Domestic Banks Need to Define Advantages and Improve Corporate Governance

After more than two decades of renovation, the banking system has made a great leap forward in both quality and quantity. From only a few state-owned commercial banks, the country now has five state-owned commercial banks, one policy bank, one development bank, 37 commercial joint stock banks, 37 foreign bank branches and 45 representative offices of foreign financial and credit organisations in Vietnam. Besides, Vietnam also has six financial companies, 11 financial leasing companies and more than 900 people’s credit funds. Currently, the financial conditions of state-owned commercial banks have been significantly improved, the ratio of bad debts is reduced, operating efficiency is bettered and the capital adequacy ratio (CAR) is hovered at 8 per cent, some even at over 10 per cent.

 

 

These are weaknesses against Vietnamese banks. “Integration brings stiff competition for banks, especially newly established commercial joint stock banks which have low financial capacity, small capital, low asset quality, weak risk resistance, and thin networks,” said Dr Tran Dinh Thien, Deputy Director of Vietnam Economic Institute. He pointed out that low IT level, limited human resource quality, and brain drain are hindrances for the development of banks.

 

Dr Le Quoc Ly, Chief of the Financial and Monetary Department under the Ministry of Planning and Investment, said the ratio of capital mobilisation usually accounts for 94 per cent of total mobilised capital; thus, the diversification of new services is a burden on state-owned commercial banks. The bad debt situation seems to be improved, but remains unstable. The outstanding debts in infrastructure construction remain too high versus total outstanding loans. The lending of these banks is mainly guaranteed by assets, while the real estate market has not developed. The liberalisation of interest rates caused the escalation in interest rates and this will harm firms reliant on bank loans,” Ly explained. Under that circumstance, according to Ly, some debtors will face insolvency and bankruptcy if they are not approved to borrow more from the bank. As a matter of fact, banks will have to “feed” their debtors and they may face capital loss.

 

 

Dr Nguyen Thi Mui, Deputy Director of Financial Institute, said the banks should pay attention to expanding market share and improving competitiveness. They should rely on their traditional strong services to standardise the process of service supply, applying new technology, ensuring publicity and transparency and providing good customer service. Regarding modern payment services, banks are in serious need of marketing strategies for such products as mobile banking, internet banking and ATM cards. However, according to Mui, when developing modern payment services, banks should combine with the construction and development of insurance and financial leasing to minimise management costs and increase efficiency. On the other hand, domestic banks should also take advantage of their knowledge in serving domestic customers to expand market share to cope with rivalry from foreign banks with strong financial capacity, modern technology, attractive products, and good governance in the country.

 

“To develop, the banks have no other way than improving their governance levels to increase vitality. To edge up competition in market and market share, commercial joint stock banks should study the formation of multifunctional financial and banking groups. They can merge with other commercial joint stock banks or with state-owned commercial banks and join hands with strategic investors to grasp the opportunity before it is too late,” said Dr Le Hoang Nga of the Banking Institute. She said foreign banks or their branches join hands with Vietnamese commercial banks to save time and costs, and employ transaction networks and human resources when they enter the Vietnamese financial market.