This project, designed to address pertinent issues, is currently progressing at a sluggish pace. To gain deeper insights into this matter, Saigon Investment engaged in a discussion with Dr. LÊ ĐẠT CHÍ from Ho Chi Minh City University of Economics.
JOURNALIST: - Sir, the primary objective of banking restructuring is to establish a robust system in accordance with international standards. However, this process has been ongoing for several years without completion. Can you shed light on this?
Dr. LÊ ĐẠT CHÍ: - Indeed, the journey of banking restructuring in Vietnam traces back to the issuance of the first Law on Credit Institutions in December 1997 (No. 02/1997/QH10). Subsequent legal amendments, including Laws No. 20/2004/QH11 and No. 47/2010/QH12, paved the way for the current Law on Credit Institutions No. 17/2017/QH14. Despite these legal frameworks, the restructuring process has been protracted. Since 2011, there have been three decisions to restructure the banking system, each spanning an average of five years (Decision No. 254/2012/QD-TTg for 2011-2015, Decision No. 1058/2016/QD-TTg for 2016-2020, and Decision No. 689/2022/QD-TTg for 2021-2025).
The challenge lies in the emergence of sub-law documents, such as decisions, once a legal document is enacted, allowing for certain provisions to go unimplemented through restructuring projects. The ongoing National Assembly session is deliberating the draft Law on Credit Institutions, aiming to replace and amend some articles of Law No. 17/2017/QH14.
- The process seems legally complex. Could you elaborate on the challenges associated with banking restructuring?
- The complexity arises from the evolving legal landscape. The need for restructuring persists due to various external and internal challenges faced by the banking system. For instance, the period from 2011-2015 aimed to address the aftermath of the post-crisis economic growth stimulus policy of 2008. Subsequent phases tackled issues arising from economic stimuli and demand following a period of inflation control. The latest restructuring, in response to the Covid pandemic, was necessitated by the repercussions of the excessive expansion of monetary policy. Lending regulations, critical to this process, are often found in sub-law documents rather than the overarching legal framework.
With Circular 06/2023/NHNN introduced, a comparison can be drawn with Circular 23/2016, revealing the State Bank's effort to increase prohibitive lending content. However, this delay in issuing legal documents has led to a more lenient lending environment, as evidenced by the development of debt instruments like corporate bonds. Some banks have consequently been placed under special control, underscoring the SBV's delayed guidance for the commercial banking system.
- Saying so about the legality is somewhat unstable, isn't it, sir?
- Not really. Restructuring the banking system is always necessary, particularly when facing numerous adverse impacts from both the international and domestic environment. The objective of bank restructuring is to enhance resilience to such adverse impacts. Consider the restructuring undertaken during the 2011-2015 period, aimed at addressing the "blood clots" resulting from the post-crisis economic growth stimulus policy of 2008. The second restructuring phase aimed to tackle issues related to economic stimulus and demand, following a period of curbing excessive inflation. Similarly, the third restructuring was prompted by the challenges arising from the Covid pandemic.
The underlying issue lies in the excessive expansion of monetary policy, which has given rise to various tools and borrowing targets outside regulatory frameworks. Consequently, with each expansion, bad debt increases, necessitating periodic restructuring efforts. A key challenge is that lending regulations are not explicitly defined in the overarching law but rather in sub-law documents.
The recent introduction of Circular 06/2023/NHNN provides an opportunity to compare loan purposes arising from Circular 23/2016. This signifies the State Bank's efforts to increase prohibitive lending content. However, concurrently, the development of debt instruments, such as corporate bonds, has made the lending activities of Vietnamese banks more lenient. Consequently, some banks find themselves under special control. This further underscores the State Bank of Vietnam's delay in issuing timely legal documents to guide the operation of the commercial banking system.
- Sir, President Võ Văn Thưởng emphasized that over the past 10 years, zero-dong banks have not been resolved, and there has even been a policy to restructure these banks. However, none of them have been completely resolved. Why have three banks been classified as zero-dong banks, and one bank is under special control for so long but still not freed?
- Looking back at the past, a common thread in the restructuring sessions is the consequence of a previous period of excessive promotion of monetary policy. During this time, the bank's assets experienced rapid growth compared to the amount of cash mobilized. The commercial banking system consistently employs new money-creation tools to rapidly increase total assets. The two major contributors to this surge are customer loans and corporate bond investments, while bank capital remains relatively thin.
If we examine the first restructuring period from 2011-2015, bank equity increased tenfold, but total bank assets skyrocketed by more than 100 times in just five years. With this staggering growth rate, achieving the Capital Adequacy Ratio (CAR) becomes a challenging proposition. The critical question arises: why is it so easy for the State Bank of Vietnam to allow many banks to excessively increase their assets when the Law on Credit Institutions and even sub-law documents outline provisions to regulate this guarantee?
The simple answer lies in inspection. When the State Bank intervenes to restructure commercial banks, especially zero-dong banks, it is compelled to directly or indirectly provide new funding to these banks to satisfy depositors. Simultaneously, the loans cannot be recovered to repay the aforementioned cash flow. In such a scenario, there is a reluctance to let these zero-dong banks go bankrupt. Consequently, despite a decade passing, the unrecoverable loans of these banks persist, underscoring the continued existence of zero-dong banks.
- At this 15th National Assembly session, the National Assembly is set to pass the amended Law on Credit Institutions, introducing additional regulations to reduce the share ownership ratio of major shareholders. This move is anticipated to actively prevent bosses from manipulating banks. In your opinion, sir, will this change in the law make a difference?
- Through the above analysis, the initial reason for the restructuring of the banking system lies in the ease for commercial banks to rapidly increase assets, with insufficient guarantee of capital adequacy criteria. This is a failure on the part of inspectors. The law needs to establish mechanisms for inspection at commercial banks, employing a level 1 supervision system with the roles of the board of directors (BOD) and control board. Subsequently, the State Bank should play a supervisory role in the second round. Unfortunately, such provisions are notably absent in the draft law on credit institutions.
An illustrative example is found in the revised Enterprise Law of 2020, where the role of the Board of Directors is framed around receiving salaries, not derived from profits after income tax but included in tax-deductible expenses. This raises questions about the accountability of those approving loan resolutions, given that they are tasked with overseeing law enforcement in each commercial bank. Therefore, it is imperative for the law to establish this control directly at each commercial bank.
The second challenge, contributing to the sluggish restructuring, is the delay in promulgating by-law documents compared to the evolving situation. When the commercial banking system engages in creating new money and lending tools fraught with risks, the State Bank has yet to issue corresponding documents. Instead, regulatory documents are only released after the risks have manifested. It is true that when a commercial bank introduces a new lending or money-creation tool, the State Government must proactively identify risks and issue guiding documents, rather than relying on the power to prohibit retrospectively. Prohibition should only occur through law as it represents the will of the people.
Therefore, there is a pressing need to amend the Law on Credit Institutions in a manner that reduces the power of sub-law documents. It should be more detailed and specific, focusing on risk classification and specificity in commercial banking system loans. Legal documents should not be subject to arbitrary promulgation and frequent amendments. Thus, the root cause of restructuring does not solely lie in the ownership ratio of major shareholders, despite the disproportionate focus on this aspect in the current Draft Law on Credit Institutions.
- Sir, the current restructuring project also aims to have at least 2 or 3 commercial banks in the top 100 largest and strongest banks in Asia; striving to have 1 or 2 banks list their shares on the international stock market. What do you think about these goals?
- Why must these goals be set? Is being at the top or internationally ranked a criterion for a healthy banking system to withstand internal and external shocks in the economy? The answer is no. So should we pursue the above goals or not? Each economy has its own characteristics and unique tasks that the commercial banking system pursues. Each listed stock market has different standards, and no one has yet evaluated which standard is better. Listing in Vietnam is as good as listing internationally. The problem of the banking system is liquidity and capital safety. These are the two main pillars of Basel's adjustments. Therefore, the Law must focus on this issue instead of the guiding documents under the law. Accompanying this pillar is an implementation monitoring system.
- Thank you very much.
