The State Bank of Vietnam (SBV) was looking at the most sensitive problems of commercial banks, such as charter capital, capital adequacy, the short-term capital ratio for long-term loans, etc. The tightening of system safety would cause many banks continue to struggle, but this was the inevitable path.
Safety tightness was inevitable
SBV had just issued Circular No. 22/2019/TT-NHNN stipulating limits and prudential ratios in operations of banks and foreign bank branches. Accordingly, SBV had set a roadmap to reduce the rate of using short-term capital for medium and long-term loans from the current 40 percent to 30 percent on October 1, 2022, reducing three percent to four percent annually. At the same time, SBV also increased the risk factor of the real estate business from 150 percent to 200%. The circular not only dealt a blow to the real estate market but also affected banks.
Talking to reporters of the Vietnam Investment Review, deputy general director of a joint stock commercial bank, said that to reduce the rate of using short-term capital for medium and long-term loans from the current 40 percent to 30 percent within nearly three years was much pressure. If not raising enough medium and long-term capital to ensure the above ratio, the bank would be in danger of having to reduce medium and long-term credits, especially real estate credit, leading to a decline in profits.
According to Bui Quang Tin, an economist, in fact, many credit contracts signed by the bank had used short-term capital for medium and long-term loans, so the tightening of this ratio could not be urgent. The adjustment roadmap of SBV was appropriate. However, also according to Tin, there were recently some banks with the rate of using short-term capital for medium and long-term loans over 40%. Therefore, these banks were forced to reduce lending or raise medium and long-term capital mobilisation. In that situation, many banks would participate in the race to raise capital and push interest rates on the market, causing interest rate market movements to go in the wrong direction, Bui Quang Tin warned.
Not only tightening the ratio of short-term capital used for medium, long-term loans, but Circular 22/2019/TT-NHNN of SBV also required commercial banks to apply Basel II standards urgently. Specifically, there were currently only 14 banks meeting Basel II standards (following Circular 41/2016/TT-NHNN). Circular 22/2019/TT-NHNN required that all banks must apply this Circular no later than January 1, 2023. That would be, within the next three years, banks must achieve the coefficient of Capital Adequacy Ratio (CAR) of eight percent.
Reducing the ratio of short-term capital to medium and long-term loans, applying Basel II standards, tightening CAR would put many pressures and difficulties on commercial banks, but it was indispensable. In the opinion of Nguyen Tri Hieu, a banking expert, he supported the approach of SBV as that was the only way to strengthen the banking system. The tightening of capital security may push interest rates up, but there was no way else to go.
Properly accounted, many banks might be short of charter capital
According to Decree No. 86/2019/ND-CP recently issued by the government, the legal capital with commercial banks remained 3 trillion dong. However, in Circular No. 22/2019/TT-NHNN, from January 1, 2020, the method of calculating legal capital in banks would be much stricter.
Many experts had said that the calculation of legal capital and charter capital of Vietnamese banks was not very accurate; bad debts had not been correctly calculated; income from accrued interest was still ambiguous. If calculating strictly according to international standards, many banks would not have had enough charter capital.
For banks, the most important thing was the real value of charter capital. Bad debts easily eroded charter capital. However, many current commercial banks accounted in an undisciplined way. If the bad debt and accrued interest had been accurately accounted, many banks might not have had enough chartered capital of 3 trillion dong, or the CAR had been lower than the prescribed level, said Nguyen Tri Hieu.
Circular 22/2019/TT-NHNN had set out specific principles to determine the actual value of charter capital and allocated capital. Accordingly, banks were only allowed to calculate the residual value of charter capital, allocated capital after full provision for risks, full of income and expenses as prescribed to determine the business results. SBV also required banks to regularly monitor and re-evaluate the actual value of charter capital to report to SBV. When the charter capital was in short supply, the bank must immediately carry out its own compensation plan.
A more rigorous way of calculating the actual value of charter capital was forcing banks to recalculate bad debts and accrued interest seriously. At present, many bad debts were irrecoverable, but many banks had restructured their debt many times, then still counted on accrued interest to increase profits, beautify books, create an incorrect picture of the financial health of the bank, Hieu commented.
Appreciating the tightening of regulations on capital safety of SBV, but many experts also said that, in addition to making regulations, the inspection and supervision agency of SBV must also be stronger in requiring banks to comply, so that, it could avoid the phenomenon of virtual capital or circumvent the law to meet the new regulations of SBV.
