Banking system facing high credit risks

Friday, April 18, 2008
The latest report by the State Bank of Viet Nam about the operation of commercial banks in HCM City in the first quarter of 2008 shows that banks’ mobilised capital was VND518.5tril, while their total outstanding loans were VND460tril, or the loaned sums accounted for 88% of mobilised capital, a very high proportion.
Some commercial banks last week began cutting lending interest rates, a sign that they have calmed down since once facing low liquidity. However, the interest rate cuts do not prove that commercial banks have been able to avoid risks. Audited reports and statistics show that many banks have high credit risks.
Financial experts have pointed out that commercial banks have put themselves in a dangerous situation as the loaning ratio proves to be overly high compared to the mobilised capital.
The latest report by the State Bank of Vietnam about the operation of commercial banks in HCM City in the first quarter of 2008 shows that banks’ mobilised capital was VND518.5tril, while their total outstanding loans were VND460tril, or the loaned sums accounted for 88% of mobilised capital, a very high proportion.
Meanwhile, the highest proportion, according to banking experts, should be no more than 75%.
Experts say that state owned banks always have low ratios of loans/mobilised capital, which help them maintain high liquidity. This means that small and newly established banks have very high percentages of loans, possibly 100-200% of mobilised capital (the banks mobilised VND100, but lent VND200, including money they borrowed from other banks on the interbank market).

The report cites the case of a bank in HCM City (S Bank) as example. S bank has the total assets of VND25.9tril, including VND15.9tril worth of mobilised capital, and VND5.3bil it borrowed from other banks. It lent VND19.3bil, which means the loans were higher than the mobilised capital. It is clear that the bank is at high risk of losing liquidity.

Moreover, commercial banks are also facing risks due to unsuitable interest rate policies. The serious shortage of VND capital has forced banks to raise deposit interest rates, once hitting 14% per annum. However, banks cannot raise lending interest rates for clients which signed credit contracts before, when the interest rates were lower. Banks now have to persuade their clients to re-negotiate new ending interest rates, and this work proves to be not easy.

The fact that the State Treasury is to take back the VND52tril deposited at state owned banks is believed will put new difficulties on banks. State owned banks’ usable capital will be less profuse than nowadays, which also means that joint stock banks cannot rely on state owned banks as the capital providers.

Aware of the risks commercial banks are facing, the State Bank of Vietnam is trying to settle the problems. Le Xuan Nghia, Director of the Banking Development Strategy Department under the State Bank of Vietnam, said that the State Bank is considering releasing a regulation which stipulates the ceiling proportion of outstanding loans on mobilised capital on the market (the credit market of banks and enterprises that borrow money for business).

The maximum lending proportion may be 80% of mobilised capital, Nghia said. (SGTT)