However, there is an opinion that some regulations drafted in it can still prove to be tedious and cumbersome. Saigon Investment held an interview with Dr. LÊ ĐẠT CHÍ from the University of Economics in Ho Chi Minh City, to clarify these issues further.
JOURNALIST: - Sir, why have we not succeeded in tackling cross-ownership in banks for more than a decade?
Dr. LÊ ĐẠT CHÍ: - Looking back at the history of the financial market in Vietnam, especially in banking, we see that in the Law on Credit Institutions that was created in 1997 there is a provision that allows banks to own a financial institution, which in other words means owning another bank. However, the second amendment of this law in 2010 changed this and accordingly, banks need to increase their capital size. From this arose the situation that a bank can own more banks and the term cross-ownership was born in Vietnam.
The third Amendment of the Law on Credit Institutions in 2017 did not allow one organization or one bank to own another organization or another bank. The fourth revision of this draft Law on Credit Institutions has been amended and submitted to the National Assembly for consideration at the last session of 2023. This shows that the State Bank of Vietnam is aware of the need to increase real capital in the banking system.
The process of cross-ownership can easily be seen as the bank owners do not have enough capital potential, so the bank increases virtual capital while the real capital in each bank is much lower. Therefore, when the second correction tightened the cross-ownership business, the bankers avoided it and tried to move it in another direction. This is to say that instead of using the capital of the bank to contribute capital to other banks they use this bank's capital to lend money to an owner to finance capital contribution to another bank which is called cross-lending to increase capital.
The third amendment to the Law on Credit Institutions continues to tighten further, which is to limit large amounts of loans. At this time, the bankers thought of another way, which is to pledge shares of the banks to get capital to increase capital. But later this provision was rescinded. However, when the bonds market boom became a lucrative tool for bankers, they used their capital contribution in shares as collateral to issue bonds and used the money raised from those bonds to contribute capital to other banks.
Cross-ownership from the simple process of one bank owning and controlling another has created a business ecosystem behind being a banker. The ownership in companies is mortgaged by the bank, then this loan is used to increase the equity in the bank. The State Bank of Vietnam has submitted a fourth draft of Law on Credit Institutions for 2023 to the National Assembly for consideration, also mentioning the reduction of the ownership ratio. This time when approved, it is to be seen whether or not cross-ownership can be tackled or terminated.
- Sir, please could you give some examples of tricks used in the process of acquiring cross-ownership?
- Because of the sensitivity of this issue I will not name the company or the bank or the owners but can only assure you about this incident that occurred. Five years ago, one company with a capital of VND 5 bln bought shares of the boss who was also the founder of a bank for a huge amount of up to trillions of dongs. So, we need to ask from where all this money came to buy this stock.
The trick is to use the loan from another bank through an organization and then mortgage it with the shares that the bank has bought. Therefore, one becomes a major shareholder of the bank without using own capital. This company has even pledged property as collateral for a term of five years, without losing its ownership while the actual capital in the bank is nonexistent. Again, a question arises as to how the representative of this capital in the bank can bear the risk in every decision made when operating that bank.
At another time in the corporate bonds market, a bank accidentally announced that an enterprise was a major shareholder of the bank and issued a lot of bonds through a private placement worth thousands of billion dongs that were guaranteed by the number of stocks that this enterprise owned. This is to say that the bonds procurement circumvented the regulations on the lending limit of the bank or the risk reserve when pledging stocks for lending.
However, the problem here is that this company is considered to have sold the bank stocks that they owned through the bonds contract, but they are still the shareholders. So, we can then question how these shareholders will be part of this enterprise when appointing people to the Board of Directors of the bank, and how they will accept the risks. We also need to clarify the second step as to who buys these issued bonds. If the bank directly buys, it will be easily detected by the inspectors working for the State Bank of Vietnam, but if a bank provides capital to a securities company to buy this lot of bonds, then the situation is entirely different.
Thus, the simple nature of the above examples is that the company contributes capital to the bank and mortgages the contributed capital to borrow. And this shareholder does not contribute any dongs to that bank after deducting the debt. The bank that received the capital contribution from the enterprise then also lends it to the enterprise, so the bank did not actually receive any capital contribution. However, when accounting, there are still two items, but real equity has decreased a lot. This is also the nature of cross-ownership in joint stock banks. While joint stock banks have state capital, the state-owned part cannot be used as collateral for loans, so the contributed capital of the bank is still positive real capital.
This shows that the picture of cross-ownership has developed to a sophisticated level, this is to say that there is no cross-ownership between one bank and another, like in the early days of 1997 when the Credit Institutions Act was introduced. From here they use all the tools, initially from the share capital that is an asset in the banks, then continue to use the shares as collateral to borrow capital.
This is why the bonds market in Vietnam has developed very strongly in recent years, but most of it is offered for private placement. Because of the private placement, only a few large investors bought thousands of billions of dongs. At the same time, on the financial statements of the banking system, there is an increase in credit through the purchase of bonds by very large enterprises. As such, the development of financial instruments has facilitated more and more sophisticated cross-ownership, not only direct lending but also using mutual financing instruments for the purpose of controlling the banks of these owners.
- Sir where exactly is the monitoring tool of the state management agency?
- Indeed when it comes to cross-ownership, which has grown to the present day along with the development of financial instruments in the market, it has led to the supervision of state management agencies. An owner of a bank creates an ecosystem layer which is a business to own the bank. And these businesses cannot be known by state management agencies. Even though we have Enterprise Laws that state that the Chairman of the Board of Directors of a bank cannot be the Chairman of another bank, it is not forbidden for that Chairman to have relatives or descendants from establishing a company to own the bank.
Therefore, it is difficult for state management agencies and especially the supervisory agency of the State Bank of Vietnam to detect this. Although the provisions of the Law on Credit Institutions limit lending to companies affiliated with the owner of the bank, it is still for the State Bank of Vietnam to supervise and enforce the provision to limit lending to a group of closely affiliated companies. It seems very difficult, especially when these companies are established without the rules of law, for example by using relatives such as son-in-law, daughter-in-law, or brother-in-law as fronts.
Therefore, it is necessary to establish a control system in the bank, which means that the bank must provide credit or decide on a bond investment for a certain enterprise. The first control that must be aimed at is the organization and operations of the Board of Directors, as the responsibility of the Board of Directors is internal control. However, in Vietnam at present, the election of the Board of Directors and the organization that operates that Board of Directors reveals too many shortcomings, while the Law on Credit Institutions has not been recognized for adjustment in this amendment.
In the Enterprise Law, it is said that a group of shareholders owning 10 percent can only nominate one member of the Board of Directors, and if elected, this member will be the representative in the bank of the nominated group of shareholders to be able to provide information to other shareholders about banking activities. So, it is very difficult for public shareholders and small shareholders in a bank to nominate someone to represent them. Banks understand this factor well, so at the end of one Board of Directors’ term to another, the Board of Directors of the old term issue a resolution to nominate a few people to continue running for the next new term. They even continue to nominate new members and independent members for the next term in the interest of major shareholder groups.
Therefore, in the Law on Credit Institutions, it is necessary to establish nomination criteria and change this behavior pattern to help the election of members of the Board of Directors who are really professionals and represent the public instead of a small group of banks. An enterprise owning a bank must be relatively stricter. The Law on Credit Institutions mentions the position of an independent member of the Board of Directors, but the standard for this independent person is to be seen. It is also to be seen who will be nominated and who nominates this person and who would qualify as an independent board member.
Currently, in the Law on Enterprises and the Law on Credit Institutions, including the latest Circular 155 in 2020, there are talks about corporate governance and public enterprises, but these guidelines cannot control the activities of enterprises. For instance, during the reading of corporate governance reports or bank governance reports often many board members are absent from meetings. A bank has seven members, but the meeting may have three absent members. Four members meeting is more than half according to the provisions of the law, but in these four members, there is one chairman and one general director.
This is to say that the chairman and the general manager can manipulate the whole bank's functioning. Looking at this we see how the role of monitoring banking activities in the first line of defense from the Board of Directors has been perforated to control risks in the banking system. This fact is not mentioned in the revised Law on Credit Institutions.
Normally the person who is on the Board of Directors is treated as a representative of the owner and works as a beneficiary of the owner but does not receive a salary although this person will work under the direction of the banker. In this way, the work of the Board of Directors is somewhat inadequate as a shareholder authorizes them in the processes of supervising the operations of a bank or enterprise.
At the last Annual General Meeting the announcement of the list of shareholders with the right to attend the meeting showed that there were several hundred businesses that held shares in the bank. They split their ownership to avoid the regulations on ownership limit under the Law on Credit Institutions, avoiding the issue of information disclosure on the stock market and this division of ownership helps the owner to control the bank and take advantage of this share capital to borrow capital and do business when the ownership right has not been used.
- Thank you very much.
