Interest groups have been so influential that they not only control small commercial credit institutions, but also stand a chance of acquiring a grip on the banking system and even the policymaking process

In 2000, State-run banks claimed nearly 78% of the economy’s total deposits and lending. This share dropped to about 74% in 2005. Such a downward trend has been clearer over the past five years. In 2010, State-run banks, including the Social Policy Bank, accounted for only 45% of deposits and 51% of loans in the economy. Private banks are indisputably on the rise.

State-run commercial banks for State-owned enterprises

The problem is that the recent bank restructuring project aims to enhance State-run banks’ role and status. Of what use is this objective if it is rooted neither in reality or in the banking sector’s restructuring needs? Like it or not, such an objective will leave an important impact on how resources are allocated between the public and private sectors or, from a broader perspective, among interest groups.

This goal seems to be in line with Vietnam’s economic philosophy, which considers the public sector as the main growth engine. More importantly, the project appears to task State-run banks with providing the necessary resources for State-owned enterprises to emerge as leading pillars of growth. Statistics bear this out, with State-run banks lending vast amounts of capital to State-owned firms. For example, Vietcombank, BIDV and Vietinbank usually give 30-35% or even 40% of the loans available to State-owned companies. In comparison, the figure for a typical commercial bank is about 5-10% only. Moreover, consider the fact that owners’ equity makes up less than 10% of the capital held by State-run banks and it will be obvious that these credit institutions are abundant sources of capital for State-owned enterprises.

This outcome amounts to inequality in capital distribution and makes it likely for the public sector to be even more bloated. The recent controversial project that seeks to modernize the Ministry of Transport attests to this possibility. If capital is allocated according to market principles and the Government refuses to provide backing, implicit or otherwise, to any interest groups, public projects that gobble financial resources will be on the wane; otherwise, profligacy and inefficiency will continue to prevail.

Favoritism

It is worrisome that the above-mentioned propensity toward inequality can be noted among private commercial banks, too. Many private banks, while classified as joint stock credit institutions, are inextricably tied with interest groups. In fact, some of these banks are dominated by a few giant shareholders, who enjoy easier access to capital at the expense of other potential clients. Worse, such banks have few incentives to diversify services, enhance managerial capitalities and boost competitiveness.

Dubious practices start to emerge when public and private banks vie against each other for profit and capital sources. The proper role of financial intermediaries is being hampered as several banks become sources of capital that strategic shareholders can use to finance risky projects. This is even more likely at present, when credit growth is restricted. Consequently, lending interest rates have not fallen as much as the deposit interest rate ceiling. Meanwhile, many enterprises continue to struggle to tap into bank loans.

Eradicating interest group dominance key to restructuring

The project will fail to achieve its aim of “nurturing a multi-functional banking system that adheres to modern standards, minimizes risk and operates efficiently to cater better to demand for finance-banking services” if there is no ownership restructuring. While the project mentions the need to restructure commercial banks in terms of legal status and ownership, exactly how this process will be carried out remains unclear. In fact, these important issues are only discussed briefly in the governance restructuring section.

Admittedly, this brief discussion manages to touch on fundamental issues such as the need to “curb the domination of strategic shareholders and resolutely punish those guilty of violating share restriction in the case of commercial joint stock banks and credit institutions with mutual capital ownership.” However, it is worth wondering why the project seeks merely to curb the domination of big shareholders instead of eradicating such a suffocating grip? Why “resolutely punish” wrongdoers instead of simply handling them according to prevailing regulations? This is not simply a matter of wording; it actually shows interest groups have been so influential that they not only control small commercial credit institutions, but also stand a chance of acquiring a grip on the banking system and even the policymaking process.

There is a similarity between strategic shareholders that dominate commercial banks and State-run credit institutions that exert a significant grip on the banking sector. In fact, the latter group seems to be much more dangerous. It will be contentious for the Government to curtail the domination of the first group while protecting the second group. The objectives of the restructuring project will be beyond reach if the allocation of resources among interest groups is not efficient and transparent.

SGT