Difficulties for banking system: Do not blame WTO

The WTO does not create bad debts or any other challenges, he said, adding that it even provides fresh impetus for the renovation of the banking sector.

Internal challenges

Speaking at a recent seminar on Vietnam’s service, banking, and financial markets after joining the WTO, Associate Professor Nguyen Thi Quy, international arbitrator and former vice President of the Foreign Trade University, says the banks’ poor financial capacity is one of the challenges they face.

As of June 2011, State-run commercial banks accounted for 70 percent of Vietnam’s banking and financial market.

However, the average capital adequacy ratio (CAR) of some large banks is estimated at only 9 percent, while the average world figure is 12 percent and 13 percent in the Asia-Pacific region, she says, adding that the average Return on Equity (ROE) is estimated at 20 percent in the world, but only 15 percent in Vietnam.

Another alarming figure is the bad debt rate (2.5 percent), which is much higher than the world’s average (0.4 percent).

In terms of liquidity, Quy says, Vietnamese banks are taking a lot of risks because most of them mobilize short-term deposits while offering long-term loans.

Less than one year deposits make up 99 percent of bank deposits in Vietnam, she cites.

Regarding services, foreign banks operating in Vietnam are offering high-profit products with high level of safety such as foreign exchange, bank cards, global payments, and stock deposits, while Vietnamese banks are still in a vicious cycle of credit, unfair competition, and under-the-counter interest rates.

Outdated technology is also a challenge for Vietnamese banks, says Quy, attributing it to poor financing and forecasting, and a lack of management capacity.

But these are not caused by Vietnam joining the WTO, she stresses.

Pressure from foreign banks

Truong Dinh Tuyen, former Minister of Trade, says since Vietnam joined the WTO in 2006, foreign banks have appeared in the country and this placed a lot of competitive pressure on Vietnamese banks that need to renovate their management to provide better services.

However, Tuyen says, Vietnamese banks can still corner the market, and if they can take advantage of the WTO commitments, they will enjoy significant development.

It is crucial for Vietnamese banks to change their management methods and offer more services, instead of focusing too much on credit.

According to Quy, the inflow of foreign banks to Vietnam, especially when the country is opening its doors to the world, is inevitable.

The five banking enterprises, five banks with 100 percent foreign capital, 48 branches of foreign banks, and 80 finance leasing companies operating in Vietnam account for only 10 percent of the market, but they have breathed new life into Vietnam’s financial market.

In addition, everyone can feel a trend of mergers and acquisitions (M&A) by foreign banks in the domestic market, Quy says.

She says by the third quarter of 2010, foreign banks had mobilized VND77,444 billion, their assets had increased by 29.8 percent compared to 2009, and their credit outstanding was raised by 11.9 percent to VND38,322 billion.

These figures indicate their efforts to expand operations and corner the market and this presents a real challenge for the young Vietnamese market, she notes.

Former Minister Tuyen says Vietnam does not need to worry about the M&A trend as its WTO commitments allow foreign banks to hold only a maximum 30 percent of the capital in a joint stock commercial bank.

However, foreign banks will try to increase their market share, he says.

Trinh Quang Anh, Director of the Maritime Bank Economic Study Center says most foreign banks are now focusing on V.I.P customers so Vietnamese banks still have a chance to expand their business in the rural market.