Survival of the fittest for Vietnam’s weakest banks

Vietnam’s small and weak banks face a grave situation that will soon become worse.

A recent deposit rate cut by larger Vietnamese banks is making it more difficult for smaller banks to attract funds, said the International Monetary Fund.

The State Bank of Vietnam lowering of the dong’s deposit cap for terms of one month and above to 13% from 14% beginning March 13 stands to place smaller and weaker banks in a more perilous position.

The central bank said small banks can’t mobilize funds from depositors even at the 14% rate, “. . . given their well-known weaknesses. At a 13% deposit rate, they will find it even more difficult. That would drive them even more toward liquidity support.”

As a solution, the government should separate bad assets of weaker lenders as part of its restructuring plan, and consider selling the holdings to a private or public asset management company.

Masato Miyazaki, the IMF’s head in Vietnam, cautioned that failure to resolve bad debts may erode confidence in the banking industry.

“Overall I don’t think the situation of Vietnam’s banking industry has improved yet,” Miyazaki said. “The understanding of the problem on the part of the authorities has improved, but the dire situation facing the weak banks hasn’t improved.”

Prime Minister Nguyen Tan Dung approved a bank restructuring plan this month. Measures to bring this about may include government purchases of collateralized bad-debts from commercial banks and more foreign ownership in weak lenders.