However, the Draft Circular on internal inspection for credit institutions, currently being reviewed by the State Bank of Vietnam (SBV), has generated numerous concerns. To delve deeper into these issues, Saigon Investment interviewed Dr. LÊ ĐẠT CHÍ from Ho Chi Minh City University of Economics.
JOURNALIST: - More than a year ago, the State Bank submitted a policy for the compulsory transfer of four banks to the Government. Why hasn't this policy been implemented yet?
DR. LÊ ĐẠT CHÍ: - The challenge lies primarily in finding willing and capable new owners for these banks. Despite being under special inspection for many years, there has been no resolution. Investors are hesitant to take over banks with negative actual capital, even at a zero transfer price. The legal complexities of transferring ownership exacerbate the issue. When these banks were first put under special inspection, their shares were transferred to the SBV, making them effectively state-owned. Any transfer of state-owned assets must follow strict divestment rules, including asset revaluation and public auction, a complex and time-consuming process.
- Does this complexity lead to the SBV's Draft Circular on special inspection for credit institutions under the new Law on Credit Institutions 2024?
- Yes, indeed. Compulsory transfer has been part of the Law on Credit Institutions since 2010, but practical challenges have persisted. The 2024 Law introduces significant changes, particularly for banks under special inspection. The Draft Circular allows the SBV to reduce the charter capital of these banks to reflect their true financial state, potentially even to zero. This would simplify transferring ownership without the need for asset revaluation or the sale of shares, expediting the restructuring process.
- Does this mean the draft will "free" weak banks?
- Technically, yes. Reducing charter capital to zero removes shares from the equation, addressing the negative equity problem caused by bad debt. However, the SBV still holds a corresponding amount of shares. Transferring ownership requires selling these shares via auction, necessitating asset revaluation—a lengthy process. Simplifying this by reducing capital to zero speeds up restructuring.
- Can you provide data from Dong A Bank's 2014 financial report to illustrate this issue?
- Dong A's 2014 report showed total assets of VND 87,000 billion, with customer loans at VND 50,000 billion and equity at VND 5,600 billion. If bad debt exceeded 15%, equity would be wiped out, resulting in negative capital. Despite collateral, many loans couldn't be recovered, leading to significant shareholder losses. The SBV's approach to reduce capital to zero reflects this reality, eliminating previous shareholders' stakes and facilitating a smoother transfer to a new owner.
- If an organization receives a zero-priced transfer but must meet the minimum charter capital, what are the implications?
- According to Decree 86/2019, a bank must have at least VND 3,000 billion in charter capital. A bank with zero charter capital violates this requirement. The transferee must infuse at least VND 3,000 billion to comply. The 2024 Law allows for preferential interest rate loans for restructuring, approved by the Prime Minister, potentially at 0% interest. This support helps but must be managed to ensure the proper use of funds.
- Will the SBV continue to support banks after the transfer?
- No, the SBV's goal is to restore healthy banking operations and recover any direct or indirect loans. Proper supervision of the transferee is crucial to ensure effective restructuring and prevent misuse of preferential loans.
- Is reducing charter capital to zero a viable solution for handling these banks?
- Article 8 of the Draft Circular effectively reflects the banks' true capital status, removing state ownership issues and simplifying the transfer process. However, it relies on finding a willing and capable third party for restructuring. While beneficial, reducing capital to zero also diminishes the roles of the Board of Directors and General Director, highlighting the need for shareholders to understand the 2024 Law to protect their investments.
- Can you elaborate on the specific steps and benefits of reducing charter capital to zero?
- Reducing the charter capital to zero essentially wipes out the existing shareholders' stakes, aligning the bank's book value with its actual financial condition. This makes it easier for the SBV to transfer ownership without the legal and procedural delays associated with asset revaluation and public auctions. For instance, Dong A Bank, with its significant bad debts, would no longer need to go through a lengthy asset valuation process that might reveal even greater negative equity. This streamlining allows for quicker intervention and restructuring, which is crucial for maintaining stability in the banking sector.
- What are the potential risks associated with this approach?
- While the reduction of capital to zero is beneficial for expediency, it does pose some risks. For one, it might discourage future investments if potential investors feel that their stakes could be nullified without adequate compensation. Additionally, the process might face legal challenges from existing shareholders who feel their rights are being overridden. Moreover, the effectiveness of this approach hinges on finding competent and willing third parties to take over and restructure the banks, which is not always guaranteed.
- How will the SBV ensure that the new owners properly manage and restructure these banks?
- The SBV will likely implement stringent monitoring and reporting requirements for the new owners to ensure compliance with the restructuring plans. This could include regular financial audits, progress reports on the implementation of restructuring strategies, and adherence to regulatory requirements. Additionally, the SBV may retain some oversight powers to intervene if the new management deviates from the agreed-upon restructuring plan.
- What role does the government play in this restructuring process?
- The government plays a crucial role, particularly in providing the regulatory framework and financial support necessary for restructuring. Under the 2024 Law on Credit Institutions, the government can approve preferential interest rate loans to facilitate the restructuring process. These loans, potentially at zero interest, provide significant financial relief and incentive for new investors to take on the task of restructuring weak banks. However, this also requires careful management to ensure that the funds are used effectively and not misappropriated.
- In your opinion, will the new law and the draft circular be enough to address the challenges faced by these banks?
- The new law and draft circular are significant steps in the right direction. They address some of the core issues that have stalled the restructuring of weak banks, such as the cumbersome process of asset revaluation and the legal complexities of transferring ownership. However, their success will depend on effective implementation and the ability to attract competent new owners. It will also require continuous oversight and support from the SBV and the government to ensure that the restructuring process is carried out efficiently and transparently.
- Could you provide more details about the preferential interest rate loans and how they support the restructuring process?
- The preferential interest rate loans are designed to provide financial support to the new owners of banks under special inspection. These loans, potentially offered at zero or very low interest rates, help reduce the financial burden on the new owners during the initial stages of restructuring. The funds can be used to stabilize the bank's operations, address immediate liquidity needs, and invest in necessary improvements. However, the allocation and use of these loans will be closely monitored to ensure they are used effectively and not diverted for other purposes. The approval and terms of these loans are determined by the Prime Minister, adding a layer of oversight and control to the process.
- How does the reduction of charter capital impact the existing shareholders and their rights?
- Reducing charter capital to zero effectively nullifies the stakes of existing shareholders. This means that shareholders, whether major or minor, lose their investments in the bank. This approach reflects the reality of the bank's financial condition but can be controversial as it overrides the rights of shareholders. It's a drastic measure intended to facilitate quick and effective restructuring, but it also underscores the importance of regulatory oversight and the need for shareholders to be vigilant about the financial health of their investments.
- What measures are in place to prevent future mismanagement and ensure the stability of restructured banks?
- The SBV and the government will implement several measures to ensure the stability of restructured banks. These include stringent regulatory requirements, regular audits, and oversight of the new management teams. The restructured banks will need to adhere to detailed restructuring plans approved by the SBV, which will include specific milestones and performance targets. Additionally, the SBV may require periodic progress reports and conduct on-site inspections to monitor compliance with the restructuring plans. These measures aim to prevent the recurrence of issues that led to the banks' initial decline and ensure they operate on a sound financial footing.
- How does this restructuring process align with international best practices in banking regulation?
- The restructuring process aligns with international best practices by emphasizing transparency, accountability, and swift resolution of financial distress. Reducing charter capital to reflect the true financial condition of banks, streamlining ownership transfer processes, and providing financial support for restructuring are all measures seen in global banking regulations. These practices help restore confidence in the banking system, protect depositors, and ensure that weak banks can be turned around effectively. The SBV's approach incorporates these principles, aiming to enhance the resilience and stability of Vietnam's banking sector.
- What are the long-term implications of the 2024 Law on Credit Institutions for Vietnam's banking sector?
- The long-term implications of the 2024 Law on Credit Institutions are profound. By addressing the structural weaknesses of the banking sector and providing a clear framework for the resolution of distressed banks, the law paves the way for a more stable and resilient banking environment. It can enhance investor confidence, attract foreign investment, and promote sustainable economic growth. Moreover, by incorporating international best practices, the law aligns Vietnam's banking regulations with global standards, further integrating the country into the global financial system. Over time, these measures can lead to a more dynamic and competitive banking sector, better equipped to support Vietnam's economic development.
- Thank you for your insights, Dr. Chí.
