The “shadow banking” boom has been causing social unrest, especially in rural areas. So, what is a solution to repel this type of credit?
Currently, the regulated financial market of Vietnam only meets about 80-85 percent of the capital demand; the rest is the unregulated credit market.
Due to the agreed interest rate between the lender and the borrower, the shadow banking market operates quite openly, which is beyond the reach of regulators and is only investigated when a dispute arises or there are signs of criminal violations.
According to economic experts, the nature of lending in the unregulated market is not bad. This is an effective and flexible credit channel to address the diverse credit needs of the individuals or businesses that the banks or financial institutions cannot meet. However, in addition to the positive side that this market brings, the shadow banking operation also has many “bottlenecks” that are pressing in society.
However, recently, the operation of the shadow banking market has violated many provisions of the law; Business activities are not really supportive for those who are in need of capital, especially small capital flow. According to the analysis of lawyer Bui Quang Tin, the capital demand of the economy has always increased, therefore, every year, the State Bank of Vietnam (SBV) raises the credit limit to 14-20 percent for the market to meet the needs of legal entities and organisations. However, this credit has not been able to “satisfy” the economy’s credit demand, so the shadow banking market has “exploded” to meet most of this demand.
Currently, the lending interest rate ceiling in civil law stipulates a maximum of 20 percent per year, but in fact, most shadow banking activities breach this regulated interest rate. In addition, debt collection methods also violate civil law, civil and criminal procedures.
The above analysis shows that the reason for the shadow banking market boom is that its operation brings huge profits, over 100 percent per year, even several hundred per cent per year. Because of that, the shadow banking market has sprung up and developed strongly.
Secondly, due to the relaxed way of handling and implementing laws on investigation, inspection and sanctioning of shadow bankers, especially the sanctioning process for shadow bankers.
Thirdly, it is lack of specialised law for shadow banking activities to reduce the violations.
The policy of preventing shadow banking with extremely high interest rates is necessary and urgent in the current context. However, the shadow banking prevention based on the expansion of existing credit packages will be difficult to achieve the desired results.
According to Bui Quang Tin, in order to deal with this situation, in the short term, the management of lending forms among subjects under civil law needs more detail; there should be a circular to guide the agencies to have a basis to deal more closely with lending activities under the management of civil law.
On the part of the individuals and businesses, they should also access more financial and legal knowledge to understand the content and provisions in the agreement between borrowers and lenders; need to be knowledgeable about the law to avoid the violations, especially regarding interest rates, interest rate ceilings.
“That coordination will assist in minimising the increasingly complicated shadow banking situation. SBV as well as related ministries and agencies continue to have policies to support capital to individuals and businesses”, Bui Quang Tin shared.
Also according to Lawyer Nguyen Thanh Ha, Chair of SB Law Limited Company, to repel shadow banking, functional agencies as well as police in conjunction with local authorities should conduct investigations and prosecutions, handling shadow banking lines in localities.
In the current Penal Code, there are still provisions on offense of high-interest loans, so all functional agencies can prosecute, investigate and deal with crime of high-interest lending and shadow banking problems.
Another solution that Ms Ha shared, banks need to offer credit packages that can compete with shadow banking on loan terms. Policy banks or agricultural banks should have credit packages to support customers to borrow small loans or need loans to compete with shadow banking.
Thirdly, big cities need individual financial lenders in the form of technology adoption, which means connecting borrowers and lenders. This is a very good form to fight against shadow banking but currently Vietnam does not have a legal framework. Therefore, the authorities need to develop a legal framework to help financial companies operate properly in accordance with the law and apply technology to lending.
“The current sanctions have been sufficiently deterrent, but to detect and prosecute shadow banking cases, there is a need for enforcement and action of the authorities. Recently, a number of local cases have been prosecuted, there are still many lines and cases that have not been detected and still operate strongly. The problem is not in sanctioning procedures, but how to enforce sanctions,” said lawyer Nguyen Thanh Ha.
In the face of the booming and painful shadow banking situation in the current society, SBV Governor Le Minh Hung said that in the near future, this unit would direct credit institutions to build many suitable credit programmes, meeting the legitimate needs of individuals and businesses with interest rates much lower than the interest rates borrowed outside the banking system. In addition, SBV would propose to the government to consider for the Social Policy Bank to stop some programmes to focus on resolving urgent credit problems.
