IMF published its staff report in context of the 2019 Article IV consultation with Vietnam. The IMF Directors noted ongoing reforms in the financial sector, including the shift of bank business models to lending to households and private firms; this is accompanied by more prudent aggregate credit growth limits and deepening of bond and equity markets, which has reduced financial stability risks and improved the quality of financial intermediation. Directors welcomed the adoption of Basel II standards and encouraged swift recapitalization of the systemic state-owned banks and the construction of a modern macro-prudential framework to replace quantitative credit limits and deal with potential financial stability risks.
The staff report highlights that bank earnings have improved in recent years. As large firms issue more corporate bonds, banks have increased credit to small and medium enterprises recently. Fintech helps banks to expand their customer base, fostering inclusion. Nonperforming loan (NPL) ratios have been declining, with banks aggressively buying back NPLs from the Vietnam Asset Management Corporation. Resolution 42 of 2017 helped resolve NPLs more efficiently, by providing more legal powers to seize collateral and opportunities to sell NPLs at an auction. Staff welcomes the progress in resolving NPLs and recapitalizing banks. The level of NPLs should be carefully monitored. With the recent steps to strengthen the implementation of Resolution 42, its policy effects are expected to continue, with NPLs continuing to come down from the still-high current level (of 6.5%) to close to the average for the emerging market economies (4% to 5%).
Strengthening bank capital is in progress, catalyzed by the deadline for implementing Basel II rules. Most large private banks are well-capitalized to meet Basel II rules, owing to retained earnings backed by high profitability and equity injections from foreign investors. The authorities should continue to strengthen the banking sector and use the Basel II deadline of January 01, 2020 as an opportunity to restructure and consolidate the banking sector as necessary. Foreign-ownership limits, regulations on new equity issues and rapid growth in credit demand all contributed to the lowering capital adequacy ratios (CARs). The authorities have formulated a bank-by-bank strategy for recapitalizing large state-owned commercial banks, with financing sources under internal discussion. Banks are being urged to raise CARs by issuing equity to private investors, disinvesting from private bank and non-bank entities, and shrinking balance sheets.
SBV has stepped up prudential measures, including a cap on the ratio of short-term funding to long-term lending. It has also strengthened its banking sector stress tests and monitoring of early warning indicators. CARs for some state-owned commercial banks, where the increase in consumer finance has been significant, have declined. Balance-sheet stress tests show that the largest risks for these banks are related to liquidity and credit. A high-level, multi-agency National Financial and Monetary Advisory Council has been created, chaired by the Deputy Prime Minister. The Council has been charged with monitoring system-wide risks and providing advice on policy measures as financial markets deepen, become more interlinked, and are liberalized. Greater information-sharing and transparency throughout the government should facilitate macro-financial risk management.
Plans to liberalize the financial system should be carefully sequenced. A well-capitalized banking system, a strong modern macro-prudential framework and bank supervision, and enhanced capacity for financial stability assessments are preconditions. Despite significant progress on all these fronts, there is need to build additional capacity, which cannot be achieved overnight. It is, therefore, prudent to maintain credit ceilings for the time being while allowing banks that have achieved Basel II standards more room for lending.
Related Link: Staff Report
Keywords: Asia Pacific, Vietnam, Banking, NPLs, Basel II, Systemic Risk, Financial Liberalization, Stress Testing, Financial Stability, Macro-Prudential Policy, Capital Adequacy, SBV, IMF
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