Banking system in difficulties, but not desperation

Tuesday, May 6, 2008
Le Xuan Nghia, Director of the Banking Development Strategy Department under the State Bank of Viet Nam, has denied the opinion that banks may fall into a financial crisis due to the tightened monetary policy and the sharp price falls of real estate, which is 50% of the mortgaged assets for bank loans.

What is your comment about the pressure of fighting inflation which is burdening commercial banks?

The Government should not be overhasty in fighting inflation by overly tightening the monetary policy, as this will make banks’ liquidity lower and bring more risks. We have to go step by step in fighting inflation in the context of the possible world crisis. We have to do the things that both allow us to curb inflation and ensure the liquidity of banks as well.

If the Government and State Bank of Vietnam become impatient to reduce the inflation rate to below the previous year’s level or restrain the credit growth rate at 30% this year, banks’ liquidity will be low.

The Viet Nam Banking Association still insists on the ceiling interest rate scheme. What would you say about this?

The association wants low lending interest rates in order to ease the burden on businesses. However, it is impossible to do both things at the same time, tightening monetary policy and keep low interest rates. I advocate the removal of the ceiling interest rate scheme.

I think that the State should keep a line of retreat open for commercial banks. It should not use administrative orders to regulate the market, with which the banks cannot survive.

As you may know, the US and European economies are paying heavy prices for the real estate bubble. How will the bubble burst in Vietnam, if it occurrs, affect the national economy?

The outstanding loans to fund real estate investments just amount to 10% of banks’ total assets. However, the properties which are the mortgaged assets for bank loans, account for up to 50% of banks’ total assets, nearly equal to Vietnam’s GDP. Therefore, it is clear that if the real estate market collapses, this will harm the financial system. Therefore, the Government must not let the market collapse, and must not let the bubble exist. The bubble must be burst, but gradually.

Statistics showed that some banks have lent 250% of mobilized capital. Do you think that it is a sign of banks’ crisis?

The figure is not worrying. Why can bank borrow VND1 and lend VND2.5? Because it can borrow money from bigger banks, and the money is in the fixed term loans among banks. No bank dares use overnight loans to lend. It seems that even the central bank’s officials do not well understand the principle, therefore, worries about the crisis have been raised.

Between low liquidity, falling real estate market, do you think that all these factors can trigger a banking crisis?

I think that the liquidity problems are just temporary, which cannot cause the collapse of the banking system. The banking system is in difficulties, but everything is still under control. In case one or several banks fall into crisis, the central bank will surely rescue them in order to avoid domino effects. (SGTT)