World Bank Sees Flaws in Vietnam Bank Overhaul Plan

Vietnam’s plans to restructure its banks needs to overcome weaknesses such as a failure to perform audits of key financial institutions, the World Bank said days before a debt asset management company is due to start.

An asset management company that will help clean up almost $5 billion of bad debt at lenders is scheduled to begin operations mid-July, the State Bank of Vietnam said last month. The World Bank said in a report today that the government’s bank restructuring plans are “considerably different from what is generally considered as good practice.”

The “very small” level of capital assigned to the asset management company, its lack of independence and plans to acquire debt at book value, are “not good practices,” said Deepak Mishra, the World Bank’s lead economist in Vietnam and co-author of the report.

Prime Minister Nguyen Tan Dung is under pressure to rejuvenate an economy that’s seen expansion slow to less than 5 percent this year, after one of the highest bad debt-levels in Southeast Asia crimped credit to businesses. Delayed structural reforms of banks and state companies could undermine investors’ confidence and worsen growth prospects, the World Bank said.

Limited Progress

Vietnam has made “limited” progress in solving problems in its banking sector, Mishra said at a conference today to discuss the report. “There is a lot more effort that needs to be done to make the Vietnam Asset Management Company and other parts of the banking sector reform successful,” he said.

A plan to delay requiring banks to use stricter standards for bad debt gives banks room to “flexibly interpret the loan classification system and to underreport” non-performing loans, the report said.

The country’s strategy for its banks “stands little chance of being effective in isolation,” and needs to be part of a broader financial restructuring such as reforming state-owned companies, given banks’ exposure to loans to such companies, the report said.

“More than two years after the government set out to reform the state-owned enterprise sector, progress has been limited,” the World Bank said, citing as an example a target of selling shares in 93 state companies last year against which “it seems” that shares were only sold in 12, according to the report.

It also identified the Vietnamese government’s decision not to use taxpayers’ money in the bank restructuring effort as a risk.

“Most banking-sector restructuring involves costs, which are absorbed into the government budget, often stretching over a number of years,” the World Bank said. At the same time, “accurately measuring the size of the NPLs through special audits of banks and using them to estimate the recapitalization needs are important for a successful restructuring process,” it said.

While the creation of the company signals that the government is “finally serious” about cleaning up the banking sector, the plan may hamper economic growth by taking several years to repair bank balance sheets, JPMorgan Chase & Co. said this month.

— With assistance by Jason Folkmanis

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