are now using short-term capital to offer medium and long term loans.

 

Vietnamese banks now use some 40-50 per cent of short-term deposits to offer medium and long-term loans while the central bank allows credit organizations except for the Bank for Agriculture and Rural Development (Agribank) to use the maximum 30 per cent. Such imbalance, if being not closely controlled, would easily lead to a crisis for the whole banking system.

 

Table 2: Total outstanding loans of Vietnamese banking system

(Unit: VND trillion)

Banks	2000	2001	2002	2003	2004
State owned banks	123.8	157	206.5	296.7	369.8
Joint stock banks	18.9	28	40.7	222.4	269
Foreign banks and joint venture banks	29.2	30.1	33.7	39.2	49.4
Total	172	215	281	351.3	688.3

 

Table 3: Credit growth, deposit growth of Vietnamese banking system

(Unit:  per cent)

	2000	2001	2002	2003	2004
Credit growth	27.69	23.24	30.39	27.96	26.24
Deposit growth	31.95	24.88	22.72	24.04	21.92
Medium, long-term deposit/total capital	26.7	28.4	30.7	28.1	29.4
Medium, long-term loans/total outstanding loans	35.8	38.4	41	43.5	42.7

 

Table 4: Deposits of Vietnamese banking system

(Unit: VND trillion)

	1999	2000	2001	2002	2003	2004
State owned banks	93.7	131.4	166.6	207.4	241.4	287.6
Joint stock banks	12.3	19.4	23	26.6	42.9	52.3
Foreign branches and joint venture banks	11.8	17.6	21.7	23.3	36.4	44.8

 

Particularly, management capacity and technologies of Vietnamese banks remain backward compared to international standards. Quality of human resources is too poor, not yet meeting requirements in the renovation period.

 

Clearly, role and market share of foreign banks will be increasingly bigger. Thank to strengths of capital, scope, modern technologies, diversification of different kinds of services, foreign banks will attain competitive advantages in Vietnam market, presenting greater pressures on domestic banks.

 

Moreover, with appearance of foreign rivals, domestic banks will face up more risks. Foreign banks, when operating in Vietnam, will chose big clients making profit, having good prestige, lowest risks, and therefore, leaving the remanding poor clients to domestic banks.

 

Additionally, entry of foreign banks will also make management, supervision of the banking system more complicated.

 

What is more, Vietnam still lacks policies and legal regulations related to operations of banks and these rules remain inconsistent.
Economic Studies