Retrospective

Bank regulation and supervision has existed in some form or other in Vietnam since the creation of the State Bank of Vietnam (SBV) in 1951 (see Chapter 5), where the Office of State Inspection audited the activities of the SBV. The creation of a two tier banking system in 1989 and the continuing transition to a market economy imposed new challenges that required changes in the objectives, structure, and implementation of the prudential supervisory framework. One of the most important and difficult changes is the effort to create a more level playing field between government and privately controlled financial institutions.

Like many other developing countries Vietnam has a concentrated banking sector with a high level of state ownership. Following the Asian Development Bank (ADB 1999), the major State Owned Commercial Banks (SOCBs) hold approximately 75 percent of total assets of the banking sector. In addition, the SOCBs are large shareholders in the Joint Stock Banks (JSBs), and as markets for SOCBs and JSBs are completely separate in terms of both depositors and borrowers the share of assets under complete or partial government control could be much higher. The SOCB dominance is further reflected in the fact that the major SOCBs undertook approximately 80 percent of the commercial

bank operations during the 1990s although this share was declining somewhat during the period (see Chapter 6).

Given their dominant and central position in the financial system, the SBV continually exerts considerable efforts to strengthen the legal and regulatory framework for the SOCB. Recently, new regulations where adopted to strengthen the prudential framework.

This most likely reflects that the SBV and the government have realized the importance of the implementation of an effective prudential bank supervision programme. The changes are far-reaching and affect the financial sector in a multitude of ways – all pointing towards a gradually larger reliance on guided market powers. The recent reforms include:

• Strengthening the legal and regulatory framework for entry and exit into the sector. Here the plans for the near future include a standard review of minimum capital requirements, the introduction of qualitative evaluations of new entrants, and the creation of accountability standards for Bank Board of Directors and senior management.

• Addressing potential conflicts of interest and moral hazard problems. Vietnam has, in order to reduce the risk of encountering problems of this nature, adopted regulation that limits financial institutions from lending to shareholders, directors and enterprises in which the bank has ownership interests. In addition, Vietnam has agreed to establish and implement a risk based bank supervision system and is currently working on the development and establishment of a CAMEL¹⁴ bank rating system, which is required if a risk-based banking supervision is to result in improved bank supervisory practices.

• Protection of depositors. A deposit-insurance scheme covering all depositors has been established.

• Enhancing the overall transparency of the sector. As a part of the agreement with the IMF and the WB the Vietnamese government has pledged to change the current loan classification and the loan loss provisioning standards to bring them in line with international standards. As a part of this process independent IAS audits of the large SOCBs was recently completed – although the results have not been made publicly available. Finally, the government has indicated that bank

14 CAMEL is an internationally recognized framework for assessing the Capital adequacy, Asset quality, Management, Earnings and Liquidity of banks. Recently, an ‘S’ for Supervision was added, making the

compliance to the revised loan classification and loan loss provisioning will be verified through recurrent audits. In addition, the government is considering whether or not it should develop an implementation plan for the use of IAS in the banking sector and in banking supervisory functions.

Some of these recent reforms should be viewed in connection with the efforts to restructure the four large SOCBs. This restructuring is among the current big issues in the efforts to develop a transparent and accountable financial sector, and in some areas they have already begun. The government has, for example, already developed and agreed upon a detailed restructuring plan for the Vietcombank. This consists among other things also of a timetable for the implementation of performance conditions closely linked to its phased re-capitalization over three years. During the next couple of years a detailed restructuring plan for the Vietnam Bank for Agriculture and Rural Development (VBARD), Incombank and the Bank for Investment and Development of Vietnam (BIDV) will be developed on the basis of the recently completed IAS audits mentioned above. In this context the issue of the non-performing loans held by the SOCBs play a crucial role. Due to its central importance for the overall stability and profitability of the financial sector the issue of NPL is analysed in depth in Section 5.5.

Overall, the reform strategy for the banking sector in Vietnam aims at restoring soundness to the system and to improve the efficiency of financial intermediation. As described throughout this report, the Vietnamese government has adopted a wide range of reforms designed to increase competition, move toward a market-oriented allocation and mobilization of resources while maintaining system stability. Although the above-mentioned reforms in many ways represent steps in the right direction, this process of gradually liberalizing the financial sector is not without risks for both the financial sector and for the economy as a whole. The cost of re-capitalization of the SOCBs might, for example, give rise to concern if the pace of SOE and banking reform slows down.

Many of the above-mentioned reforms are inspired by the experiences of other countries and/or internationally recognised best practice. In this context it is, however, important to recognise and take into account that Vietnam’s initial conditions (see below) for a sound financial development might be quite different from the countries with which Vietnam normally compares herself. Furthermore, it is important to note that the financial sector in a developed country differs significantly from that in emerging market economies. As a result, “best practice” lessons from developed countries do not always translate to developing countries such as Vietnam.