Các rủi ro của hệ thống ngân hàng việt nam và một số gợi ý chính sách

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



xi

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












1

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
2

banks lacked the necessary financial and technological capacity required for such a risk-taking
industry as well as professional experience and ethical standards expected of sound bankers. In
addition, the shortfall of skilled employees reduced workforce quality and in that way
indirectly lowered the banks‟ risk assessment ability and exposed them to future credit risks.
The more violent competition and struggle for market share as well as profits forced bank
managers to loosen credit-granting criteria. In such conditions, prudential requirements of
capital adequacy, liquidity and asset quality were ignored not only by banks but also by SBV.
The lack of appropriate regulation of credit risk provision has made the banking system
become vulnerable at a time of monetary contraction.
When the global financial crisis, reduction of economic growth, capital outflows, the

public debt crisis in the EU, contraction of export markets and a drop in the price of real estate
projects emerge, many enterprises could not continue doing business. The latent problems in
the banking system were exposed. Liquidity problems and bad debt are becoming more and
more serious with frenzied efforts by problem banks, which are illiquid or even insolvent, to
mobilize deposits and maintain normal banking business. This is also the first time that
collateral requirements have been attached to interbank lending. It is a signal of serious
deterioration of confidence among banks in this normally safe market. In addition, risks from
currency mismatch and connected lending seem to be larger and are not being well-controlled.
These facts put SBV in a challenging position and required a prompt response to prevent the
system from collapsing. The official declarations regarding bank restructuring sent by the
Prime Minister and Governor of SBV indicated that bank restructuring is an important part of
economic restructuring to avoid the danger of a banking crisis. Therefore, the identification of
important risks faced by the banking system becomes an important and urgent task for policy
recommendations.
The third meeting of 11
th
Communist Party of Vietnam Central Committee highlighted
the restructuring of financial markets with a focus on the banking system as one of the three
most important objectives of the next five-year period. The restructuring plan to improve
safety and soundness of the banking system is to be carried out in the spirit of guaranteeing the
3

interests of depositors and doing the utmost to handle any bank collapses. Therefore, the need
to specify major risks threatening the stability of the banking sector becomes very important.
1.2. Research Questions
This thesis intends to answer the following questions:
(i) What important risks (microeconomic risks) is the Vietnamese banking system facing?
(ii) What should be done to reduce such risks?
1.3. Research Objectives
The thesis has the following research objectives:

(i) To specify the main risks (microeconomic risks) faced by the Vietnamese banking
system through analyzing the banks‟ financial data.
(ii) To research and propose policy recommendations in order to reduce adverse effects of
such risks.
1.4. Research Methods, Sources of Information and Research Scope
This research uses qualitative method by secondary data collected from financial
statements, annual reports of commercial banks, SBV annual reports, and related reports of
other organizations. Through this analysis, the research intends to specify the main risks faced
by the banking system and propose recommendations to effectively control and manage such
risks.
Because joint-venture banks and foreign-owned banks account for only a small share
of the market and most of these banks do not make their financial statements public, it is hard
to analyze such banks‟ financial situation. Therefore, for the purpose of this thesis, the
research will be limited to the data analyzed within scope of commercial banks including state
banks and other domestic commercial banks.
4

1.5. Thesis Structure
The thesis is structured as follows:
(i) The first part reviews literature on risks to the banking sector;
(ii) The second part analyzes important risks faced by the banking system with the focus
on microeconomic risks;
(iii) The third part mentions some policy implications; and
(iv) The forth part concludes the thesis.

5

CHAPTER 2. LITERATURE REVIEW
2.1. General Literature
There is extensive literature regarding banking crises around the world. Initial

researches paid more attention to macroeconomic approach and these tried to investigate the
relationships between macro-economic conditions and banking system stability (Demirgüç-
Kunt and Detragiache, 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 macro-
economy (Bernanke, 1983). Adverse shocks reduce domestic money demand and/or cause
foreign capital outflows. Banks, which do not have a diversified base of capital or are too
dependent on short-term foreign capital, will find it difficult to mobilize funds to meet a
deposit outflow, lending commitments and other financial obligations. A decline in the terms
of trade or asset prices can reduce profitability among bank borrowers while capital
contraction reduces their ability to rollover debts. Such contractions, therefore, significantly
increase their debt burden (Bernanke 1983). The combination of both makes it difficult for
them to pay back loans at the due date and quickly increases NPLs and erodes asset quality on
bank balance sheets. In turn, the contraction of deposits and loans limits the supply of money
and credit and thus will exacerbate macroeconomic shocks that cause them (Calomiris, 2007).
Conversely, a surge of international capital and/or sudden increase in deposit demand
exceeding the absorptive capacity of the economy can create a lending boom. The expansion
of lending activities without improvements in managerial skills can let banks gather NPLs and
reduce their resistance to adverse changes. Unstable fiscal policy with volatile domestic
interest rates also has a part in creating shocks to the financial system by changing
expectations of inflation and deposit demand. In addition, the structure and level of public
debt, if not managed carefully, also creates pressure 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 (bank-specific level), individual banks‟ financial
data are used to evaluate the condition of banks. Hermosillo (1999) asserts that models based
on bank-specific variables, including different measures of market, credit and liquidity risks
and proxies for moral hazard, seem to work reasonably well in most cases. Due to the result of
different risk-taking behavior, sound and unsound banks have different characteristics. Failed
banks usually have a large percentage of loans in the real estate sector, maintain a high
leverage ratio and unsuitable levels of liquid assets. The ratio of NPLs to total loans (or total
assets) is often higher for problem banks and hence, capital can be quickly wiped out in a time
of crisis. The significant reserves to cover NPLs or sufficient increases in equity can help
banks improve their financial standing. Hermosillo (1999) also shows that the effect of a one-
unit increase in NPLs ratio increase the probability of failure and reduce the survival time of
banks by more than the equity to total assets ratio. Low liquidity and coverage ratios compared
with the sector average can imply that banks are in trouble and may not have enough money
for extraordinary needs or to deal with a sudden run. The deterioration in banks‟ coverage
ratio can signal the actual failure in near future. In addition, capital adequacy ratios (CARs)
cannot serve as a cushion to absorb shocks if they are not high enough. A well-diversified
portfolio has an important role in helping banks to withstand banks‟ shocks. Banking crises in
California (1980s), the Northeast (1991-1992) in the US and in Japan (1990s) are examples of
maintaining poorly-diversified portfolios with high concentrations in real estate markets, some
specific commercial and industrial loans (Hermosillo 1999).
In addition, Pomerleano (1999) also mentions that crony capitalism was at the core of
the East Asia crisis. Crony capitalism supports bad polices including implicit government
guarantees and poor banking supervision. This practice causes poor credit allocation decisions
in the banking dominated system. The close and 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, these regulations still have many drawbacks and fail to reflect the
actual risks faced by the banking system. The surge of international capital inflows beginning
in 2007 and excessive credit growth have reduced banks‟ loss-absorbing capacity. In the
context of unstable macroeconomic conditions and high inflation, the pressure from NPLs and
liquidity risks have increased the vulnerability of the banks and reduced their capacity to lend.
Capital cannot flow to the most needed and productive activities. Although there are some
papers, reports and discussions regarding risks to the banking system (such as researches of
Béllocq, 2008; Hoang Tien Loi, 2006 and Dam, 2010), these documents are still limited in
content and analytical scope. Some researches such as Rosengard et al., (2011) and Nguyn
Kim Anh et al., (2010) also mention some aspects of bank risk but just 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
After Vietnam became the WTO‟s 150
th
member, a surge of capital inflows caused the
increase of asset markets. The combination of high domestic credit and massive foreign
portfolio investment (FPI) created conditions for the formation of asset bubbles, especially in
real estate and stock markets. To protect the exchange rate (ER), SBV bought about $9 billion
using or issuing VND. However, due to the “impossible trinity” of simultaneously trying to
maintain a fixed ER, an open capital account and an independent monetary policy, the
sterilization failed to manage the expansion in the monetary base (Doan, 2008). The strong
and quick increase of high power money put into circulation (more than ten percent of GDP)
and the money supply (more than fifty percent) within a year, while having low capability in

effectively absorbing capital inflows, flooded the banking system with liquidity. Significant
portions of loans went into speculative activities and inefficient SOEs rather than went into
productive investments (Rosengard, et al., 2011; FETP, 2008; Leung, 2009 and Menon, 2009).
The inflation in Vietnam, therefore, can be seen as a dispensable consequence of three
combined forces including pressure from the large inflow of foreign capital, aggressive public
investment (pro-cyclical fiscal spending) and external shocks (Ohno, 2008). The high inflation
rate reduced the attractiveness of keeping VND and encouraged the capital flows to high-
return and high-risk sectors. This further exacerbated the boom of asset prices.
In an effort to reduce the rate of inflation, many measures were employed including
increased reserve requirements and interest rates, ceilings on credit growth and required bank
purchase of treasury bills on the monetary side and limitations on SOE non-core investments
on the fiscal side (Leung, 2009). Although these policies reduced inflationary pressures, they
forced the banking system to face liquidity problems. The domestic macroeconomic instability
at the time of global financial crisis triggered a sudden stop in capital flows and a reduction of
major export market demand. Due to the wealth effect from the booming asset markets, the
need for imported goods increased and resulted in a large trade deficit, which reached the
9

worrying level during the period 2007-2009. The external and internal instabilities caused the
drop of growth rate and the bursting of asset bubbles (Rosengard, et al., 2011). The tough
business environment put pressure on and reduced the profits of the corporate sector. In
addition, because many of the banks‟ loans are collateralized by real estate, the bursting of the
real estate bubble significantly reduced the value of collateral, reducing asset quality in
banking system and triggering massive loan defaults (Lê Vân Anh, 2008 and FETP, 2008).
The widening of the savings-investment gap left the economy and banking system
much more dependent on external resources. In addition, despite having large short-term
capital inflows, foreign-currency reserves, which can protect the economy in case of a sudden
shift in capital flows, were quite low compared to other neighboring countries (FETP, 2008).
In 2011, inflation was still an area of concern, though there was some improvement in the
balance of payments. Monetary tightening polices helped control credit and money supply

growth at a price of slower GDP growth. Tightening fiscal and monetary policy, high inflation
and interest rates increased the burden on the banking sector and made production difficult
(WB, 2011). In a context of increasing risks from NPLs, illiquidity and currency mismatches
threatening the health of the banking system, restructuring has become more important as a
tool to restore the public confidence and the stability of the financial sector.
3.2. Microeconomic Risks
3.2.1. Risk from NPLs
With the largest portion of revenue from credit, credit risk is deemed the most
important risk for not only Vietnamese banks but nearly all other emerging countries‟ banking
systems. According to the World Bank, the domestic credit to GDP ratio grew quickly during
last ten years and reached 125 percent in 2010, one of the highest rates in the region. NPLs in
Vietnam increased to 3.39 percent in 2011 from 2.14 percent in 2010 using Vietnamese
accounting standards (SGTT, 2011a). In absolute terms, bad debts are equivalent to USD four
billion. This is the inevitable result of a long period of credit expansion and struggle for
market share. However, Mr. Tran Minh Tuan, SBV‟s Vice Governor, publicly admitted that
10

this number does not reflect the true nature of banks‟ NPLs and implied that risks from NPLs
might be understated. The understatement of NPLs is due to the difference between
Vietnamese regulations and international standards on categorizing NPLs (see Appendix I).
The definition of NPLs according to the Basel Committee and the IMF is not based solely on
payment at the due date but also on the probability that the bank will be able to collect the
total due according to the terms of the loan agreement. Accordingly, the standard definition of
NPLs is more stringent than under the Vietnamese regulations. In addition, Vietnamese banks
have found ways to move NPLs off their balance sheets, for example converting bad loans into
bonds or selling them to off-balance sheet vehicles.
In addition, current regulations are not closely adhered to due to the fear of a recorded
increase in NPLs on the banks‟ balance sheets. The increase in NPLs leads to a correlative
increase in provisions and substantially reduces net income. This means no dividends to
shareholders, which then means that the bank finds it hard to attract new equity investment or

improve the liquidity of bank shares on the stock market. In addition, the existence of
principal and agent problems together with bad incentive structures discourages managers
from reporting the true situation because this can affect their benefits or even their position at
the bank. That is why few researchers have confidence in the SBV Inspectorate‟s conclusion
that domestic credit is approximately VND 2,500,000 billion, of which NPLs account for 3.39
percent or VND 85,300 billion (Anh V, 2011). Moreover, NPLs of nearly all banks are
categorized pursuant to the quantitative method rather than qualitative method, which is the
more prudent and advanced method (see Appendix I for the difference between these two
methods). For example, BIDV‟s NPLs were 3.9 percent in 2007 pursuant to the qualitative
method but only were 1.56 percent if the quantitative method was used. That is the reason why
many researchers and global rating agencies such as Fitch Ratings believe that if NPLs were
calculated under international standards, the NPLs of Vietnamese banks would be three or four
times higher than the SBV estimates (FitchRatings, 2012).
Consequently, although NPLs in the banking system are only 3.39 percent, still below
the threshold of five percent, this number itself does not reveal the overall picture. In addition,
11

banks also grant credits in the form of corporate bonds, which are not assessed using the same
credit risk rules and therefore, proper provisions are not made and collateral is not required.
According to the National Financial Supervisory Commission, if corporate bonds and trust
funds were also taken into account, real estate credit would account for twenty percent of
outstanding loans. NPLs would also be from eight to twelve percent, in which debts in group
five (losses) make up forty percent (equivalent to twelve percent of charter capital). This is
also one of the banks‟ methods of avoiding credit growth restrictions and limits on
“nonproductive lending”.
1
In this way, reported NPLs and credit provision can be lowered,
while at the same time actual risks faced by banks can be concealed.
In 2009 and 2010, credit grew quickly at 37.53 percent and 31.19 percent, respectively
(SBV Annual Reports). In addition, due to the negative effects of the global financial crisis

and the slowdown of economic growth, SBV carried out a monetary expansion and applied
some programs to overcome the crisis including a four percent interest rate subsidy for
corporations. Inexperienced management combined with weak control and implicit guarantees
from government stimulated bank managers to take more risks in their portfolio for higher
profits.
However, when the fear of high inflation forced SBV to implement monetary
contraction including controls on credit, money supply growth, interest rate ceilings and
curtailment of credit for “nonproductive” sectors, the weak points of the banking system were
exposed and threatened the stability of the banking system. High lending rates have put many
domestic enterprises under pressure and have increased the incidence of bankruptcy. The
difficulties of these enterprises are also reflected in banks‟ balance sheets by deteriorating
asset quality, an increase in NPLs and provisions for bad loans. As shown in Appendix VI,
Figures 1 and 7, the NPLs ratio in 2011 increased when compared to 2010 (eight out of nine
listed banks and similar trends for non-listed banks). In addition, while provision for credit

1
Pursuant to Official Letter 2956/NHNN-CSTT: “Providing loans to non-production areas shall include:
loans, discount of valuable paper for securities investment and dealing; loans for real estate investment
and dealing; loans to capital demand for serving life, loans through the issuance and use of credit cards
(collectively referred to as consumer loans)”.
12

losses to loans granted to customers slightly increased (six out of nine listed banks), provision
for credit losses to NPLs decreased in 2011 (eight out of nine listed banks) (Appendix VI,
Figures 13 and 14). This means that NPLs accounted for a larger share of bank loans and there
is a slight change in the structure of NPLs in 2011 at some banks. Total NPLs of nine listed
banks were VND 11,819 billion as of December 31, 2011, in which debts in group 5 (losses)
were VND 5,500 billion, the equivalent of 47 percent of total NPLs. For both groups (listed
and non-listed), the NPL ratios were highest in 2008, at the time of global financial crisis.
Although the NPL ratio began falling in 2009, it increased again in 2010 and the rising trend

of NPLs is clearer in 2011.
Of concern in the debt structure of many banks is the increase of special mention 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 group are considered “pre-
NPLs”. 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. If the financial situation of the bank‟s
borrowers does not improve, it is probable that the banks must reclassify such loans as NPLs.
An increase in provisions
2
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 1, 5). Because a few percentage points increase in VCB‟s
NPLs is much larger in absolute terms than a large increase in small banks, this signal
concerning VCB‟s NPLs situation is more of a cause of concern than in other banks. A similar
circumstance is also apparent among non-listed banks. As presented in Appendix VI, Figure
10, BIDV, one of the biggest state 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 terms, the NPLs of four state banks AGB, BIDV, VCB and CTG
substantially exceed all other banks (Appendix VI, Figures 3 and 8). This fact is easy to

understand due to the large size of such banks in the sector. Nevertheless, for that very reason,
together with the high percentage of debts in Group 2 and the fact that their main customers
are SOEs, leads to suspicions that actual NPLs are larger than the reported figures. In addition,
the largest and most exposed state bank, AGB (Agribank), did not publish its complete annual
financial statements and failed to release information on its actual situation. Although the bank
announced that its NPLs ratio was six percent in 2011, equivalent to VND 26,609 billion or
nearly USD 1.3 billion, the degree of confidence in this number is low. Even if this number is
accurate, the NPLs of AGB are equal to 120 percent of equity capital and five percent of its
total assets.
3
Due to their poor risk management, state banks in fact need closer supervision
than small banks to prevent considerable adverse effects and huge bailout costs.
Moreover, a consideration of banks‟ NPLs also reveals the dangerous position of two
merged banks, TNB and SCB. Both of them have many NPLs in their debt structure. It can be
seen that they were in a dangerous situation during the period 2008-2010 (Appendix VI,
Figure 7). This can explain why both banks were illiquid and ultimately must be merged.
Besides, a few small banks did not make their financial statements public or published
incomplete statements. Therefore, it is difficult to analyze these small and high-risk banks.
The ambiguity of real numbers of NPLs makes others suspicious about these banks‟ credit
risks. Since financial and banking risks are systematic, any bank failure can lead to systematic
contagion effects. The concealment of risk can make the latent credit risk more serious and
complicate efforts to manage it.
In addition, provision for credit losses in some banks was lower than 100 percent in
2010 and 2011 (Appendix VI, Figures 14 and 16). This means that provisions of these banks
(including general and specific) were not sufficient to cover all NPLs in the worst case. This

3
Until September 2011, Agribank‟s equity capital and total assets are about VND 22,176 and 524,000
billion, respectively (Agribank, 2011).

14

fact contradicts the opinion of SBV that NPLs in the banking system were not worth worrying
about because sufficient provisions had been made for all of them.
The increase in NPLs of the banks has resulted from problems on both the banks‟ side
and the borrowers‟ side. On the banks‟ side, many credit officers lack necessary credit risk
management skills. Therefore, many of them do not have enough knowledge of project
appraisal and required understanding of borrowers‟ business lines. Moreover, although
financial statements are considered as one of fundamental sources for assessing borrowers‟
financial situation, their reliability is still very low due to the limits in ensuring compliance
with accounting regulations. The fact that borrowers have two sets of accounts (accounts for
tax purpose and for internal use) and keep incorrect and/or unclear records is widely known.
For this reason, without internal information, it is very hard for credit officers to have an
accurate assessment of the feasibility of projects and to apply a suitable risk premium for
specific risks incurred by banks. Because of these difficulties, collateral is required by banks
for loans (Hunh Th Du, 2004b). However, collateral, mainly real estate, is not a perfect
safety net for banks. Although banks have the legal right to liquidate collateral, the legal
process of foreclosure takes time and high fees can sharply reduce the asset value and
expected cash flow from foreclosures.
Credit risks are also higher in banks in which professional ethics of officers is too low
and supervisory systems are lax. In these banks, collusion between credit officers and high-
risk borrowers or their related parties happens more often. Bank officers can easily lend
hundreds or even thousands of billion VND without adequate security or completing required
procedures and enjoy high commissions from these loans. These sources of money are then
invested in speculative sectors such as real estate, securities or even unofficial credit.
Although some bank officers have been arrested and prosecuted, financial consequences
suffered by banks in the form of NPLs are still unresolved. In 2010 and the first ten months of
2011, 69 cases related to banking were prosecuted. However, only a quarter of losses were
recovered. During the economic boom, most banks only paid attention to profit growth,
deposit mobilization and credit expansion without paying enough attention to credit risk.