In the last three years of phase two ‘Restructuring the system of credit institutions (CIs) associated with handling bad debts’, the banking industry has been entering the ‘sprint’ phase to achieve the plan.
The project ‘Restructuring the system of credit institutions associated with the handling of bad debts in the period 2016-2020′ was approved in July 2017.
Debt reduction…
After the restructuring period 2011-2015, the banking sector has made steady steps and moved to a new page. The restructuring continued in 2016, followed by efforts to restructure and deal with bad debts in the foundation of the re-established banking system.
In 2018, the banking sector focused on solving barriers and restructuring challenges, bad debts, and effectively implemented Resolution 42/2017/NQ-QH on handling bad debts.
According to the State Bank of Vietnam (SBV)’s statistics by the end of 2018, the whole system of credit institutions has handled 149.22 trillion dong of bad debt, the internal bad debt ratio of the credit system reduced to 1.89 percent from 2.46 percent at the end of 2016 and 1.99 percent at the end of 2017. This was the lowest system-wide bad debt level from 2012 to 2018.
Remarkably, Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) and Vietnam Technological and Commercial Joint Stock Bank (Techcombank) continued to be ‘debt free’ with the Vietnam Asset Management Company Limited (VAMC). Beside them, Military Joint Stock Commercial Bank (MB) and Asia Joint Stock Commercial Bank (ACB) also no longer entangled with bad debts, lowering banks’ bad debt ratio. Vietcombank, Techcombank, MB, and ACB are in fact recognised as the organisations with breakthrough business results in 2018, proving the positive correlation between low bad debt ratio and business performance improvement.
… and capital raising
Minimum capital requirement is one of three pillars of Basel II standards. The requirement to meet this main pillar is getting more urgent when the application period of Circular 41/2016/TT-NHNN is close.
However, a number of large commercial banks are now facing difficulties in raising capital to meet Basel II standards. One example is VietinBank because the room for foreign investors in this bank has been exhausted, the ownership ratio of state shareholders has fallen to 64.46 percent, lower than the current required level of 65 percent. Another example is Agribank with its slow equitisation process. In addition, small private commercial banks are struggling to raise capital. Some examples are Viet A Joint Stock Commercial Bank (Viet A Bank), National Citizen Bank (NCB), Bao Viet Joint Stock Commercial Bank (BaoViet Bank), Saigon Bank for Industry & Trade (SGB), and Vietnam Thuong Tin Joint Stock Commercial Bank (Vietbank).
An expert evaluated that, in 2019, capital increase is also a compulsory condition for banks to increase their competitiveness and meet the demand for working capital when the SBV terminates application of the low ratio of short-term mobilised capital for medium and long-term loans.
Delaying the implementation of Circular 06/2016/TT-NHNN (prescribing the ratio of short-term capital for medium and long-term loans to be decreased from 60 percent to 50 percent in 2017 and 40 percent by 2018) on time reduced the pressure on banks in this race. However, in 2019, banks do not expect an ‘elasticity’ of new application term. The issuance of the Circular No. 19/2017/TT-NHNN stipulating the rate of 40 percent in 2019 shows the flexibility of the SBV’s management, but clearly confirms its target to tighten safety indicators to ensure the sustainable operation of the banking system. This goal cannot be delayed again when the restructuring process has reached its destination. Especially, when the system has been showing signs of bad debt returning, real estate credit with high proportion needs to be tightened.
In such a context, the fact that some leading credit institutions such as Vietcombank, Vietnam International Joint Stock Commercial Bank (VIB), and Orient Joint Stock Commercial Bank (OCB) are recognised to meet Basel II standards and likely to be granted a higher credit growth rate than the whole system becomes a big motivation for banks in this race.
