The government’s economic restructuring scheme in 2012 should focus on banking reform first, Vu Thanh Tu Anh, director of research at the Fulbright Economics Teaching Program in Ho Chi Minh City, told Tien Phong newspaper.
“I think the number one priority is to reform the commercial system and the regulatory framework for commercial banks.”
“Currently, potential disruptions to the economy lie primarily in the banking sector,” he told Tien Phong newspaper.
The banking system's liquidity has recently emerged as a big problem with interest rates on the interbank market skyrocketing to 30-40 percent and remaining at such high levels for a long time.
Non-performing loans (NPLs), or bad debts, have even appeared on the interbank market, thus building up risk and constraining liquidity.
In addition, NPLs of real estate projects are likely to rise since the property market is forecast to remain frozen this year.
After a one- or two-year hold, investors now cannot hold out any longer, potentially causing an accelerated process of NPLs of the banking sector that, if not well controlled, could even lead to a big crash, Anh said.
The reform of public investment and big state-owned enterprises (SOEs) will take a lot of time, thanks to the involvement of a variety of interest groups, and therefore it should be considered a problem in the medium and long term.
On the other end of the spectrum, the banking sector of Vietnam is now the potential systemic risk, which could trigger an economic collapse.
This is the first reason for the government to put a high priority on the reform of the banking sector.
The second reason for it is the ripple effect of the restructuring of the banking system.
If the restructuring results in the reallocation of commercial lending for only effective projects, which will not be evaluated based on relational or political factors, it will have served a very important purpose: the effective allocation of a finite resource, namely the financial resources and credit of a nation, to be used the most effective way.
Accomplishing this will help increase the efficiency of the economy and help reduce inflation.
When the relationship between banks and enterprises becomes a commercial relationship it will immediately reduce the influence of the large SOEs sector - the sole economic sector which is said to be less effective, and would then reallocate resources capital to the private sector - which generates the majority of jobs and generates three-quarters of GDP growth.
The third reason is related to feasibility.
Among 43 commercial banks nationwide, there are some 10 that have real problems. The separation of the 10 banks is much easier than the management of thousands of public investment projects or about the roughly 1,300 SOEs.
Moreover, compared with the policy impact of public investment and state enterprises, the monetary policy, conducted via the banking system, will be more transparent, and have faster transmission speed to the whole economy, so it is suitable to solve the problem in the short term.
Handling the banking system well will lay the groundwork for handling the remaining two issues: the restructuring of public investment and the SOEs.
Banking restructuring to be a hard task: governor
Currently, the economy is under high pressure, with high inflation and certain destabilizing factors which can cause macroeconomic instability, including high public debt, large budget deficits, and limited government resources.
Besides, Vietnam doesn’t yet have a complete legal system for the restructuring of the banking sector, especially the problem of bankruptcy and ownership of property and financial obligations, Nguyen Van Giau, governor of the State Bank of Vietnam, told Phap Luat newspaper.
In addition to domestic factors, the State Bank is also under pressure from adverse developments in the world economy. These factors impact the psychological instability of the local people, the governor said.
Initially, the SBV will prioritize the evaluation and classification of banks into three categories: healthy, temporary lack of liquidity, and weak.
The healthy banks will facilitate the development of scale and competitiveness, while the weak financial institutions will be prioritized for restructuring.
If weak banks cannot recover, they must pull out of the business in an orderly manner, so it will not destabilize the whole system.
Some banks which are facing a liquidity shortage will receive support from the SBV to restore sound financial footing, and then must reorganize and consolidate to operate in a healthy way.
The head of the bank said the government and the central bank will not "subsidize" all the costs for the restructuring of banks.
Losses and costs in the processing of the weak banks should have a reasonable share of the State between the parties, owners, investors and depositors.
In particular, bank owners are responsible first and last.
The government and the central bank should continue to reform and perfect the legal frameworks and documents on banking activities, including safety standards and risk management, credit regulations, regulations on loan classification and provision for risk, and the regulations that permit the establishment of banks.
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