The Vietnamese banking system must be reformed in a comprehensive and substantive manner in order to unleash credit and other capital sources for the economy, said banking expert Dr. Nguyen Tri Hieu.
What do you think about the prospects of the banking industry in 2023?
Experts predict that the banking industry will continue to see good growth in 2023, especially in the field of digital financial services. The application of technology in bank operations will be promoted more strongly, creating more convenience for customers.
However, many challenges remain, particularly in controlling credit risks from stock and real estate market downturns. Basically, bank credit will be tightened as banks increase risk control while a significant part of deposits will be used to aid liquidity, instead of lending.
High interest rates and inflation, slow growth and the plunging stock and real estate markets will directly affect banks.
Banks now hold a large amount of corporate bonds, while the volume of corporate bonds maturing this year is huge, with very low repayment capacity. This situation is alarming.
If corporate bond defaults become common, it will seriously affect the equity of the banking system, potentially pulling the capital adequacy ratio (CAR) of the banking system down from 11.69% in October 2022 to less than 10%, thus increasing the level of systemic risk for Vietnamese banks.
Could “health” be the most important keyword of the banking industry in 2023?
According to CAMELS (capital adequacy, assets, management capability, earnings, liquidity, sensitivity) rating system criteria, Vietnam's banking industry is currently facing three major problems: liquidity, asset quality and interest rates.
Some banks are relying on the State Bank of Vietnam’s (SBV) help to maintain liquidity, which means the ability to pay customer deposits and repay loans. The liquidity shortage stems from two main sources: bad debt and corporate bonds.
Bad debts equal unpaid loans and force banks to mobilize new capital at high interest rates to ensure liquidity. Along with that are risky investments, including corporate bonds, especially those of real estate businesses. When many bond issuers have to postpone debt repayment and face the risk of default, bank liquidity will become more strained.
Due to weak liquidity, many banks have to maintain high interest rates to mobilize deposits. High deposit rates push up lending rates, thus paralyzing the economy and forcing many businesses into shutdown or bankruptcy. It forms a spiral: business difficulties lead to bad debt and late debt repayments; bad debt and debt repayment postponement lead to interest rate hikes to mobilize new deposits to pay off old ones, kicking many businesses out of the market. Eventually, crises and recessions will materialize.
What is the solution to the capital problem for the economy via the bank credit channel?
The quality of bank assets, specifically bank loans, is a dark point in the picture of Vietnamese bank health under the CAMELS rating system. To improve asset quality, firstly, the banking system needs to make bad debt figures and information transparent. Bad debt will not disappear automatically if we keep "Sweeping all the trash under the carpet".
Secondly, banks can find ways to sell bad debts on the bad debt exchange set up by the Vietnam Asset Management Company (VAMC) last year. However, to make the bad debt "market" active, legal regulations on the transfer of collateral and mortgage should be revised.
Thirdly, the National Assembly’s Resolution 42/2017 on the pilot settlement of bad debt should be amended or replaced with another resolution to legalize bad debt settlement. Many terms need to be added to make debt settlement and collection more effective and suitable to the new business and legal environment.
Fourthly, regulators and inspectors must pay special attention to the two areas with the highest credit risk, namely loans for real estate and securities investment.
With the recent collapse of Silicon Valley Bank (SVB) and Signature Bank, the SBV should gradually consider drastic restructuring of the domestic banking system, including mergers or pilot bankruptcy. In order to unleash credit and other capital sources, the Vietnamese banking system must be reformed in a comprehensive and substantive manner.