Building Capacity of Risk Management in Banking

This is the main content of the Banking Vietnam Conference and Exhibition, which is held from May 20 to 22 in Hanoi. The event is co-organised by State Bank of Vietnam (SBV), Department of Banking Information Technology and International Data Group (IDG) to address the core issues that the banks need to focus to build business strategies effectively in a competitive environment as the present.

 

As reported at the conference, the year of 2013 saw the first signs of recovery of the banking sector in Vietnam with an 8.83 percent increase of credit in the whole system (SBV, December 2013). The process of restructuring the banking system has been stabilised with two successful M&A contracts in 2012 and 2 more contracts in 2013. The merging and acquisition strategies are expected to be more efficient as the domestic banks boost restructuring in order to increase competitiveness. On the basis of the achievements in 2013, SBV set up their objectives of 2014 which aim to increase 16-19 percent of total payment methods, reach 12-14 percent of the whole system credit growth, adjust appropriate interest rates and exchange rates, strictly adopt the 245 project of restructuring system of credit institutions to improve operational efficiency and disciplines in banking.

 

Besides, the financial service is becoming a new source of revenue, along with the traditional credit packages. According to the KPMG's report in 2013, the revenue from the customer service has reached 6.47 percent, the largest proportion of net profit of the bank. The demand for customer services of the financial institutions is continuing to recover after a tumultuous year and is expected to increase slightly in 2014.

 

Foreseeing this trend, the banks have actively invested in upgrading and applying technology in banking to develop financial service channels such as modern banking Mobile banking, Internet banking, SMS banking, and card services. Specifically, in Vietnam, there have been 52 card issuers with 57.1 million cards, 14,300 ATMs and 101, 400 POS (SBV, December 2013). With many distribution channels, the ability of integrating and effectively managing the diverse distribution channels are core factors that determine the success or failure of a bank (World Retail Banking Report- Capgemini & Efma, 2013).

 

However, financial institutions in the region are facing common pressure when profitability declines due to the gradually growing costs. For many banks, the development and application of new technologies such as switching of core banking system, effective application of cloud computing and mobile computing, and deployment of intelligent outsourcing model to minimize the operating cost, which is one of most important issues of the business development strategies.

 

According to Doan Thanh Hai, Deputy Director, Department of Banking Information Technology, SBV, the banking sector is now building an relatively advanced technology platform to meet the needs of socio-economic development. The core banking system has been put into use in most of the banks to help them renew their products, streamline the operational mechanism and reduce business costs. However, due to the limitations of capital investment and experiences, the technology application is still less productive and weak compared to branches of the foreign banks.

 

In addition, the development of the banking sector in 2014 is facing some potential risks, which stem from multiple sources. In recent years, the lending rate on deposit at commercial banks is above 100 percent; in addition, the proportion of medium and long- term capital is low, accounting for only 16 percent of total mobilised loans (Vietnam banking report- VP Bank Securities Feb 2014). This indicates that the liquidity risk of financial market Vietnam is high.

 

In this situation, recently, SBV has issued a series of circulars and drafts to regulate the risk management systems in banks. SBV starts to build and step by step to standardise and synchronise bank infrastructure in accordance with world standards, to keep updated and consistent with current development trends to help reduce risk for credit institutions, limit the risk of market disruption and enable banks to deal with the challenges and potential risks.

 

Regarding to the payment system, the representatives said that to make their distribution channel different from other counterpart, the banks need to focus on promoting distribution capabilities to ensure product supply and service quality to provide the customers consistent experiences in all distribution channels. Besides, the banks need to come up with new banking solutions, particularly the payment system, to improve the customer experiences in the distribution channel.

 

The bank is place where IT dominates almost every business activity. Each breakthrough of IT requires innovation of the system. This is also identified as one of the key tasks throughout the development of new banking system.

 

After nearly 30 years of Doi Moi (renovation), the advanced technology has been widely applied in the banking system; IT has been applied rapidly and efficiently in all banking activities; research activities have been transformed from decentralised model to more centralised model to develop products and services more diverse and proximity to the world.

 

But in the coming time, Vietnam should complete environmental and legal institutions for banking operations, creating a legal framework consistent with science and technology applications in the banking industry, researching and promulgating security standards in banking operations and determining steps with consistent roadmap for application.

 

Risks in business activity tend to rise and to be increasingly complex. This fact raises the urgent need for the development of systems to help identify, assess and manage risk effectively in the financial and banking sector. Accordingly, the banks will need to review and re-build risk management strategies as well as learn from successful experiences to come up with solutions to develop and maintain growth.

 

The role of credit rating analysis system is very important for credit institutions in risk management and supportive to build an effective credit policy. At the same time, this system will also support the government in the management and administration processes.