Foreign banks eye up NPL impasse

Foreign banks are expressing interest in acquiring larger stakes in Vietnamese banks  struggling with the non-performing loan crisis. But, foreign and local banks are waiting for State Bank guidance to encourage such moves.

Increasing the foreign ownership limit in a local bank to address non-performing loans (NPL) was an option noted in the government’s scheme to restructure banking system during 2011-2015.  But so far, there are no reported cases of foreign banks being allowed to increase stakes, although local bankers claim the interest do so remained strong.

Le Quang Trung, deputy director of Vietnam International Bank, said despite the high NPL ratio, Vietnam’s banking system remained attractive. “In discussions with some foreign partners, I see they are very interested in Vietnam as it has hidden attractiveness,” Trung said. “But it is necessary to loosen ownership limits so foreign shareholders can have decision power in a bank.”

Granting a larger role to foreign banks, some experts say, would provide access to huge capital flows that would help address the NPL problem. Under the current circumstances, NPLs limit the ability of local commercial banks with limited resources.  

Pham Hong Hai, managing director, head of global banking and markets at HSBC Vietnam, said foreign banks still wanted deeper involvement and were waiting for clearer instructions from the State Bank.

“There is no need to raise foreign ownership [levels] in all banks. The government and State Bank can select some weak banks that must be restructured as soon as possible,” Hai said. “The [foreign] holdings can be increased to 51 per cent as this is large enough for foreign banks to manage a local bank.”

Banking expert Nguyen Tri Hieu recommended dividing the process into two periods. The first period is the next four years, with the government to allow foreign banks to hold 49 per cent stakes in a local bank and from 2016-2020, the ownership limit must be removed based on Vietnam’s World Trade Organization commitments.

“Establishing a national asset management company to deal with NPLs is still controversial,” Hieu said. “Meanwhile, the Ministry of Finance’s Debt and Asset Trading Company does not have much experience in dealing with national NPLs, thus raising foreign ownership is a good solution.”

High NPLs is one of the main reasons for banks to raise deposit interest rates or even break the deposit interest rate cap as happening recently. In fact, some banks are still facing liquidity troubles, as they struggle to collect on loans. Moreover,  the maturity mismatch between loans and deposits that exists in banking system cannot be quickly resolved.

Moreover, if banks continue to raise interest rates on deposits, the capital cost over the longer term will be higher. This would affect the lending rate, slowing down the  lending rate reduction process encouraged by the State Bank. Thus, reducing NPLs is the priority in the market now.

“There can be different specific solutions to NPLs, but we suggested that NPLs must be reduced as soon as possible with the resources coming from outside of the banking system,” said economic expert Nguyen Duc Thanh.