In the recent report, Saigon Securities Incorporation (SSI) offered an assessment on the prospect of the banking sector in the near future. Accordingly, analysts stated that Vietnam’s macro economy is gradually improving through low inflation and stable currency. That will help enhance asset quality and liquidity of the banking system.
One of the important policies with positive impacts is the application of the Basel II Accord. This Accord uses the concept of “three pillars” including (1) minimum capital, (2) supervision, and (3) market discipline and information disclosure.
The first pillar involves the maintenance of required capital. Accordingly, the minimum Capital Adequacy Ratio (CAR) is still 8 percent of the total risk-weighted assets like Basel I. However, the risks are calculated based on three main factors that banks have to face, including credit risk, operational risk, and market risk. The second pillar involves banks’ policy making. Basel II provides policymakers better tools than Basel I. This pillar also provides a framework for the risks that banks face such as systemic risk, strategic risk, reputation risk, liquidity risk, and regulatory risk; which are summed up by the Accord as residual risk. The third pillar requires banks to properly disclose information under market rules.
According to analysts from SSI, the Basel II gives a list of requirements that force banks to publish information, from capital structure, capital adequacy level to the information pertaining to the bank’s sensitivity to credit risk, market risk, operational risk, and the bank’s assessment process for each of these risks. The application of Basel II helps banks operate safer and healthier thanks to the enhanced risk management, in which the risk management measures especially risk model and internal rating are actively applied while capital is more effectively managed.
In the credit field, banks will have to shift their focus to the assessment of customers’ credit rating rather than relying heavily on secured assets. Moreover, after applying international standards on capital adequacy and liquidity, the Vietnam’s banking system will attract more foreign investors as banks operate in a business environment that meets international standards.
However, SSI also noted that Vietnamese banks should pay more attention to bad debt issue in the near future. Specifically, according to Fitch credit rating agency, the large amount of bad debts will take a long time to settle due to legal obstacles. Currently, the settlement of bad debts is mainly from provisioning. The reduction of bad debts via selling debts to Vietnam Asset Management Company (VAMC) is not expected as an effective tool as VAMC is yet to have full right to determine the bad debts and secured assets, VAMC’s capital resources are too limited compared to the value of bad debts in order to acquire debts at market prices or handle the purchased bad debts.
In addition, banks’ profits are also affected when banks have to set higher provisions for VAMC’s special bonds. Nevertheless, the credit growth, especially of retail loans with high interest rates, may ease the pressure from these costs.
