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Decision to halt licencing banks applauded   2008-08-12 - TBKTVN

he decision by the State Bank of Vietnam to temporarily suspend licencing new commercial banks has been applauded by economists, who say that the decision should have been made sooner.


Licence of new commercial joint-stock banks temporarily halted


On April 19, the preparatory committee for the establishment of Kinh Bac Bank gathered to discuss the establishment plan. However, the bank will have to wait awhile before it gets a licencing decision.

Dr Nguyen Minh Phong from the Hanoi Socio-Economic Institute said that the State Bank of Vietnam should have stopped licencing sooner, as the wide-scale bank establishment in 2007 has shown negative impacts. High inflation, an interest rate race and difficulties of the stock market have been blamed on the establishment of too many banks.


Phong said that the banks were set up not because of the high demand of the national economy, but because of the desire of the banks’ owners to earn fat profit like other banks.


He said that the appearance of the banks has led to a money supply increase, which is one of the reasons behind the high inflation. The expert also said that the fragility of the banking system, bad debts and non-performing loans are big problems banks are now facing.


Prior to that, Huynh The Du, an economist, warned that the existence of too many banks in a small-scale economy could lead to high risks.


Phong said that the establishment of too many banks was the ‘culprit’ of the serious wounds of the stock market.


Bank share prices went up dramatically to ‘virtual’ levels, and then dropped dramatically. The stock market witnessed many banks rushing to increase chartered capital. The OTC market became chaotic as investors rushed to sell and purchase options to buy stocks of banks which didn’t even exist.


Explaining the decision to halt licencing banks, Governor of the State Bank of Vietnam Nguyen Van Giau said that on July 29, the Government Office issued an official dispatch with the PM's instruction asking the SBV to adjust criteria for the establishment of commercial joint-stock banks. While the new criteria are being drawn up, the licencing of new commercial joint-stock banks will temporarily be suspended.


Meanwhile, many are wondering what the new criteria will be. Experts believe that the requirements on banks need to be stricter, closer to international standards.


In fact, the new regulation on bank establishment was just promulgated one year ago, on June 7, 2007. It was thought to set higher barriers for bank establishment than the previous regulation.


However, as the national economy is growing, the life expectancy of policies is proving to diminish.


One of the conditions for setting up banks under the last regulation was that a bank must have the chartered capital of VND1tril at least. However, the requirement has been too easy to satisfy. Newly set up banks have the chartered capital of VND1,500bil, and some have the capital of VND3tril or even VND5tril.


Some experts say that the required minimum capital should be raised to VND5tril. Moreover, they say it is also necessary to set stricter requirements on bank governance to heighten the transparency of the banking system.


Regarding the requirements on corporate governance, Vo Tan Hoang Van, Deputy General Director of Ernst & Young Vietnam, said that the State Bank of Vietnam should consider setting up new committees in the structure of banks, like the nomination committee (to nominate key persons of banks), and the pay committee (to consider the wages of staffs). In addition, Van said it is necessary to regulate the level of participation of independent members in management boards that do not have economic relations with banks. The regulation would help heighten the transparency and operation efficiency of banks.


In the immediate time, experts believe that the difficulties of banks which have applied for establishment and are now awaiting licencing for an indefinite period may help make investors hesitate to submit applications to establish new banks.

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