Interview: Nghiem Xuan Thanh, Phan Duc Tu, Natasha Ansell and Hong Hai
How is the Vietnamese banking sector adjusting to the Basel II recommendations and regulations?
NGHIEM XUAN THANH: The central bank has selected 10 commercial banks that will be required to implement Basel II by 2018. When complying with Basel II, the risk-weighted assets will increase, leading the bank’s capital adequacy ratio (CAR) to decrease while making sure the bank’s capital needs increase. At the same time, the banks will have to focus on handling bad debts and purifying their system to fit international standards. The reason behind the low CAR in Vietnam is the growth of risk assets, in particular with rising bank loans over the past few years. The average loan growth rate is around 18%, which poses a challenge for Vietnam’s banks to comply with the CAR under Basel II. The CAR should decrease by 1-2%, It is crucial for Vietnamese banks to follow a proper roadmap, as banks need to be in line with the capital requirements. Banks need to improve their financial health in order to reduce bad assets while maintaining growth. We also need to focus on a medium- to long-term strategy to pay stock dividends rather than cash dividends. Finally, the government needs to restructure its involvement and ownership in banking, to allow the establishment of a healthier system and encourage a greater foreign contribution.
PHAN DUC TU: Basel II is an intrinsic requirement for all banks, and local banks should actively prepare themselves for this transformation. In Vietnam, the State Bank of Vietnam (SBV) has selected 10 commercial banks, including BIDV, to implement Basel II by 2018. This is creating an official pressure for the banking sector to transform sustainably. As such, there have been a lot of efforts by local banks to implement technical projects and prepare databases and risk management policies. Raising capital to comply with the CAR requirements is a critical issue for local banks, and each bank should have a feasible plan for raising capital in order to meet these Basel II requirements.
NATASHA ANSELL: In our view, local banks are faced with three main challenges in implementing Basel II. First, there is an uncompleted legal framework. Local banks need to build policies and a risk management framework which follows both Basel II standards and the SBV requirements. However, the SBV is still in the process of finalising policies related to this content. The central bank has shared a draft version regulation with all banks. Any changes in the central bank’s policy could have a great impact on banks in the implementation of the Basel II roadmap. Banks need to work closely with the SBV’s experts to remain updated on the situation and to take timely measures.
Second, limited human capital in adopting Basel II regulations is one of the key challenges faced by all banks. The banks need time to build adequate human resources for operating risk management under Basel II. One of the solutions is to cooperate with international consultants to set up the overall roadmap for the implementation of Basel II, and to provide training and build up adequate human capital in the process.
Third, local banks face challenges in gathering information to measure and run analytical models, which require substantial historical data. It will take several years to collect appropriate data to build models with a sufficiently low error rate.
HONG HAI: Local banks are facing many challenges in raising sufficient capital to meet Basel II standards whilst growing their loan book at a very high rate every year. Local investors don’t have sufficient capital to inject into banks, whilst foreign investors are still reluctant to invest due to the low ownership ratio, high non-performing loans (NPLs) and lack of transparency. Banks need to seriously review their portfolio to reduce high-risk assets and actively find suitable investors to inject more capital. In order to ensure sufficient capital under Basel II, banks should start re-evaluating their portfolios to ensure sustainable growth. This also requires providing the right products and services to the right customers. Maintaining a healthy risk appetite is a good start to manage risk in a bank. The strategy of increasing capital should always go hand-in-hand with proper usage, which is a guarantee for sustainable capital growth. If there is some difficulty in mobilising capital from shareholders, banks should consider using retained profits. Besides, banks should always enhance risk management capability to ensure proper profit levels that can serve the capital increase purpose.
This risk management should cover credit, market and operational risks to address the requirements of Basel II. Finally, banks should look at the relationship between risk and return of the products so as to build a suitable portfolio. Good asset management on and off the balance sheet will also help banks improve their CAR to meet new regulations.
How can financial technology (fintech) improve competitiveness and banking penetration?
TU: Technology is an important trend that commercial banks should take into consideration and cooperate with fintech firms on. Commercial banks should not try to do everything themselves as fintech firms already have the advantage with regards to new trends. Rather, we need to prioritise digital products such as e-banking, and enhance the capacity of the current infrastructure and launch new products. We need to look for new initiatives in cooperation with fintech companies. Both commercial banks and fintech firms will be sharing the benefits, as fintech firms have creative ideas and cutting-edge technologies, while banks have the customer base and prudent internal policies. We need to work with fintech firms to produce apps and products to increase the number of customers, especially targeting the younger generation, as they are already app users.
ANSELL: The SBV has set ambitious 2020 goals, which include increasing e-commerce and e-payments, reducing the cash to total payments ratio to under 10%, making 70% of the population over 15 bankable, diversifying payment channels and methods, reaching annual point-of-sale volume of $200m. This is a real vision, which provides inspiration and aspiration for the banking sector. Consumer behaviour is changing, and ability to do banking on mobile devices is clearly overtaking the traditional need for branches and call centres. Security aspects will be key.
Fintech companies have been driving a lot of the creativity in this field, but the platforms must also be robust. Regulators around the world are very focused on these aspects and the SBV is also taking a proactive stance on these same issues. We feel that there is sufficient engagement from the authorities to control and implement this trend in a safe and sound way for both banks and consumers.
HAI: We have seen a wave of banks applying technology in products and services to bring convenience to customers, and this continues to be the trend, with a warm reception from Vietnamese consumers. We have seen banks getting into more partnerships with e-commerce names to accommodate the needs of customers. The advantage is that 55% of the Vietnamese population own smartphones, of which 55% spend at least two hours per day browsing the internet and shopping online. I think in the near future, mobile banking, ID touch, Voice ID and multi-channel booking systems will be widely applied in Vietnam – encouraging additional millions of bankable people with the rise of e-commerce consumption.
By adopting fintech, banks would be able to understand customers much deeper in terms of lifestyle, purchasing behaviours, etc. Banks would be able to make tailor-made offers to customers and differentiate themselves from other competitors. By leveraging fintech, banks don’t need to expand costly branch networks in rural or remote areas but can still approach these customers and give them access.
THANH: Current banking penetration in Vietnam is fairly low; only 35% of the population has a bank account. Most of the youth are mobile and tech savvy, which opens the opportunity for technology inclusion and mobile banking. By adopting this growing trend, banks can increase their retail loans and provide new products that will contribute to the bank’s development. Fintech is a growing global trend, and many firms are starting in Vietnam. This is a potential future competitor for banks in the field of online payment and diversified consumer services. Local banks need to invest in innovation and upgrade their technology platform. They will then be able to diversify their product base in order to compete with fintech firms.
In what ways can the popularity and usage of credit cards be increased in Vietnam?
ANSELL: There are many ways banks and the local government can cooperate to push credit card penetration. For example, in order to improve the ability of banks to issue cards, the infrastructure of the credit bureau needs to be enhanced. Also, expanding card acceptance through mobile point-of-sale terminals in non-card-accepting merchants will boost the usage of credit cards. The government should allow official payments to be made through a cashless system. There is a need to push e-commerce and digital players to adopt full non-cash transactions rather than relying on cash. Finally, given the high level of mobile penetration in Vietnam, contactless payment infrastructure should be developed.
HAI: In order for credit card transactions to be improved, there must be cooperation between international card institutions, acquiring banks, issuing banks and merchants. Additionally, regulators should provide a suitable operating environment for all. Within this environment, international card institutions must provide a smooth platform for card operations, with a clear division of responsibility between all parties and introducing new products such as contactless cards, which would inspire younger consumers to adopt the latest trends in technology.
Issuing banks must implement good sales and promotion campaigns, provide security tools to create easy and comfortable usage for cardholders, and educate clients about security measures and how to use cards intelligently. Acquiring banks and merchants encourage clients, fulfilling responsibilities in processing customers’ cards.
THANH: Although credit card usage only recently began in Vietnam, the growth rate is impressive. Today, many government officials and top management are increasing credit card usage on both a local and international base. This market has great potential, which is why many banks have partnered with credit card issuers such as Visa and MasterCard. Point-of-sale terminals have also increased in number throughout the country in order to access a bigger chunk of the population, which will boost the growth rate in the coming few years.
TU: Credit cards and other payment services are a vital aspect of Vietnam’s banking development, especially with the SBV’s move to reduce the use of cash in Vietnam and increase non-cash payments in the economy. Credit card payment is one popular way to serve individual consumers, therefore we need to improve the procedure to get customers’ interests. We should also increase the quality of services and other utilities, and increase cooperation with service providers such as airlines or entertainment outlets to create schemes that will boost usage of credit cards, especially among young customers.
To what extent is access to financing an issue for small and medium-sized enterprises (SMEs)?
HAI: Only 30% of SMEs can access bank loans and the rest of their financing is from their own capital or loans from unofficial channels. Improving access to financing for SMEs should be the effort of all stakeholders, not only of the banks. Support from the government means a lot for SMEs’ sustainable development, which is a must for their healthy operation. I encourage the government to continue developing the policy framework for SMEs. Banks should develop their own SME loan programmes with preferential terms, as the loan size is smaller and it requires scale. Banks could also leverage fintech solutions such as score-lending and data analytics to provide better loan access to SMEs. In this area, local banks have an advantage over foreign banks since they have bigger branch networks available to serve nationwide. I think the most important thing is to create a well functioning funding market for SMEs to access loans from financial institutions, based on their own performance. Banks’ risk aversion and tightened credit conditions regarding SMEs come from a history of bad debt, leading to banks’ high cost of monitoring.
THANH: The new Cabinet has been very aggressive and committed in developing Vietnamese firms while adapting to the country’s new economic strategy. The new policies have translated into an increase in start-ups in the country. According to a recent study, SMEs account for 98% of businesses and invest 30% of the nation’s capital, contributing over 40% of GDP and employing 50% of the workforce. However, only 30% have access to proper capital from banks, as a result of SMEs’ financial health and low collateral compared to larger firms. The lack of financial transparency is why banks hesitate to provide any loans. SMEs need to improve their financial health by increasing their capital or by having more collateral. The government also needs to provide a proper legal framework to bring transparency to the market through firms disclosing their financial statements.
TU: Given that 98% of Vietnamese companies are SMEs, most banks have taken note of their contribution to the growth of the country and bank’s asset. Banks are attentive to SME lending and financial support. Nevertheless, SMEs are currently facing some significant obstacles to loan access, including limited financial strength, lack of convincing business plans, inexperienced corporate governance and, especially, substandard financial reporting systems. We are aware of the government’s intention to support SMEs to overcome difficulties, particularly those SMEs specialised in services, agricultural processing and industrial supply chain support to foreign direct investment companies, which is an important contributor to Vietnam’s GDP. The government should also remove barriers to credit guarantee funds for SMEs and SMEs development funds.
ANSELL: More government support is needed for SMEs with regards to lending. High NPL levels are typical when lending to SMEs. Given that banks are ultimately commercial entities which need to protect shareholders and depositors, a government programme to guarantee part of the loans granted to SMEs would be a great initiative. Banks have to charge higher interest rates to offset the risk of NPLs, so having some form of government support through a lending programme is critical. There are multiple examples around the world of such successful programmes which Vietnam could leverage.
Another way to get credit is through supplier financing, where the bank makes use of the financial strength of a larger corporation to grant credit to suppliers that are unable to obtain credit on a standalone basis. This helps smaller companies grow and focus on improving the quality of the proposition without having to worry about financing. Transparency of financials and business strategy is critical. The bank must understand the business model and strategy of the client, as we are looking at long-term relationships. If crucial information is withheld, it will cause a ripple effect through the bank in terms of their overall risk appetite regarding loans to SMEs.
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