CHAPTER 2
THE NECESSITY OF FORMING A BANKING FINANCIAL GROUP FROM A JOINT STOCK COMMERCIAL BANK
IN HO CHI MINH CITY
2.1. THE NECESSITY OF FORMING TC–NH GROUP IN HO CHI MINH CITY
2.1.1. Overview of the development process of Vietnam's commercial banking system [27]
On May 6, 1951, President Ho Chi Minh signed Decree No. 15/SL establishing the National Bank of Vietnam - now the State Bank of Vietnam. The establishment of the National Bank of Vietnam was a historic turning point, the result of the process of fighting to build an independent and autonomous monetary and credit system, marking a new development step, a qualitative change in the monetary and credit sector of Vietnam. Over the past 60 years of formation and development, the National Bank of Vietnam (SBV) has gradually grown and made an important contribution to the construction and completion of the monetary and credit institutions and the Vietnamese banking system, actively serving the cause of innovation, development and international and regional economic integration of Vietnam.
The development process of the Vietnamese banking system since the establishment of the State Bank of Vietnam can be divided into two periods:
- Pre-renovation period (1951 – February 1988)
During this period, the Vietnamese banking system was organized according to a one-tier banking system, in which the State Bank played the role of a state management agency, and at the same time performed business functions in the fields of currency, credit, and banking, as a cash center, credit center, and payment center of the national economy. Therefore, all activities of the State Bank were decided by guidelines, policies, and directions according to the annual state plan, also known as the centralized planning mechanism.
- Period of fundamental and comprehensive innovation of the banking system (1988 to present)
In March 1988, the Council of Ministers issued Decree 53/HDBT with the basic orientation of transforming banks into business operations, contributing to the formation of a new banking model in the rudimentary form of the two-tier banking system. This is the first legal framework for the formation of a two-tier bank - an important milestone in the development of the Vietnamese banking system. Accordingly, the State Bank has the function of managing monetary and credit activities; credit institutions directly carry out capital mobilization activities, provide credit to economic organizations and provide other banking services.
In May 1990, the State Council passed and promulgated two banking ordinances (the Ordinance on the State Bank of Vietnam and the Ordinance on Banks, Credit Cooperatives and Finance Companies). The promulgation of the two banking ordinances officially changed the operating mechanism of the Vietnamese banking system from one level to two levels, in which the State Bank of Vietnam performs the function of state management of monetary business activities and acts as a Central Bank. Commercial banks and credit institutions perform monetary business and banking functions within the legal framework. The two banking ordinances affirmed the multi-form ownership, multi-component and multi-functional nature of the commercial banking system, paving the way for the development of banking types in Vietnam, including State-owned commercial banks, joint-stock commercial banks, joint-stock commercial banks between Vietnam and foreign countries, and foreign bank branches in Vietnam.
In 2000, the government decided to establish the Vietnam Bank for Social Policies, together with the Development Assistance Fund (later the Vietnam Development Bank), separating the function of lending to policy subjects from the State Commercial Banks, thereby allowing these commercial banks to focus on banking activities according to market mechanisms.
Decision No. 84/2004/QD-TTg dated May 13, 2004 selected two State-owned commercial banks to pilot equitization in 2007, namely the Bank for Foreign Trade of Vietnam and the Mekong Delta Housing Development Bank. On September 26, 2007, the Government
The Government has signed a decision approving the equitization plan of the Bank for Foreign Trade of Vietnam and this bank has become the first State-owned commercial bank to be equitized.
Based on the reality as well as the requirement to put banking activities into a higher legal framework, two banking ordinances were summarized, reconstructed and upgraded into two laws (Law on the State Bank of Vietnam No. 01/1997/QH10 and Law on Credit Institutions No. 02/1997/QH10), passed by the National Assembly on December 25, 1997, effective from October 1, 1998, and amended in 2003; 2004. On June 16, 2010, the 12th National Assembly, 7th session, passed the Law on the State Bank of Vietnam No. 46/2010/QH12 and the Law on Credit Institutions No. 47/2010/QH12, effective from January 1, 2011 and replacing the Law on the State Bank of Vietnam No. 01/1997/QH10 and the Law on Credit Institutions No. 02/1997/QH10.
Accordingly, a series of new mechanisms and policies have been issued, ensuring effective planning and implementation of monetary policies, facilitating credit institutions to operate according to market mechanisms and approaching international practices.
Sign the agreement
VN- trade
United States 2001
Joined WTO 2007
Global financial crisis 2008
2001-2003
Restructuring 5 commercial banks
NN, rectify and strengthen joint stock commercial banks
Figure 2.1: Some important milestones in the development history of Vietnamese banks
Separate NHTM NN left the State Bank in 1988 | |
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Asian Financial Crisis 1997 | |
1997 Issue 2 Banking Laws | |
1999 Establishment of Deposit Insurance | |
2010 Issue 2 new banking laws | |
1990 Issue 2 laws bank order | |
( Source : author's synthesis) [28,31]
According to the State Bank of Vietnam report, by the end of 2011, Vietnam had established a system of credit institutions that was quite large in scale and diverse in ownership. The Vietnamese banking system included 1 Development Bank, 1 Social Policy Bank, 5 State-owned commercial banks and commercial banks with State-controlled shares, 35 joint-stock commercial banks, 5 joint-venture banks, 5 100% foreign-owned banks, 30 financial companies and financial leasing companies, 1 Central People's Credit Fund with 936 grassroots people's credit funds (Table 2.1).
Table 2.1: Some indicators of the system of credit institutions in Vietnam by 2011
Block of credit institutions
Number quantity | Capital rate (%) | CEO production (%) | Mobilize capital (%) | Total balance in debt (%) | |
Block of State Commercial Banks | 5 | 30.19 | 39 | 43.6 | 51.3 |
Joint Stock Commercial Bank Block | 35 | 52.73 | 45.2 | 47.1 | 34.8 |
NH block with NN factor | 10 | 9.23 | 12 | 7.6 | 8.6 |
Financial and leasing companies | 30 | 7.73 | 3.6 | 0.87 | 3.35 |
Central Committee of the Vietnam Fatherland Front, grassroots | 916 | 0.12 | 0.2 | 0.83 | 1.95 |
Whole system | 100 | 100 | 100 | 100 |
(Source: Report of the State Bank of Vietnam - excluding the Bank for Social Policies)
Vietnam, Vietnam Development Bank) [28,31]
In the past 10 years, the Vietnamese banking system has shown remarkable growth as follows:
Total assets of the credit institution system increased by an average of 37% per year during the period 2001 - 2010. By 2011, it reached more than 4,713 trillion VND, equivalent to 212.6% of GDP. However, although the state-owned commercial bank sector has the largest scale, its growth rate in recent years has been slower than that of the joint-stock sector. Specifically, the market share of the state sector decreased from 47.6% in 2009 to 41.3% in 2010 and by the end of 2011 was only about 39%. The joint-stock commercial bank sector is
Showing a strong breakthrough despite being affected by the global economic crisis like other banking groups, in 2011, the growth rate of this sector reached 16.4% compared to the end of 2010; market share in 2009 was 41.2%, in 2010 was 44.3% and at the end of 2011 was 45.4%, while the market share of joint venture commercial banks and foreign branches fluctuated around 12%.
Regarding charter capital, to strengthen financial capacity and enhance competitiveness in the process of international economic integration, credit institutions have actively increased their charter capital. The total charter capital of credit institutions within 10 years increased more than 20 times, from 17,220 billion VND in 2001 to more than 350,000 billion VND at the end of 2011. The CAR ratio of the entire system at the end of 2011 reached 11.92%, which, if calculated in general, meets the Basel 2 requirements as well as current regulations of the State Bank.
The growth of the credit institution system focuses on two traditional areas: lending and mobilization. The rate of capital mobilization growth increased rapidly from
240,524 billion VND in 2001 to 2.8 million billion VND by the end of 2011. The credit growth rate was quite high, reaching an average of 33%/year in the period 2005 - 2010 and 13% in 2011. The total outstanding debt at the end of 2011 reached 2.5 million billion VND, of which the bad debt of the whole system according to the books was 3.3%, equivalent to 85 thousand billion VND. However, if credit classification was done honestly, the above figure may not stop there, the possibility that credit institutions have applied debt classification that is not in accordance with the regulations of the State Bank is very high.
Regarding financial depth, the overall financial depth of the system has also changed significantly as the credit/GDP and deposit/GDP ratios have increased rapidly over the years, reaching 120.2% and 120.5% respectively by the end of 2011. The M2/GDP ratio alone increased from 58.1% in 2001 to 133% in 2010 and 115% in 2011 according to estimates. This shows that the money supply has increased quite rapidly in the economy, but GDP growth has not kept up (see table 2.2), demonstrating that the overall capital use efficiency of the economy is not high.
Table 2.2: Financial depth in the period 2005 -2011
Unit: billion VND
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |
Nominal GDP | 839,000 | 974,000 | 1,144,000 | 1,583,000 | 1,658,000 | 1,981,000 | 2,145,000 |
Credit | 553,000 | 694,000 | 1,069,000 | 1,340,000 | 1,845,000 | 2306,000 | 2,580,000 |
Deposit | 553,000 | 764,000 | 1,146,000 | 1,472,000 | 1,894,000 | 2,601,000 | 2,800,000 |
Credit (%GDP) | 66 | 71 | 93 | 84 | 111.2 | 116.4 | 102 |
Deposits (% of GDP) | 67 | 78 | 100 | 93 | 114.2 | 131.2 | 130.5 |
M2 (% of GDP) | 82.3 | 94.7 | 117.9 | 109.2 | 126.2 | 133.8 | 115 |
( Source : ADB, Key Indicators for Asia and the Pacific, 2011) [17]
- Application of information technology and development of banking services: information technology is widely applied in the operations of credit institutions, contributing to making banking products and services increasingly rich and diverse. Up to now, most commercial banks have a core banking system - a centralized information management system of the bank. On the basis of this system, banks have developed many convenient and diverse ebanking products and services for customers, especially in the field of non-cash payments.
In terms of payment card usage, the Vietnamese card market has made a strong breakthrough in recent years. 
5 million cards of all kinds, nearly 3,000 ATMs and about 11,000 card swiping machines (POS). By the end of 2011, the number of cards nationwide increased to more than 42 million, of which about 40 million were ATM cards (accounting for more than 93%). The infrastructure for card payments has also been significantly improved with the number of ATMs by the end of 2011 being
13,000 and nearly 70,000 POS machines. Payments are made through three main systems of the National Switching Joint Stock Company (Banknetvn), Smartline Card Services Joint Stock Company (Smartlink) and Smart Card Joint Stock Company (VNBC).
Some of the above highlights show the remarkable achievements of the Vietnamese banking system, however, after the Asian financial crisis in 1997 or most recently the global economic crisis in 2008, it has shown that the resilience of commercial banks is quite weak, easily shaken when the market is unfavorable. That can be due to many different reasons such as limitations in capital, management capacity, and strategic planning. Especially in the context of an interconnected market, cross-risks occur more and more, specifically, currently, commercial banking activities are heavily affected by cross-risks from the decline of the stock and real estate markets. This is the consequence of the hot credit growth in the period 2005 - 2010 in securities, real estate, investments, non-transparent credit loans... leading to a number of joint-stock commercial banks falling into a state of illiquidity, bad debts increasing rapidly, forcing them to receive intervention from the State Bank or voluntarily merge to continue to exist. Overdue debts at banks increased without the possibility of recovery, according to objective estimates of independent organizations, by the end of 2011, about 11% of total outstanding debts, of which the majority came from corporations, state-owned general companies and customers who were the "backyards" of the banks. According to the State Bank, by the end of 2011, 14 joint-stock commercial banks were insolvent, meaning that about 1/3 of the number of joint-stock commercial banks faced the risk of merger or dissolution.
In addition, with the integration of world finance, international monetary organizations are forcing the Vietnamese banking system to be transparent in information, handle bad debts, improve the quality of operations, implement international standards on financial accounting... forcing banks to restructure the entire system of credit institutions, screen out weak institutions, and strengthen operational capacity. If we consider both the macro and micro aspects of each commercial bank, we can see that the current time is ripe to restructure the system, forming large banking and financial groups to provide a solid foundation for domestic economic entities facing crises due to inflation and declining economic "demand"; at the same time, playing a leading, supporting and promoting economic growth.
2.1.2. Development situation of some joint stock commercial banks in Ho Chi Minh City
After 1975, the banking system in the area was all branches of the State Commercial Bank operating at one level and people's credit funds. Nearly 10 years later, credit cooperatives were born. However, after a short time of existence, these credit cooperatives caused debt and bankruptcy due to loss of liquidity, the cause of which was the situation of mobilizing with high interest rates, lending without collateral, not being strict, not being able to recover capital and especially lacking the ability and experience to manage monetary and banking activities. The collapse of the credit cooperative system caused great fluctuations in the socio-economic life in the area.
Learning from the collapse of those credit cooperatives, Ho Chi Minh City has quickly rectified the financial and monetary market to stabilize the socio-economy in a new direction based on the newly issued banking ordinance. Specifically, Ho Chi Minh City has boldly dealt with the weak and failed credit cooperatives by dissolving or merging to form the first joint-stock commercial banks in the country. There are credit cooperatives that are forced to dissolve completely and transfer to law enforcement agencies for handling according to their authority, but there are also good credit cooperatives that are retained to merge into joint-stock commercial banks such as Lu Gia credit cooperatives, Thanh Cong credit cooperatives, and Tan Binh credit cooperatives.
With the government's policy of shifting from a one-tier banking system to a two-tier system in mid-1988 and the establishment of many intermediary financial institutions alongside commercial banks such as financial leasing companies and insurance companies, participating in financial and monetary activities, contributing to meeting the needs of economic development. The growth rate of the banking industry in the area during this period was very high, averaging 16% per year. This is a positive trend in the internal structural shift of the service sector to develop economic sectors and improve social life.