Some Proposals to Promote the Formation of Tc-Nh Group

3.4. SOME PROPOSALS TO PROMOTE THE FORMATION OF TC-NH GROUP

3.4.1. Some recommendations to the government

The survey shows that the formation of TC-NH groups is an inevitable development trend of commercial banks, so whether it is recognized or not, it still exists and has impacts on monetary policy as well as the economy. Therefore, instead of not recognizing this model in the immediate future, state management agencies should also have regulations or guiding documents to control and adjust. Specifically, the following issues should be concerned:

3.4.1.1. Legal aspects for the formation of TC-NH group

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Mergers and consolidations to strengthen business strength or expand the market are objective trends of economic entities, the group model is the result of the above mergers and consolidations. In reality, regarding the group model, the state currently only recognizes the name "Bao Viet Financial Group" but is not specific to banks or other financial institutions.

Although the law does not have specific regulations, if we consider the 2005 Enterprise Law as the original and basic law for all types of enterprises to operate, once the Enterprise Law has specifically regulated the issue of economic corporations, the inclusion of the concept of TC-NH groups is completely reasonable because commercial banks in general, joint-stock commercial banks in particular and their member companies are all economic entities with full legal status; in addition, all laws related to enterprises and banks do not prohibit it at all, so it is natural that joint-stock commercial banks also have the right to establish themselves under the name TC-NH groups. Currently, the Law on TCTD and its implementing documents allow commercial banks to establish affiliated companies to do business in the fields of financial leasing, finance, insurance, remittances, asset management, securities, investment funds, capital contributions, joint ventures with financial institutions, and other non-financial companies to create a series of subsidiaries, companies.

subsidiary companies, affiliated companies. At the same time, the provisions of the Competition Law (economic concentration mechanism, monopoly control), the Securities Law (capital contribution mechanism, share purchase mechanism), the Investment Law (investment mechanism in the form of merger, consolidation...) have created a legal framework allowing credit institutions to contribute capital, buy, sell, merge, consolidate with other banks, and invest and contribute capital in other non-financial organizations.

Furthermore, Circular No. 04/2010/TT-NHNN of the State Bank of Vietnam has also issued guidelines for mergers, consolidations and acquisitions of credit institutions, paving the way for the formation of larger credit institutions, so legal recognition is essential.

Therefore, the solution to the legal problem for the TC-NH group model is that the government should study and issue specific regulations in the form of appropriate legal documents to both control and promote the development of TC-NH groups based on the following orientations:

- Firstly, the TC-NH group model is historically formed, objectively independent, so the state needs to support, promote and control it. The state should recognize this model with a unified name.

- Second, the TC-NH group must be a multi-ownership group but mainly focus on the financial and banking sector. If established with a parent company as a commercial bank and a series of subsidiaries operating in multiple sectors, it is essentially just a name change from a commercial bank to a TC-NH group, so there must be certain limits to ensure harmonious development with businesses and banks that have not or will not form a group.

- Third, enhance the dominant and controlling role of the parent bank with its subsidiaries through financial relationships and compliance agreements. The core bank must strictly comply with the regulations of the State Bank and approach international standards.

- Fourth , the government needs to expand the scope of participation in capital contribution and share purchase of foreign investors, expand the participation rights of large financial and banking groups in the world to help joint stock commercial banks take shortcuts, get ahead, save time and costs, and quickly form financial and banking groups as directed by the government.

3.4.1.2. On the management of operations of joint stock commercial banks

- Firstly, due to the sensitive nature and influence of banks in the economy, the government should establish a steering committee to accelerate mergers, consolidations or acquisitions to both restructure banks and promote joint stock commercial banks to form TCNH groups; in restructuring, prepare for bankruptcy if necessary to ensure banking transparency and customer rights.

This can be considered the most basic solution because it both carries out the economic restructuring in general, banking in particular, and promotes the formation of financial-banking groups in Vietnam. The Government can assign the National Financial Supervisory Commission to take on this role to ensure greater objectivity than the State Bank.

In the past, many joint stock commercial banks violated monetary policies such as liquidity, interest rates, credit classification, provisioning, non-transparent investment, increasing "virtual" charter capital, that is, banks used credit leverage, invested in subsidiary bonds to increase capital [16]... but the State Bank did not handle it thoroughly, leading to serious consequences.

Therefore, establishing a committee to restructure the banking system as well as the economy is necessary because if only solving the banking problem, it will not change the economy because the banking system itself is related to many other subjects and entities in the economy. An independent committee will be more objective, more thorough, and can increase transparency and trust in the market.

Accordingly, the government can assign the National Financial Supervision Committee to coordinate with the State Bank branch, the Department of Finance and a number of related departments to work.

Specifically for each joint stock commercial bank in the area, determine the strategy and roadmap for the future operations of each joint stock commercial bank, forcing these banks to meet state management requirements on operational safety and improve competitiveness, and choose appropriate models for regional and global financial integration.

Even if a bank is too weak, it must be bankrupt like other businesses, but it cannot be assumed that there will be no collapse and insecurity when restructuring. Bankers who create risks to the system, reduce the value of shareholders' assets, and affect monetary policy must be dealt with using their own assets, and at the same time, weak banks must go bankrupt to rectify the entire system.

- Second, establish a national bad debt trading company to participate in handling bad debts of banks and businesses.

The first solution is to force commercial banks to thoroughly handle bad debts by themselves with risk reserves and commercial bank assets. Then the government will participate in handling bad debts through the national bad debt trading company. The source of handling can be formed from mobilizing the formation of public funds or issuing securities secured by these assets, as experienced by Korea in handling bad debts in the years 1997-2000.

To deal with the amount of bad debts of banks up to 92 billion USD, equivalent to 20% of GDP, Korea established a government-owned debt settlement company (KAMCO) to buy back the debt at market prices. The cost for the government to buy back this debt was only 33 billion USD with an average discount rate of 64%. The bad debt was then handled by issuing securities backed by these assets as well as selling them directly. The emergence of the centralized debt settlement company created a market for bad debt transactions and encouraged banks to sell bad debt (see Appendix 4).

These measures have helped to rapidly improve the financial and governance situation of banks. The bad debt ratio at banks has fallen sharply from a peak of 13.6% in 1999 to only 2.4% in 2002. The capital adequacy ratio has increased sharply from a low of 7% in 1997 to 10.5% in 2002.

- Third, strengthen the supervision of capital use of joint stock commercial banks in general, avoid cases of "backdooring" and circumventing the law to facilitate the operations of affiliated companies, which can cause serious consequences.

Currently, it is quite common for commercial banks to "conspire" with each other in using capital to circumvent the law and regulations of the State Bank.

Specifically, in Clauses 7, 8, 9 of Article 8, Circular 13 stipulates: Credit institutions are not allowed to provide credit to affiliated companies that are enterprises operating in securities trading. Credit institutions are not allowed to provide unsecured loans for investment and trading in securities. The total outstanding loans and discount of valuable papers for all customers for investment and trading in securities must not exceed 20% of the charter capital of the credit institution... but this seems not to be seriously implemented by joint stock commercial banks in the area. They "conspire" with each other to circumvent the State Bank's regulations.

For example, if Bank A is not allowed to lend to a securities company under A, they transfer money to Bank B to lend to a securities company of Bank A and vice versa, just a few simple transactions have invalidated the State Bank's regulations. Or buy shares of a company C and company C uses this money to transfer back to securities company A.

On the other hand, the fact that a joint stock commercial bank invests in too many other joint stock commercial banks also happens vigorously, the main purpose of which is to seek profits, but certainly also for other non-transparent purposes. For example, to legalize overdue debts into due debts or to make ambiguous payments for personal interests.

Or the possibility of credit incentives that benefit internal relationships is what has happened in recent years. It explains why credit has not increased but banks still mobilize high interest rates and liquidity is increasingly poor.

The solution to prevent this is to increase remote monitoring of transaction volumes by state management levels, including increased inspections by the Government Inspectorate or the National Financial Supervision Committee if there are suspicious signs. In addition, it is necessary to require all management levels to honestly declare personal relationships working within the group. In addition, it is also necessary to apply more severe sanctions to violations of the law by organizations and individuals than before.

- Fourth, regulate or limit the investment fields of TC-NH groups to limit the use of internal preferential capital, distorting the bank's credit intermediary function.

It is easy to see that currently, joint stock commercial banks are investing widely both inside and outside the banking sector. The field of operation is also diversified to diversify income, but as analyzed above, it also has potential risks. A reality is that joint stock commercial banks invest too widely, causing bubbles in the economy such as investment and lending in the real estate and securities sectors, forcing the State Bank to regulate the limit ratio.

Therefore, if a joint stock commercial bank operates under a group model, the government needs to limit the proportion of capital participating in investment or limit the field of operation. Investment capital in joint ventures and associates needs to be reduced to below 40% of current equity capital and also limit the subjects that joint stock commercial banks participate in. It is impossible for a joint stock commercial bank to use capital instead of granting credit or participating in the market to invest in tourism, real estate, hotels, healthcare, education, etc.

Through the author's research, it is recommended that the scope and objects of the TC-NH group should be limited to three areas: banking - securities -

Insurance. Investment in joint ventures and associated companies is limited to administrative units as regulated by the State Bank and cannot be spread to other fields as it is now.

- Fourth, pay close attention to and closely monitor the issue of capital account liberalization.

Capital account liberalization means allowing capital to flow freely across national borders between countries. Capital account liberalization helps each country's economy become more flexible and integrate more deeply into the international economy. On the contrary, cross-border capital movements will be very difficult to control, especially when capital flows back abroad. At that time, it will put pressure on exchange rates and domestic asset markets, forcing management agencies to consider the possibility of raising interest rates or letting the currency depreciate. If the currency depreciates, it will increase the financial burden for businesses borrowing in foreign currencies, and in the worst case, it will even lead to the risk of a serious banking and currency crisis.

Members of domestic TC-NH groups are not limited by the participation of enterprises, financial institutions, and foreign financial investment funds, so controlling the movement of cash flows is extremely difficult. Just the investment of Vietnam's FDI capital flow alone cannot account for all tax losses, so in the financial sector, it will be very difficult to control the movement of assets and profits, or in other words, transferring profits to the "parent company" abroad and transferring losses to the "subsidiary" in Vietnam, which is essentially for a group of people with related interests. Therefore, controlling capital account liberalization is an issue that requires high vigilance.

3.4.1.3. Other issues

The Government has strengthened the inspection and supervision of banks and resolutely and strictly handled violations regardless of the type of bank, whether state-owned or joint-stock, joint-venture or foreign, financial companies, financial leasing companies and foreign investment funds, especially non-credit financial institutions.

The Government should establish an organization to annually assess the national creditworthiness of domestic credit institutions, including some organizations operating in the financial market such as securities companies and investment funds, and have preferential policies to encourage these organizations to focus on perfecting management mechanisms and enhancing operational capacity.

The government can intervene in the purchase and sale of debts to rescue joint-stock commercial banks, as the US did in 2009 with its banks. Or like China in 1999, the central bank of China established four asset management companies responsible for handling bad debts for some state-owned commercial banks. These companies boldly securitized the banks' debts and then bought them back, eventually recovering the bad debts of these banks (Huarong 32.5%, Great Wall 24%, Cinda 35.1%)[39]

Or buy back shares of joint stock commercial banks that do not meet operating conditions, or in banks with “problems” to participate in controlling, restructuring, improving banking operations and transferring them to partners with better management and operation experience. Only then can we both prevent and guard against risks caused indirectly or directly by banking operations.

Another issue is to rebuild mechanisms and policies in the direction of enhancing the proactive debt handling rights of joint-stock commercial banks. Allowing, to a certain extent, debt handling and asset exploitation companies under joint-stock commercial banks to proactively auction assets to recover debts for banks and be fully responsible to state management agencies. The Government can direct relevant ministries and branches to coordinate with joint-stock commercial banks to speed up the debt handling process and enforce judgments to recover debts for banks.

In addition, the government needs to issue a strict and detailed anti-competition law to not only protect banking activities but also protect customers and other economic sectors in the economy. Because ignoring the aspect of unfair competition to attract each other's customers, TC-

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