Many experts said that the slow charter capital increase of state-owned banks will reduce the ability to supply credit to the economy, thereby affecting the economic growth and reducing tax revenue.
Urgent need
This issue has been raised repeatedly in recent time, because although raising charter capital in state-owned banks is in the government’s policy, it is still very slow and posing a risk of threatening the safety of state-owned commercial banks and the entire system.
Despite applying synchronous measures such as controlling credit growth rate, restructuring the portfolio of risk-weighted assets in the direction of reducing the proportion of high-risk assets, issuing secondary bonds to raise Tier-2 capital to improve capital adequacy ratio (CAR), etc.; except for Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank), the remaining state-owned commercial banks have not met the minimum capital requirement under the Basel II standards.
Even if using the Basel I standards, the current average CAR of four state-owned banks, according to the latest statistics of the State Bank of Vietnam (SBV), is only 9.6 percent, lower than the average CAR of the entire system which is 12.19 percent, and just slightly higher than the nine percent minimum level stipulated in Circular 36/2014/TT-NHNN.
Therefore, according to the Vietnam Banking Association (VNBA), if state-owned banks do not quickly increase their charter capital, their safety of operation may be affected and that may also negatively affect the whole economy; because to ensure the safety ratios, state-owned banks must tighten credit growth, and that influence the ability to supply capital for the economy.
However, the capital increase of state-owned banks will not be successful without the support of the State, because the State is still holding dominant shares in these banks. “In the short term, state-owned banks expect the State to allow them to retain annual profits or distribute the State’s dividends in shares to increase capital, partly solving the current difficulties,” VNBA proposed.
In fact, since the four state-owned banks are holding 40 percent of total assets and 50 percent of the credit market share of the entire system, it plays an extremely important role in providing capital to the economy.
Lawyer Truong Thanh Duc Basico law firm said that if being unable to increase charter capital, state-owned banks will have to slow down credit growth, increase lending rates, thus adversely affecting the economic growth, reducing tax revenues, at the same time being at risk of violating capital safety ratio, negatively affecting the operational safety and international credit rating, etc.
VietinBank’s case is an obvious example. Since VietinBank has been unable to supplement charter capital from 2014 while still having to provide capital to the economy, its current CAR is very close to the minimum threshold. Therefore, to ensure the capital safety goal, in the fourth quarter of 2018, VietinBank had to narrow down the size of credit, resulting in a modest credit growth of just six percent in the whole year, the lowest level in the last 10 years. The bank’s outstanding credit continued to decline by 0.44 percent in Q1 2019.
Finance and banking expert Dr Nguyen Tri Hieu also said that if not urgently raising capital for state-owned banks, the risk is growing. Due to the compliance with the Basel II, these banks will have to account correct costs, bad debts and risky loans will erode their equity and the capital will be even lower. However, raising capital by distributing dividends in shares is not reasonable because it continues to slow down the equitisation and restructuring process of state-owned banks. “The best way is to partly sell of State’s shareholding, lowering the ownership rate of the State shareholder to attract foreign strategic investors. Because no investors are willing to contribute capital to state-owned banks if the State keeps holding at least 65 percent of shares in state-owned banks,” Dr Hieu emphasized.
