Hanoi (VNA) – If banks cannot increase charter capital, they’ll have to reduce credit growth, which could harm the provision of capital 🔯to serve economic development.

Transactions at the Maritime Bank (Photo: VietnamPlus)

Vietnam has been quite late in the application of Basel II standards compared to international progress as well as internal demand. The country officially applied the second edition of the Basel Accords in 2016. It is time for credit institutions to fully meet the Basel II standards – which are recommendations on banking laws and regulations issued by the Basel Committee on banking supervision.

Basel II comprises minimum capital requirements, supervisory review and market discipline. It aims to enhance competition and transparency in the banking system and make banks more resistant to changes.

A member from the national financial and monetary policy advisory council said that for banks with relatively good business performance and financial foundation, the application of Basel II standards is successful. However, this is difficult for banks that face financial difficulties.

“Being able to meet the Basel II standards is not a rosy road but full of difficulties for banks.”

Even for banks with high Capital Adequacy Ratio (CAR) – also known as capital-to-risk weighted assets ratio used to protect depositors and promote the stability and efficiency of financial systems, it is not easy to obey Basel II because they must not only meet capital requirements but also comply with strict regulations of a risk management system of Basel II. This is extremely difficult for Vietnamese banks.

Most banks have set a plan to increase capital, but so far, only medium and large banks have achieved their goals.

According to experts, competing to increase capital for small banks is a struggle because of low profits, a lack of transparent information and low stock prices. 

This will increase the differentiation among banks and small banks are likely to lag behind more. In that context, experts said small banks should take into account merger and acquisition (M&A) activities to increase competitiveness.

Many banks are pushing the application of information technology to serve customers (Photo: VietnamPlus)

A few years ago, executive agencies suggested that the whole system just needed some 15-17 large-scale banks with strong financial health. Meanwhile, the total number of one member limited liability commercial banks owned by the State and joint stock commercial banks is 35.

Apart from increasing charter capital to maintain the Capital Adequacy Ratio (CAR), high equity is an important factor to help banks mitigate damages in case of market fluctuations.

Vice versa, banks with poor capital health will be strongly affected. Therefore the CAR and equity are the “backbone” of a bank.

The Vietnam Banks Association has proposed State agencies allow banks to increase capital.

Total assets and credit outstanding of State-owned commercial banks make up 50 percent of the whole banking system. In recent years, though these banks did not receive supplementary capital from the State, they still managed to expand credit to meet the economy’s capital needs.

If unable to increase charter capital, banks will have to cut credit growth, meaning less capital to be channeled for economic development. In particular, there is a risk of violating capital adequacy ratios, adversely affecting operational safety, international credit rating and prestige in the global market.

The Vietnam Banks Association said that if receiving timely support from the State to increase charter capital, commercial banks could promote their role as a powerful tool to implement the Party and State’s guidelines and policies, including the provision of capital for economic growth, helping the Government realise the growth targets in 2019 and the following years. In the long run, it will help ensure the safe operation of the credit institutions system.

This is an urgent issue, hence the Vietnam Banks Association proposed relevant ministries and departments soon deploy measures to address the need of increasing charter capital of State commercial banks.

ไThe association asked State management agencies to allow banks to keep the annual pro🍒fits or pay the dividends of the State by shares to increase capital and help solve current difficulties.-VNA