Banking industry needs strategic roadmap

Banking industry needs strategic roadmap

As the local banking industry grows, Ashok Sud, chairman of Banking Working Group of the Viet Nam Business Forum (VBF), told Viet Nam News reporter Ha Phuong about the urgency of building a suitable roadmap.

In the paper “A forward looking roadmap for the banking industry,” the Banking Working Group recommends three major areas that need to be addressed by the State Bank of Viet Nam (SBV). Can you tell us more about them?

The Banking Working Group, which represents more than 30 institutions from over 15 countries, basically projects in our roadmap what the banking and financial sector should look like in five to seven years in Viet Nam, so that participants can make their own plans accordingly. This is not an easy task as it requires building consensus, evaluating options and indeed making changes as unexpected situations arise.

In the context of Viet Nam, these recommendations fall into three broad categories: a forward looking roadmap for the banking industry; efficiency; and clarity in the way the market and regulations should work to ultimately reduce the “cost of delivery” of banking products and services; and clear guiding principles and removal of major impediments for the Consumer Banking and Consumer Finance industries.

There are three key areas that need addressing. The first one is speedy implementation of Decree 22 dealing with the process involved in converting the three international banks that have been granted a licence to locally incorporate into a subsidiary.

The second one is clarity on when and to what level the current cap of 20 per cent holding by an international bank in a local bank under Decree 69 would get lifted. Such clarity will lead to a much more constructive and planned approach for the banking sector in Viet Nam. The third one is consolidation: currently there are over 80 banks in Viet Nam where the top 20 banks are estimated to do the bulk of the banking business. The bottom 25 per cent of the banks have limited business, are undercapitalised and may not be stable going forward.

Why do you think 80 banks is too many for Viet Nam when other countries have more?

Banking is like any manufacturing industry where if you have too many small players you do not get efficiency of scale, cost and skills. Additionally, a bank is liable for the safety of its depositors’ money and if it runs itself aground on either cost efficiency or not enough attention to risk it would create a loss of confidence in the banking system as a whole. For the size of Viet Nam’s population and banking customer base, it would be practical to have fewer banks which are more solid in terms of capital, distribution, people skills, etc. than to have a large number, ie. quality not quantity. It is recognised that this is the preferable direction for the development of Viet Nam’s banking sector.

However, consolidation or shutting down could send the opposite signal, like the bank run in Indonesia in 1998. How could that be avoided in Viet Nam?

Consolidation does not mean shutting down a bank but amalgamating it with a bigger bank. It should actually make depositors more comfortable and secure and would give the banks concerned the advantage of size, scale and skills. This is very similar to the process of consolidation in industry where market leadership is attained in exactly the same process. Consolidation should not have a negative connotation but actually a very positive one. And this should be done in close consultation with the SBV and the respective banks involved. In summary consolidation is not a “bail out” process but more a creation of positive energy and scale.

How do you assess current legislation on Viet Nam’s banks?

As a result of the recent turmoil that we are witnessing in the global financial market, regulators and indeed investors are suggesting and encouraging higher levels of capital adequacy norms compared to what was acceptable earlier – this is not a change of rules yet but more market practice and acceptance of the reality. In Viet Nam too, the regulator would, I am sure, be looking at such issues. As we know, Viet Nam has already tightened its definition of non-performing loans but here again new guidelines may have to be prescribed for recognising “market to market” losses and prescribing a two-or three-year window for banks to move gradually to the new norms.

What do you think about the interest rate cap policy in Viet Nam?

The basic principle of banking is that loans must be priced based on the risk that the bank takes. Within any class of borrowers there is a range of risk levels with the best risk and the worst risk being priced differently. If this is not done then effectively the pricing of the best risk is subsidising the pricing of the worst risk. By imposing a ceiling on interest rates on loans which is 15 per cent per annum (based on 150 per cent of SBV base rate of 10 per cent), banks will not find it viable to lend to the “higher risk category” thereby starving them of vital funds and ironically pushing them to borrow from the unorganised sectors at over 60 per cent per annum!

Experience in all markets where there is an interest rate cap imposed suggests that it is retrograde to the development of the banking sector and the economy. The removal of the interest rate cap and the encouragement of competition amongst banks would ensure that risk is priced appropriately based on its true level and competition would ensure that it is not over-priced. In the context of Viet Nam, I believe the interest rate cap is stymieing lending to individuals and SMEs. So, it is actually in the interest of individuals and SMEs that the interest rate cap be removed to enable them to access adequate funding from the banking system based on their classification and risk profile.

The Banking Working Group recently held a workshop where international experience on markets with or without interest rate cap is discussed with the State Bank of Viet Nam. However, the interest rate cap was not imposed by the SBV but by Viet Nam’s Civil Code and hence this can only be lifted by the Government. —