Vietnam Regulatory Brief: Bank Mergers, Consumer Lending Caps, and Economic Restructuring
Compulsory M&A for weak banks
The State Bank of Vietnam (SBV) will be submitting a draft plan to the government on restructuring the credit institutions to reduce bad debts during the 2016-2020 period, by encouraging mergers and acquisitions (M&A) for weak credit institutions such as commercial banks, financial institutions, financial leasing companies, and people’s credit unions. The SBV will also have the authority to compel institutions enter into M&A deals to ensure stability. The SBV has identified five weak commercial banks in need for restructuring and aims to restructure them in 2017. Investors are also encouraged to be part of the restructuring to reduce the number of weaker firms.
Smaller banks are unable to compete in the market due to declining profits, poor administration, and reduced chartered capital, currently standing at US$131 million (VND3 trillion). Banks such as SaigonBank and DongABank also issued preferred stock to increase their chartered capital, but stockholders are not willing to invest further due to reduced growth, affecting the lending capabilities and total assets of the bank. Industry experts have suggested increasing the FDI cap in banking sector to more than 30 percent for foreign investors.
Consumer lending capped at US$4,400
The State Bank of Vietnam (SBV) has issued a new Decree No. 43/2016/TT-NHNN to cap maximum permissible outstanding loans for consumers at US$4,400 (VND 100 million), to be in effect from March 15. However, the limit will not apply to car loans, as the vehicle will be the collateral for the loan. The circular also asks finance companies to simplify the loan approval process and to ensure transparency in lending operations. Experts believe this move will encourage lenders to provide smaller loans, which will increase consumption and credit access.
Vietnam is poised to see an increase in consumer lending in the next few years driven by a growing economy and a younger population with increasing consumer needs. The decree asks lending companies to regulate the high interest rate and stipulate the highest and lowest rates for each product for greater transparency. In Vietnam, the consumer lending rates are much higher than banking rates due to the high risks in consumer lending. Consumer lending accounts for 10 percent of the total outstanding loans in Vietnam, lower in comparison to the neighboring countries where consumer lending accounts for 25 to 30 percent.
Government to implement policies on economic restructuring
The government has issued an action program on economic restructuring for the 2016-2020 period. By 2020, the policy aims to reduce government debts, maintain inflation below 5 percent, and reduce state spending to below 3.5 per cent of the GDP. To achieve their targets, banks are to regulate interest rates, exchange rates and manage the forex and gold markets, while the Ministry of Finance (MoF) has been directed to reduce government borrowings and expenditures in all sectors. The central bank is to focus on credit institutions and reduce bad debt to below 3 percent by 2020. The government expects more banks to comply in the next few years with the Basel II standards to increase competitiveness.
By 2020, the MoF is to restructure State-owned enterprises (SOEs), increase divestment, increase control of state capital, and provide a comprehensive overhauling scheme for such entities. Overall, the government aims to cut down costs incurred by the state and its institutions and develop the industrial, private, and public sector by 2020.
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