A Surer Path to Banking Repair in Vietnam

Abstract

Vietnam is in transition from a non-market economy towards one which makes extensive use of markets. Many of the leaders and business owners were trained in the Soviet Union and the country faces some of Russia’s transitional problems. The financial system functions poorly. There is a large unbanked population, but a large number of weak commercial banks. There is too much banking of the wrong sort, and too little of the right sort.The collapse of the property market, and stalling of the economy, has left many banks under-capitalised. Most analysts suggest around 15% of bank loans are non-performing (by normal criteria). For some banks it is much higher. The deeply indebted banking system is reluctant to lend directly or to pass through any stimulus from monetary policy towards borrowers. The immediate issue then is how to encourage banks to lend. But of course poor quality lending got the banks into difficulties in the first place, so the more fundamental issue is how to improve the quality of bank lending.The government has adopted three core strategies to address the problems of the existing banks: I. It has set up a process whereby, under certain conditions, banks can move their bad debts off to an asset management company to be gradually sold off. This reduces the bad debt problem of banks and should free them up to lend. This process has been going slowly. II. A second step has been to take over some banks and to encourage weak banks to merge. This process too has been going very slowly although it has accelerated over recent months.III. The government is attacking the quality of future lending issue by tightening the regulatory constraints on banks with tighter supervision, greater transparency, and improved credit standards. The short-term impact of this approach is to make banks less likely to lend. There seem to be two reasons the processes are slow. Many parties involved believe it is better to grow out of the problem rather than expose losses and weaknesses, and so are in no hurry to reform. Second, the society is in transition from a planning-oriented, socialist economy and lacks many of the basic institutions and behaviours which underpin a market oriented society so that resolution is difficult.The way in which reform evolves will partly depend on politics with a change of senior figures in government likely next year after a significant process of transition. Recognising this uncertainty, Australia should-- Encourage the State Bank of Vietnam and the Ministry of Finance in persisting with the process of reform, of exposing weaknesses in the system and in closing banks with insufficient capital;-- Warn Vietnam that new global regulatory standards for banks make it unlikely that foreign banks will enter the market as minority shareholders. The retreat of foreign banks is likely to continue.From an aid point of view institution building is perhaps the most important contribution Australia can make. The points we should focus on are:-- Improving the definition of who has property rights-- Improving the processes around the enforcement of property rights -- Improving vocational educations standards-- Encouraging the allowance of a greater degree of foreign ownership to facilitate skills transfer-- Encouraging reforms to facilitate the spread of basic banking.