MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS, HO CHI MINH CITY    V TH MAI TRÂM RISKS TO VIETNAM’S BANKING SECTOR AND POLICY RECOMMENDATIONS MASTER IN PUBLIC POLICY THESIS HO CHI MINH CITY – 2012 ii MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS, HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM V TH MAI TRÂM RISKS TO VIETNAM’S BANKING SECTOR AND POLICY RECOMMENDATIONS MAJOR: PUBLIC POLICY CODE: 603114 MASTER IN PUBLIC POLICY THESIS SUPERVISOR Dr. JONATHAN R. PINCUS HO CHI MINH CITY - 2012 iii CERTIFICATION I certify that the substance of the thesis has not already been submitted for any degree and is not being currently submitted for any other degree. I certify that to the best of my knowledge any help received in preparing the thesis and all sources used have been acknowledged in the thesis. The study does not necessarily reflect the views of the Ho Chi Minh City Economics University or Fulbright Economics Teaching Program. Author V TH MAI TRÂM iv ACKNOWLEDGEMENTS I would like to express my deep gratitude to my parents who always encourage me in my life and my studying. I would like to express my sincere appreciation to my supervisor, Dr. Jonathan R. Pincus, who has helped me in performing the thesis. With rich knowledge, experience and enthusiasm, he has effectively contributed to my thesis. I am graceful to Ms. Dinh Vu Trang Ngan for thoughtful and valuable comments on the early version of my work. I would like to thank all teachers in Fulbright Economics Teaching Program, who have retransmitted a lot of their knowledge and experience to me. Last but not least, I express my thanks to all of my friends who help and motivate me in performing the study. V TH MAI TRÂM Ho Chi Minh City - June, 2012 v ABSTRACT Vietnamese banking system has faced some extraordinary events, which have had a negative impact on the prestige of the banking system and perceptions of the management capacity of SBV and reduced the public‟s confidence. In general, Vietnamese banking system faces the following risks: risk from non-performing loans, liquidity risk, currency risk and risk from connected lending. To reduce the negative impacts of these risks, Vietnam should combine many resolutions to manage effectively such risks. The appropriate incentive and legal framework, the improvement of underlying institutions (fiscal, financial and monetary institutions) and the strong corporate governance are deemed prerequisite to maintain the stability and the development of financial system. vi ABBREVIATIONS ABB An Binh Commercial Joint Stock Bank ACB Asia Commercial Joint Stock Bank AGB Vietnam Bank for Agriculture and Rural Development AMC Asset management company BAB BACA Commercial Joint Stock Bank BIDV Bank for Investment and Development of Vietnam BOM Board of management BVB Bao Viet Joint Stock Commercial Bank CAR Capital adequacy ratio CTG Vietnam Bank for Industry and Trade DAB Great Asia Commercial Joint Stock Bank EAB Dong A Commercial Joint Stock Bank EIB Vietnam Export Import Commercial Joint Stock Bank ER Exchange rate FCB First Joint Stock Commercial Bank GPB Global Petro Commercial Joint Stock Bank GSO The General Statistics Office vii HBB Hanoi Building Commercial Joint Stock Bank HDB Housing Development Commercial Joint Stock Bank JSC Joint Stock Company JVC Joint Venture Company KLB Kien Long Commercial Joint Stock Bank LVB LienViet Post Joint Stock Commercial Bank MBB Military Commercial Joint Stock Bank MDB Mekong Development Joint Stock Commercial Bank MHB Housing Bank of Mekong Delta MPI Ministry of Planning and Investment MSB Maritime Commercial Joint Stock Bank NAB Nam A Commercial Joint Stock Bank NPLs Non-performing loans NVB Nam Viet Commercial Joint Stock Bank OCB Orient Commercial Joint Stock Bank OCEAN Ocean Commercial Joint Stock Bank PGB Petrolimex Group Commercial Joint Stock Bank SBV The State Bank of Vietnam SCB Sai Gon Commercial Joint Stock Bank viii SEB Southeast Asia Commercial Joint Stock Bank SGB Saigon Bank for Industry & Trade SHB Saigon-Hanoi Commercial Joint Stock Bank SNB Southern Commercial Joint Stock Bank SOE State owned enterprise STB Sai Gon Thuong Tin Commercial Joint Stock Bank TCB Viet Nam Technological and Commercial Joint Stock Bank TNB Vietnam Tin Nghia Commercial Joint Stock Bank TPB TienPhong Commercial Joint Stock Bank TRB Great Trust Joint Stock Commercial Bank VAB Viet A Commercial Joint Stock Bank VCAP (GDB) Viet Capital Commercial Joint Stock Bank (Gia Dinh Commercial Joint Stock Bank) VCB Joint Stock Commercial Bank for Foreign Trade of Vietnam VIB Vietnam International Commercial Joint Stock Bank VPB Vietnam Prosperity Joint Stock Commercial Bank VTB Viet Nam Thuong Tin Commercial Joint Stock Bank WEB Western Commercial Joint Stock Bank ix TABLE OF CONTENTS Page CERTIFICATION iii ACKNOWLEDGEMENTS iv ABSTRACT v ABBREVIATIONS vi TABLE OF CONTENTS ix LIST OF FIGURES xi CHAPTER 1. INTRODUCTION 1 1.1. Introduction 1 1.2. Research Questions 3 1.3. Research Objectives 3 1.4. Research Methods, Sources of Information and Research Scope 3 1.5. Thesis Structure 4 CHAPTER 2. LITERATURE REVIEW 5 2.1. General Literature 5 2.2. Implications for Vietnam 7 CHAPTER 3. RISKS TO BANKING SECTOR OF VIETNAM 8 3.1. Macroeconomic Vulnerabilities 8 3.2. Microeconomic Risks 9 3.2.1. Risk from NPLs 9 3.2.2. Liquidity Risk 19 3.2.3. Currency Risk 25 3.2.4. Risk from Connected Lending 28 CHAPTER 4. POLICY RECOMMENDATIONS 34 4.1. Resolution for NPLs 34 4.2. Resolution for Liquidity Risk 37 4.3. Resolution for Currency Risk 39 4.4. Resolution for Connected Lending 40 CHAPTER 5. CONCLUSION 43 x REFERENCES 44 APPENDIX I. COMPARISON BETWEEN VIETNAMESE REGULATIONS AND INTERNATIONAL STANDARDS ON NON-PERFORMING LOANS 57 APPENDIX II. LITERATURE ON RESOLUTIONS OF NONPERFORMING LOANS 61 APPENDIX III. LITERATURE ON RESOLUTIONS OF LIQUIDITY RISK 65 APPENDIX IV. LITERATURE ON RESOLUTIONS OF CURRENCY RISK 70 APPENDIX V. LITERATURE ON RESOLUTIONS OF CONNECTED LENDING 76 APPENDIX VI. FIGURES 81 APPENDIX VII. CONNECTED RELATIONSHIP AND LENDING 93 [...]... 1998; Eichengreen and Rose, 1997) However, due to the limitations of the macro approach, many recent researches have started to shift their focus to the micro economic approach (Jonghe, 2009; Goldstein and Turner, 1996) Under the macroeconomic approach, the banking system is deemed vulnerable to macroeconomic shocks, and bank failures usually follow adverse developments in the macroeconomy (Bernanke,... debts (Group 2) (Appendix VI, Figures 5 and 6) Because most NPLs are initially classified in Group 2 before being transferred to the NPL groups, debts in this g - Some banks try to hide NPLs by classifying them in Group 2 to reduce provisions and increase profits Therefore, it is reasonable to believe that an increase or a high proportion of debts in Group 2 will signal rising NPLs in the future borrowers... banks, has a large share of loans in Group 2 This is a danger signal, especially if this bank hides its real NPLs under the cover of special mention debts 2 According to Decision 493/2005/QD-NHNN, the rates of specific provision for each debt group are as follows: Group 1: zero percent, Group 2: five percent, Group 3: twenty percent, Group 4: fifty percent, and Group 5: one hundred percent 13 In absolute... on the banking system (European public 6 debt is a very famous example) (Gavin and Hausmann, 1996) However, using this approach alone cannot explain why not all banks fail even when they suffer the same adverse macro shocks For this reason, it is better to pursue a combination of macro and micro approaches to explain bank failures (Hermosillo, 1999) Under the microeconomic approach (bankdata are used... future borrowers does not improve, it is probable that the banks must reclassify such loans as NPLs An increase in provisions2 and a reduction in net profits, therefore, are unavoidable For example VCB, although its NPLs to total gross loans ratio is lower than in the previous year, increasing debt in Group 2 may imply a deterioration of asset quality rather than an improvement (Appendix VI, Figures... and those who depended on it swiftly perished when supply from banks dried up Moreover, interest rates up to 20-25 percent or even 28 percent wiped out their profits From January to August of 2011, credit for non-production was estimated to drop approximately 17 percent Due to the credit contraction and difficulty in obtaining new loans, some borrowers choose not to pay mature payments and accept a penalty... avoid increasing NPLs Credit growth pressure to provide finance for economic growth has forced many banks to distort the real asset quality reflected in their balance sheets by way of turning bad into good debt Moreover, most investors seem unaware of latent credit risks incurred by banks and only show excessive interest in profits and growth of assets and gross revenue That profits while having few criteria... long-term relationship between banks and 7 companies usually leads to the lax credit allocation processes (connected lending) without regard to the profitability and viability of the projects 2.2 Implications for Vietnam From the lessons mentioned above, Vietnam has promulgated some regulations regarding increasing capital, tightening prudential ratios and accounting practices in the banking sector However,... as a part of their researches Therefore, this dissertation focuses on the risks to Vietnamese banks, especially the microeconomic risks, and based on this analysis, proposes policies to strengthen the banking system and reduce the probability of systemic failure 8 CHAPTER 3 RISKS TO BANKING SECTOR OF VIETNAM 3.1 Macroeconomic Vulnerabilities th member, a surge of capital inflows caused the increase... 2.33 times However, in some SOEs this ratio is far higher than the average, such as Vietnam Shipping Industry Group (Vinashin) (10.9 times) and some Civil Engineering Construction Corporations (CIENCO) (from 12 to 21.6 times) in 2010, Vietnam Electricity (EVN) (4.25 times) and Vietnam National Industry Construction Group (VNIC) (3.91 times) in 2011, while the permitted threshold is only three times In . allocation processes (connected lending) without regard to the profitability and viability of the projects. 2.2. Implications for Vietnam From the lessons mentioned above, Vietnam has promulgated. adverse macro shocks. For this reason, it is better to pursue a combination of macro and micro approaches to explain bank failures (Hermosillo, 1999). Under the microeconomic approach (bank-specific. 1998; Eichengreen and Rose, 1997). However, due to the limitations of the macro approach, many recent researches have started to shift their focus to the micro economic approach (Jonghe, 2009;