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Vietnam’s Financial System~from the perspective of financial

intermediary functioning~

Nguyen Thi HanhSasakawa Peace Foundation (SPF)

Why financial system?Basic observations:

Industrialization depends 66% on domestic capital=> pivotal role in capital mobilization

Skeptical on formal financial intermediaries: - persistent speculations on lands- financial deepening: loan/GDP, deposits/GDP

(international comparison)- inaccessibility for farmers- huge bad debts etc…

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Total deposits/GDP (%)

14 1516

19

22

27

0

5

10

15

20

25

30

1994 1995 1996 1997 1998 1999

Total deposits/GDP

96.5 138.0 121.6 83.9 17.7 97.3

126.0 153.0 220.0 123.2 55.8 162.0

0% 20% 40% 60% 80% 100%

1996-2000

2001-2005

Capital for Industrialization

Officialdevelopmentassistance (ODA)

Foreign directinvestment (FDI)

Domestic privatesector

State budget (exc.ODA)

State Credit (exc. on-lending ODA)

State enterprise

OutlineA bird’s-eye view

_ Financial institutions_ Shares in financial market_ Overall featuresFinancial Intermediary Functioning

_ Resource mobilization of banks_ Resource allocation_ Problems remainedDirections for further development

_ From the long-term perspective of system design

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Financial Institutions

Economic entities

People Credit Funds

Insurance Companies

Finance Company

Leasing Companies

Security companies

Postal savings (VPSC)

Private transactions

Real Estate speculations

Safe Boxes

SBV

SOCBs

JSBs, JVBs

FBanks

Overall featuresDominance of Banking sector & SOCBs- Share in Deposits- Share in CreditsOverall features:- Poor Capital and Reserve- Group lending & related party-lending- Poor risk management- Improper Accounting Practices and Transparency- Inadequate Managerial skills

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Resource Mobilization (1)Dominance of SOCBs, regardless of interest rates- Big scale => wide networks of branches- Advantage in credibility <= government’s

bailout, traditional clients- JSBs, JVBs: lack of networks, traditional clients

=> week competitiveness => credit collapses - Foreign bank branches: restrictions in domestic transactionsVPSCs & people credit funds: short of data, but seem promising

Share in deposits

Share in deposits among financial instituti

0

10

20

30

40

50

60

70

80

90

100

1993 1994 1995 1996

State-Owned CommerciaBanks

Agribank

Incombank

BIDV

Vietcombank

Joint Stock Banks

Joint Venture Banks

Foreign Banks (branches

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Share in Credit among Financial Institutions

0

10

20

30

40

50

60

70

80

90

100

1993 1994 1995 1996

State-OwnedCommercial BanksAgribank

Incombank

BIDV

Vietcombank

Joint Stock Banks

Joint Venture Banks

Foreign Banks(branches)

Resource Mobilization (2)Low fund mobilization from rural areas- low accessibility to banks- (low savings)※Role division among SOCBs- Agribank - 71% from individuals <= wide networks in rural; - BIDV - 87% from private companies & others;

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Low mobilization at rural (1)

Deposit at State-owned commercial banks (%, as ofDec.1996)

0

10

20

30

40

50

60

Agribank BIDV Incombank Vietcombank

North

(Hanoi)

South

(HCM City)

Middle

Low mobilization at rural (2)Monetary asset structure in rural areas (1,000 VND)

6,971.3

1,620.0

5,117.9

500.0

10,000.0

5,503.6

0.0

0.0

365.5

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

rural area 1

rural area 2

rural area 3

VND & US$ Gold Deposits

6,858.9 2,616.0 10,074.8

1,724.7 4,852.8 2,905.5

7,946.4 1,830.0 1,786.7

0% 20% 40% 60% 80% 100%

urban 1

urban 2

urban 3

Monetary asset structure in urban areas (1,000 VND

VND & US$ Gold Deposits

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SOCBs comparison (1)

22 71 7

5 8 87

31 39 30

41 27 32

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Agribank

BIDV

Incombank

Vietcombank

Deposit Structures by entities (%, as of Dec.

State-owned enterprises Individuals Others

SOCBs comparison (2)

0.05.0

10.015.020.025.030.035.040.045.0

Overdue Short-term Long-term

Credit at SOEs as of Dec

Agribank BIDV IncombankVietcombankOthers

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Overdue Short-term Long-term

Credit at private sector, as of

AgribankBIDV IncombankVietcombankOther

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Resource Mobilization (3)~Household saving practices

- Savings mainly flow into Houses and Lands - Deposits prevails traditional means- Traditional loans bigger where deposit equal 0.

Implications:==> Accessibility does matter==> minimum deposit size seems to be constraint of deposits for low income households Land price policy does matter

Table 11-1 Households With/Without DepositsUnit: 1000VND

71 3.97% 1,717 96.03%Current Income 26,366 14,005Current Expenditure 17,431 10,055Current Savings 8,936 3,951Investment in real assets 11,363 4.59% 4,061 4.45%

-1945 -0.79% 169 0.19%Currency (VND) 2,152 0.87% 2,510 2.75%Dollar ($1=VND11,000) 310 0.13% 46 0.05%Gold (1 Chi=VND 500,000) 2,595 1.05% 1,856 2.04%

19,432 7.85% 0 0.00%Loans to ho/hui 8 0.00% 103 0.11%Personal loans without interest 90 0.04% 157 0.17%Personal loans with interest 0 0.00% 222 0.24%Accounts receivable 110 0.04% 319 0.35%Durable consumption good 16,649 6.73% 5,470 6.00%Durable equipment 1,330 0.54% 2,213 2.43%House and Land 195,349 78.95% 74,062 81.22%Total Assets 247,443 100.00% 91,188 100.00%

35 5.07% 736 33.41%Debts to ho/hui 0 0.00% 50 2.27%Personal Debts without interest 602 87.25% 631 28.64%Personal Debts with interest 1 0.14% 232 10.53%Accounts payable 52 7.54% 308 13.98%Debts to government 0 0.00% 93 4.22%Debts to money lenders 0 0.00% 153 6.95%Total Liabilities 690 100% 2,203 100.00%Net Worth 246,753 88,985Note: Data are results of sample investigationSource: Study on Economic Development Policy in the Transition Toward a Market-

oriented Economy in Viet Nam (Phase 2), MPI/JICA, 1998, p.138

institutions

institutions

Without DepositsWith DepositsNumber of Households

assets

9

ImplicationsPolicies to improve accessibility => encouraging of banking franchiseBanking policies to encourage banks in attracting small depositorsModels in mobilizing dispersed small savings:- China: strengthening PCFs- Japan: strengthening postal savings

Resource Allocation (1)

High proportion of short-term loans- lack of lending skills (risk managements, maturity transformation…)

- despite of comparatively high reserve rates

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Resource Allocation (2)Huge NPLs- total bad debts/credit balance: 13.7% in 1999- 1/3 to 40% of total loans: foreign currency-based => huge risk in connect with exchange rate- SOEs hold big share => SOE reforms (securitizations) - PCFs- huge bad debts in 1990 (73%), but gradually reformed and improved

Resource Allocation (3)Loans in favor of state-own sector- SOEs: 52% of total loans + FDI => only apx. 50% of GDP- loans to private sector: mainly to farm households- capital shortage - biggest obstacles for private companies <= lack of bailout; high risk; mortgage policies (land use right etc.); lack of legal documents; high transaction costs (for banks) ==> corruptions; private borrowers to pay 6.5% kickback to “brokers”

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ImplicationsLack of lending skills, corruptions => Need more transparency and competitiveness, through gradual privatization & foreign ownership SOE reform (securitization) to help resolve NPL issueLegal environment to encourage private lending; level playing field

Loans by MaturityLoan Proportion by Maturity (%)

66 65

56 54 56

33 34

44 45 44

1 1 1 1 10

10

20

30

40

50

60

70

1995 1996 1997 1998 1999

Short term loan Medium and Long term loanCapital Participation

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Reserve RatiosReserve Ratio (%)

0

10

20

30

40

50

60

70

80

90

1991 1992 1993 1994 1995 1996

Agribank

BIDV

Incombank

Vietcombank

Joint stockcommercial banksAverage of all banks

Share by borrowers (1)Share of loans by borrower (%)

62.255.9 52.8

29.1 26.0 26.0

8.7

18.1 21.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1994 1995 1996

State-own enterprises Private Sector Other Sector

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Share by borrowers (2)Share of borrowers in credit (%)

57.0

52.8

49.851.9

48.2

43.0

47.2

50.248.1

51.8

30.0

35.0

40.0

45.0

50.0

55.0

60.0

1995 1996 1997 1998 1999

State-owned enterprises (SOEs) Private enterprises & others

Capital for Private CompaniesTable 16

Unit: %

Urban area Rural areaOwn capital 91.2 90.3Non interest loan 3.1 3.8Banks credit 0.8 1.9Credit cooperatives 0.0 1.0Local authorities 0.0 0.3Worker contribution 2.2 0.1Borrowing from individuals 1.3 2.3Others 1.5 0.3

Source:

Capital sources at start up establishing of private enterprises (In ruraurban areas)

Study on Economic Development Policy in the Transition Toward a MarkeEconomy in Viet Nam (Phase 3), MPI/JICA, 2001, p.56

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Overdue Loans (1)Overdue Loan Ratio

0

5

10

15

20

25

30

35

1991 1992 1993 1994 1995 1996

Agribank BIDV IncombankVietcombank Others Total of bank sector

Overdue Loans (2)

29.3 65.9 4.8

86.6 10 3.4

34.2 54.9 10.9

65 6.2 28.8

45.6 23.2 31.1

44.4 41.8 13.8

0% 20% 40% 60% 80% 100%

Agribank

BIDV

Incombank

Vietcombank

Others

Total

Share of Overdue Loan by Sector (1996, %)

SOEs Private Others

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Interest rate policiesTo be an instrument to encourage banking franchise <= “financial restraint model”(Hellman, Murdock, Stiglitz)Ex: deposit rate ceiling & lending rate floorCurrent interest policies to have adverse effects: - Ceiling on loan interest rate - maximum spread between lending & deposit rates=> hard profit earning for JSBs, JVBs (which have to compete fiercely with SOCBs)=> unsound competition causes deeper financial troubles when law enforceability limited

Interest rates

Table 21 Ceiling interest rate on loansUnit: % monthly

Areas Jan. 1999 Feb. 1999 Jun. 1999 Aug. 1999 Sep. 1999 Oct. 1999Urban area 1.25 1.15 1.15 1.05 0.95 0.85Rural area 1.25 1.25 1.15 1.05 1.05 1.00Rural joint-stock co 1.25 1.25 1.15 1.15 1.15 1.15People credit fund 1.50 1.50 1.50 1.50 1.50 1.50Source: Study on Economic Development Policy in the Transition Tow

Economy in Viet Nam (Phase 3), MPI/JICA, 2001, p.275

Implications:

- To revise the above-mentioned interest policy combination

- Ceiling on loan rate to be abolished in 2002

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Directions for further development ~ system design

Banks (Indirect finance) to continue playing dominant role - two types of financial system & corporate governance issues- prerequisites in transitional economies- advantage of “path dependence”approach

Ownership Structure

While the sequence remains to be complicated issue, Gradual Privatization & Foreign Ownership to be inevitable- foreign ownership => more efficiency, competitiveness with technology transfer- financial market to be open to foreign ownership in few years (following the BTA with the US, WTO accession)

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Other issuesSystem of commercial banks and long-term investment banks in tandem- capital market under-developed- lacks of banking skills in maturity transformation Security and Bond Market continuing to be developed, of courseGovernment to continue to play big role in the system design

THANK YOU !!

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Reference (1)

金融制度構築の理論的検証

金融システムの分類：金融システムの分類：

証券市場中心の金融システム　（通称アングロ・アメリカンシステム）

銀行中心の金融システム　（ドイツ・日本型金融システム）

Haus-bank

メインバンク

敵対的買収

敵対的買収

外部企業統治

競争度合い銀行

重要でない

比較的重要でない

中心的

中心的

証券市場

ドイツフラン

ス日本U.KU.S

移行経済に特有な金

融問題

証券･

資本市場が元々不存在

市場が不完全

経済取引インフラの不備と著しい情報

非対称性問題

金融取引に関する人的資源欠如

低い組織的能力

結果としての、著しい

　　

プリンシパル‐エージェント問題

Reference (2)

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Reference (3)

コーポレート・ガバナンスー銀行監視への期待と疑問

銀行監視への期待

敵対的買収の場合のフリーライダー問題の解決

モニタリング費用の重複問題の解決

機関投資家によるフリーライダー問題の解決

銀行監視への疑問

競争がファストベストだが、激しい競争はシステムの不安定性を孕む

“Who monitors the monitor?”問題