Vietnam banking reform in trouble: experts

HO CHI MINH CITY — Vietnam's drive to restructure its troubled banking sector is being derailed by powerful interest groups as the political will needed to force through painful reforms falters, experts say.

After a decade of rapid, chaotic bank liberalisation, Vietnam has ended up with too many domestic banks (42) — many of which are overloaded with toxic debt — and poor governance across the system, economists warn.

Last year, faced with persistently high in ation and critical liquidity conditions at many of the weaker banks, the government announced aggressive restructuring plans.

But as in ation has fallen — from a high of 23 per cent last August to 8.3 per cent in May, allowing the central bank to increase monetary supply and easing banks' liquidity problems — so too have appetites for reform.

"Things have calmed down a bit because of falling in ation. So now they're thinking 'OK we don't have to be so aggressive'," said economist Nguyen Xuan Thanh, director of the public policy programme at the Fulbright School in Ho Chi Minh City.

"The second factor (slowing reform) is the resistance from the banks, from the owners of the banks... the political economy doesn't allow the government to act decisively by taking over a bank and cleaning it up to sell."

Aside from ve fullyforeign owned banks, such as ANZ and HSBC, the sector is dominated by large stateowned banks and dozens of smaller joint stock banks owned by public or private investors.

After years of rapid credit growth, the balance sheets of many of these banks are weighed down with toxic loans — the majority of which went to badly-run state-owned enterprises and speculative property investments.

While the larger state banks bene t from an implicit government guarantee and continued investor con dence, many of the joint stock banks have serious liquidity problems and can barely stay a oat, experts say.

This has hit the broader economy — credit lines have all but dried up which has affected small and medium businesses particularly badly with some 18,000 going bankrupt this year alone.

Unless there is decisive restructuring, the system will remain unhealthy "and the economy as a whole will suffer", said Thanh.

What the government needs to do is "take over the weakest banks, merge them, sell off the bad debt and then resell the merged bank", said Jonathan Pincus, a HCMC-based economist from the Harvard Kennedy School's Vietnam programme.

"It would be quicker and less risky for the system as a whole. But bank owners would resist this," he said.

To have a banking licence in Vietnam, one Hanoi-based diplomat said, you have to be "very well connected". Bank ownership brings bene ts — the possibility of kickbacks, access to cheap credit.

Many small joint stock banks are owned by subsidiaries of state-owned enterprises or well-connected groups of investors who own multiple banks, evading regulations with accounting tricks.

The sector is riddled with complex cross ownership patterns which are proving "politically dif - cult to unwind", Pincus said. — AFP