After years of sky-rocketing credit growth to finance development, Vietnam’s banking system is now weighed down by toxic loans that have forced the communist nation to launch tough reforms.

The Southeast Asian country’s financial sector consists of about a hundred banks—either state-owned, private or foreign bank branches. But most have only limited capital and many face a substantial shortfall of cash.
In the years to come, the whole set-up will have to change.

“There are too many small banks,” said Le Tham Duong, from the Banking University of Ho Chi Minh City. “The challenges are enormous.”

After a 14-fold increase in the amount of loans held by banks since 2000, reaching 244 per cent of gross domestic product in September 2011 according to the central bank, the system has woken up with a huge quantity of bad debts.

Many result from the inability of state-owned companies and banks to fully follow the market economy principles embraced by the Communist Party in the late 1990s.

The trend was further accelerated by the regime’s economic reforms in early 2010, when the government abandoned its sacred dogma of economic growth to tackle macroeconomic imbalances, particularly record inflation, still around 20 per cent.

Measures towards credit limitation via higher interest rates in particular have been taken, making it harder for indebted companies.

Official figures today show toxic loans represent about 3.2 per cent of all of those registered in the country.
But “they are increasing fast” and “could reach five per cent by the end of this year,” said Cao Si Kiem, Vice-President of the Consulting Committee for National Monetary Policy which advises the government.

Many experts distrust the figures, saying bad debts are badly underestimated in a country where opacity still dominates the corporate culture and where transparency of accounts, including the Central Bank, is mere wishful thinking.

Foreign observers suggest at least 10 per cent of banks’ assets could be bad loans.

The Daily Independent/Bangladesh/ 22th Dec 2011