Luận văn thạc sĩ UEH risks to vietnams banking sector and policy recommendations

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS, HO CHI MINH CITY

------    ------

VŨ THỊ MAI TRÂM

RISKS TO VIETNAM’S BANKING SECTOR

AND POLICY RECOMMENDATIONS

MASTER IN PUBLIC POLICY THESIS

HO CHI MINH CITY – 2012

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MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS, HO CHI MINH CITY

FULBRIGHT ECONOMICS TEACHING PROGRAM

VŨ THỊ 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

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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

VŨ THỊ MAI TRÂM

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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.

VŨ THỊ MAI TRÂM

Ho Chi Minh City - June, 2012

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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.

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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

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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

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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

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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

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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

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LIST OF FIGURES

Page

Figure 3.1. GDP, credit, mobilization and inflation rate (2001-2011) 20

Figure 3.2. Interbank average interest rate (10/2011 - 4/2012) 24

Figure 3.3. Ratios of FX deposits to total deposits and FX loans to total credit 25

Figure 3.4. Growth rate in capital mobilization from and credit to the economy

(2008 - 2010)

26

Figure 3.5. Investments outside the main business of state corporations 29

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CHAPTER 1. INTRODUCTION

1.1. Introduction

Recently the Vietnamese economy has experienced some difficulties. The banking

system has also faced some extraordinary events, such as systematic and serious violations of

the deposit rate cap, rapid credit growth and major incidents of fraud. All of these events have

had negative impacts on the prestige of the banking system and perceptions of the

management capacity of the State Bank of Vietnam (SBV). Some of the reasons for these

include weaknesses and shortcomings in financial capacity, management and competition

among banks in the market. Therefore, the public‟s confidence in the banking system has

declined sharply.

A growth model that is excessively dependent on the continuous supply of capital has

put pressure on credit provision to the economy. Average credit growth for the period 2001-

2011 is not only higher than the mobilization rate but also far higher than the GDP growth rate

(approximately four times). Banks via their intermediary role pumped large amounts of money

into the market. When cheap loans were easily accessible, conditions were created for

inefficient investments. The trend of loosening credit standards has encouraged an increase in

leverage of local enterprises, especially state owned enterprises (SOEs). The inefficiency and

wastefulness in using available capital resources have accumulated non-performing loans

(NPLs) over time and impaired asset quality. The consequence is that the Vietnamese

economy experienced high credit growth with a rising stock of domestic credit relative to

GDP. In 2011, this rate was at nearly 125 percent. Such a high rate compared to economic

capacity and other neighboring countries has led to the increase in NPLs and inflation rate.

During the period 2001 to 2011, credit growth of Vietnamese banks averaged 30.41

percent per annum. High profits in that period induced many new investors to join in the

establishment of new banks or upgrade rural to urban banks. The banking system experienced

a boom of new banks and a strong growth in total assets just in a short time. Many of these

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