If all-out equitisation of state owned enterprises (SOEs) is to be attained, total payoff of outstanding debts is impossible. And with the aim of tripling state-run banks’ capital adequacy ratios to meet international standards by 2010, the task of finding the 117 trillion dong in supplementary capital is a tough job.
“When carrying out privatisation of state firms, other transitional countries first restructured banks in order to ensure their financial capacity even though non-performing loans had forced the banks to the financial brink. Some countries were successful in privatising state banks with high NPL rates such as a Thai bank when the total NPLs exceeded 30%. Naturally, such a debt load would be unattractive to investors [without writing down the value of the equitised bank],” said Le Xuan Nghia, director of the bank development strategy department under the State Bank of Vietnam (SBV) concerning NPLs that is hindering the equitisation process of SOEs.
Financial experts assessed that many countries handled NPLs and cleaned up their finances before equitisation, however it is unnecessary and difficult to pay off outstanding loans before equitisation.
There are two possibilities for equitisation of state-run banks in Vietnam. Specifically, if shares are issued predominately to the Vietnamese side, outstanding debts can be settled after equitisation by risk provision measures and recapitalisation by the government. However, if the majority of issued shares are held by foreign institutional investors, settlement of bad debts should be sorted out before any share issuance because if NPLs are not settled before equitisation, unintentionally, the government is handing national assets to the foreign side.
Presently, the capital adequacy ratio of state owned commercial banks is very low compared with the international standard of 8%. The Bank for Agriculture and Rural Development (Bard) has the highest rate of 5.43%, Industrial and Commercial Bank of Vietnam (Icbv) 3.64%, Vietcombank 3.73% and Bank for Investment and Development of Vietnam (Bidv) 4.76%. According to Le Xuan Nghia, to attain the international capital safety rate of 8% by 2010, the four state owned banks are required to have an additional 117 trillion dong in equity, that is, ten times as much as the 2001–2004 recapitalisation provided by the government for the four state banks.
One of criteria for being an international bank is that the return on assets is required to reach 1% and return on equity (ROE) 15%. However, Vietnamese commercial banks attain an average return on assets of 0.5% and ROE of 8%. This is attributed to high rate of non-performing loans, high cost of management, downward tendency of difference between deposit and lending interest rates, and backward banking administration qualification and so forth.
Presently, some big SOEs are being restructured however such restructuring is still modest. By the end of 2003, around 557 SOEs had been equitised, of which small and medium scaled SOEs accounted for only 6% of total equity of equitised SOEs. Equity of 4,296 new SOEs average 45 billion dong, of which 50% have equity of less than five billion dong.
According to bankers, Vietnam needs to better prepare for the reform process of SOEs. If Vietnam does not have a healthy credit system in the equitisation process, it will drag down other sectors. Private investment funds can contribute greatly to increase capitalisation at banks and accordingly promote a more modern banking system.