The Prime Minister (PM) of Vietnam approved the schedule to restructure the system of credit institutions for the 2011-2015 period (Schedule) on 1 March 2012 under his Decision No. 254/QD-TTg (Decision 254).
The Schedule puts strong emphasis on Vietnam striving to have one or two banks of regional stature by 2015 and State-owned commercial banks playing an important role in restructuring the banking system.
Interesting, foreign banks will be encouraged to buy shares in weak banks, to compete equally and increase business cooperation with domestic banks. These and other salient provisions will be discussed below.
Schedule to Restructure Credit Institutions
- The Schedule aims to basically, thoroughly and comprehensively restructure the system of credit institutions, expecting local banks to achieve safe operation and sustainable performance with diversified structures of ownership, sizes, and types to be more competitive and consistent with international standards and to better meet the demand for financial and banking services of the national economy.
- In the 2011-2015 period, Vietnam will focus on improving the health and strengthening the operational capacity of credit institutions; improving their safety and operational efficiency; improving market discipline in banking operation; and striving to form at least one or two commercial banks operating on the regional scale by the end of 2015
Directions and Solutions with Respect to State-owned Commercial Banks
The Schedule aims to:
- enhance the leading role and dominant position of State-owned commercial banks; ensure that State-owned commercial banks are the main force of the whole system with large scale, safe and efficient operation, advanced management capability, and enhanced competitiveness both at home and abroad;
- further promote the equitisation of State-owned commercial banks, including Vietnam Bank for Agriculture and Rural Development (Agribank); ensure that the State holds controlling shares at the State-owned commercial banks after their equitisation;
- control bad debts of State-owned commercial banks below 3% of total loans pursuant to the Vietnam Accounting System;
- diversify capital raising methods; control credit growth in consistency with the size and term structure of deposits; gradually reduce loan-to-deposit ratio to below 90% by 2015.
Restructuring Commercial Banks and Finance Companies
Joint stock commercial banks, finance companies and financial leasing companies will be assessed with respect to their financial conditions, operation, management, especially quality of their assets, liabilities, capital and safety levels to be classified into three groups:
- temporary short of liquidity; and
The Schedule provides measures to restructure the three bank groups, including reorganisation, merger or acquisition, reform of risk management systems, or intervention by the SBV or other agencies.
The SBV will create favourable conditions for healthy credit institutions to further develop and extend refinancing credits for banks in lack of liquidity.
As for weak credit institutions, they are encouraged to merge with each other voluntarily. A tougher measure will apply in the case of weak banks not wanting to merge voluntarily: they will be enforced to merge, or the SBV will buy or direct other commercial banks (including foreign credit institutions) to buy back their shares.
In addition, they will be closely and comprehensively supervised by the SBV in terms of management, governance, financial conditions and operation.
The Schedule also highlights the solutions and details roadmaps to strengthen and develop People’s Credit Funds, microfinance institutions and foreign credit institutions.
Restructuring Foreign Credit Institutions
Under the Schedule, foreign banks will be encouraged to compete equally as well as to conduct business cooperation with domestic credit organisations. Close links between domestic and foreign credit institutions will also be called for to help develop products, improve governance and modernise technology.
Foreign ownership ratios will be increased, particularly for weaker joint stock commercial banks. Foreign credit institutions may contribute capital and purchase shares in weaker domestic entities, while parent institutions overseas are requested to guarantee the payment capacity of their affiliates in Vietnam.
Roadmap for Restructuring Credit Institutions
The roadmap for restructuring credit institutions is as follows:
- 2011-2012: Assess actual operations, assets quality and bad loans of credit institutions. Develop plans to reorganise unhealthy credit institutions to basically ensure the liquidity of the banking industry and control over weak credit institutions. Expected outcomes: Liquidity of credit institutions is basically guaranteed.
- 2013: Continue to improve financial health of the credit institutions, amend and supplement the regulations on safety operation, finish restructuring legal ownership of unsound joint stock commercial banks, to eliminate the risk of system collapse. Expected results: The risk of banking system collapse is eliminated. Weak credit institutions are basically handled.
- 2014: Complete the basic financial restructuring of credit institutions. Credit institutions are expected to meet capital requirements, obligatory standards and limits ensuring safe operations. Continue voluntary merger, acquisition and consolidation.
- 2015: Complete restructuring operation and management. Expected outcomes: The banking governance is essentially improved; credit institutions fully meet requirements on capital and safe operation.
Banks merging with each other is an incoming wave in Vietnam. M&A among credit institutions may become faster because the PM has signed Decision 254 offering solutions to handle weak ones.
The legal basis for M&A in banking is already in place. Indeed, on 11 February 2010, the SBV issued Circular No. 04/2010/TT-NHNN regulating merger, consolidation and acquisition of credit institutions (Circular 04).