New rule aims to reduce number of weak banks

New rule aims to reduce number of weak banks

Underper-forming banks may have to file for bankruptcy if they cannot meet new conditions set out by the central bank under a recently issued circular that is effective on April 27.

Circular No07/2013/TT-NHNN requires that certain banks restructure through merger or acquisition with other credit institutions.

Under the new policy, the central bank could put a weak bank's operations under its direct control. This would depend on the bank's financial situation, risk level and legal violations.

Under the new rule, the central bank will also require the owners of this group of credit institutions to increase their prescribed capital to ensure security.

If these banks are unable to increase legal capital, the central bank will have to either create a restructuring plan for the bank or require the bank to merge with or be bought by other credit institutions.

Under this plan, other credit institutions could buy shares of banks or contribute capital under the central bank's control so that safe capital ratios would be ensured.

The central bank said it would interfere with a bank's operations if the bank's accumulated losses exceed its real value of legal capital.

This information will also be publicised on the credit institutions' websites, in the media or at a shareholders' convention.

The SBV governor will decide the length of time that a credit institution is under the central bank's special control.

The time can be extended if the credit institution demonstrates that it can return to normal status, or if it needs more time to prepare for merger or acquisition.

If the bank ultimately cannot meet any of these conditions, then it will have to file for bankruptcy.

Experts' reactions

Senior economist Dr Nguyen Tri Hieu said that, in the past year, underperforming banks took advantage of the central bank's commitment to not allow any bank to collapse. As a result, banks delayed refreshing their capital reserves.

In addition, State assurance depositors avoided putting money in good banks and preferred to use banks offering high deposit rates.

These factors placed the entire banking system at risk, according to Hieu.

Nguyen Viet Khoa of HCM City Economics University said that the organisations and individuals in the past with large amounts of capital who set up banks were not afraid of going bust.

Thus, many banks were established without proper control over risks and liquidity, leading to the large amount of bad debts that exist today.

However, SBV chief inspector Nguyen Huu Nghia said there had been a lack of cooperation and a hostile attitude from weak banks' major shareholders, one of the largest hindrances to banking restructuring in the past year.

He said that, under these circumstances, the central bank was unable to intervene because of an inadequate legal framework.

Nghia said that Circular 07 would help spur bank restructuring.

An official of a joint stock bank in HCM City said that more mergers and acquisitions should have occurred in late 2011 and early 2012.

If this had happened, the bad debt dilemma would not be as critical as it is, he said.

However, he said the SBV had taken the right approach in 2011 because the banking sector liquidity remained fragile. It has improved greatly, he added.

Along with Circular 07, the prime minister has formed a steering committee for the "Restructuring the credit institution system from 2011-15" project, with the participation of various ministries, sectors and management authorities of Ha Noi and HCM City.

This is considered a preparatory step to the bank's measures to reform and resolve bad debts.

Many depositors are concerned about the central bank's decision to allow banks to go bust because deposit insurance for Vietnamese banks stands at only VND50 million (US$2,380).

However, the central bank has said that protection of the depositors' interests would be paramount during bank restructuring.

Lawyer Pham Chi Cong said that depositors should not worry because the banks had to take care of all their responsibilities towards customers before bankruptcy proceedings.

vietnamnews