Oct 13, 2012

Vietnam - Bank capital drains to be hampered

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Bank capital is likely to be either lost or reduced due to worthless shares or related dispute. How much such assets worth among banks’ collateral would need clarification.

What has struck the public recently is 20 million shares of Hoa Phat Steel JSC (HPS)-a subsidiary of Hoa Phat Group HPG which were owned by recently arrested banking Mogul Nguyen Duc Kien are mortgaged at ACB and simultaneously sold to HPG at 264 million dong.

HPG is awaiting investigation results from the responsible agencies while ACB insisted on holding such shares. Any conclusion has not been available, yet the question is how these mortgaged shares could be sold that easily.

In principle, mortgage of shares would require banks and share owners to present the shareholders books to the companies for shares to be frozen. This must be confirmed in writing by general directors and accountants of the firms, thus making these shares non transferable.

As such, if these steps are guaranteed, the shares mortgage at ACB could then hardly be transferred to HPG. Also, if ACB had the shares frozen, HPG would have spent 264 billion dong for 20 million shares of HPS which already confirmed blocking such shares.

Therefore, there are two possibilities-either the shares could not be frozen as yet, which means the shares would still be with HPG and those mortgaged at ACB would turn out worthless paper or the mortgage of shares follows the aforementioned procedure making HPG suffer capital losses.

Earlier, general director of Bianfishco Dieu Hien also used 25 million shares of Bianfishco worth of 250 billion dong as collateral at two banks and had them sold to Ho May Company at the same time. Ho May Company apparently failed to finalise the ownership transfer procedure before spending hundreds of billions dong on such shares.

The matter in question is why these companies were willing to take that much risk. Also, would it be pressure from large shareholders that force banks to ignore risk management standards in loaning?

Therefore, potential risks arising out of banks secured by shares could be noteworthy. What is dangerous is individuals who are big shareholders of their own shares could confirm freezing the shares on their own in order to be financed by credit institutions and simultaneously sell the same amount of shares to other parties.

Many commercial banks currently hold a large number of shares, most of which may turn out worthless.

Firstly, shares that have already been transferred to another beneficiary are accepted by banks to be collateral.

Secondly, mortgaged shares belong to companies of small amount of capital making their value negligible, which implies the high possibility of banks’ capital loss.

Thirdly, loans could be secured by worthless warranty deed which would be signed by unauthorised parties.

Thus, what comes into question is whether soaring interest rates would to make up for such capital loss and how and who to monitor commercial banks’ capital flows. Much would need clarification and correction so as to enhance banking operations.

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