Vietnam - Moral hazard in the banking system

The banking sector requires a high degree of transparency and professionalism, which attaches special importance to improving the quality of human resources for the system.

The manager of a transaction office of the Housing Development Bank (HDBank) in Long Binh Tan Ward in the southern province of Dong Nai was recently arrested on alleged appropriation of VND10 billion of the bank by fake dossiers, reported Thanh Nien newspaper. Two months earlier, Tien Phong newspaper reported that the Hanoi Police had detained Vu Tu, former general director of Tien Phong Bank, to investigate into his wrongdoings in the State economic management activities.

The two aforementioned cases are just among innumerable uncovered cases in recent times in which bank officers infringed rules of the banking system. According to the central bank’s HCMC Branch, different violations detected by the authorities in 2011 were worth up to thousands of billions of dong.

These misconducts include lending customers with mortgaged assets not registered for secured transactions, giving out credits to unqualified borrowers, appraising and supervising lending conditions loosely or failing to classify loans as regulated.

Last year, relevant authorities in HCMC also found out a total number of 112 cases breaking foreign currency management laws. Regarding capital mobilization activities, random checks showed that up to 62 out of 68 credit institutions had violated stipulations for promotions, gold trading and investment entrust services.

“I have never seen such serious matters in the 60-year long history of the local banking industry. Local banks have no more no less turned out to be a market. Their images thus have been worsened over the past time,” a senior executive who has been active for a long time in the industry commented on the competition among banks to woo clients by interest rates.

“The mutual trust among banks is diving. Have your staffs been trained based on the highest level of business ethics?”, the official asked bankers at a meeting held in the city early this year.

The official pointed out management level and capacity of credit institutions had yet to keep pace with their growth, development demand and economic uncertainties. The quality of human resources at banks remains low, resulting in risks for themselves and negatively affecting their operational efficiency, he said.

The banking system is an economic segment in dire need of high-level transparency and professionalism. Quality improvement of staffs is a vital duty. A substandard work force both downgrades banking governance and adversely influences business effectiveness of the system. Moral hazard is therefore serious.

“Shareholders of some banks have managed to spur their investments by borrowing money from other banks, which is known as multiple-gearing, and by re-assessing assets to keep upsizing total assets of the banks. Meanwhile, leaders of credit institutions under high pressure to make profits have invested heavily in numerous risky projects and areas, especially in property schemes, stock trading and even unofficial credit activities,” vice chairman Ha Huy Tuan of the National Financial Supervisory Committee told a seminar held in Hanoi late last year.

“Certain banks are being controlled by a number of shareholders, and this has led to an ambiguous relationship between the industry players and local companies. The ownership rate of a shareholder at some banks is much higher than that allowed by law, giving them the power to manipulate banks. This means the banking operation largely depends on the targets and interest of such individuals.

The fact shows that weak banks tend to favor those corporate borrowers having close relationship with their shareholders. These enterprises, in reality, are inclined to use the bank loans to invest in real estate, securities trading or subsidiaries,” cited a report at the seminar.

Reviewing business results of domestic banks over the past time, many experts said that the immature risk management system, particularly credit and liquidity risk control, and the ineffective internal supervision system have given rise to increasingly growing operational and moral hazards. In many cases, credit institutions are totally manipulated by several big shareholders.

A top official of the central bank once said that all banks had their own problems with management process and that the most important but hardest to control was professionalism and ethics in the banking industry. “Don’t confuse people’s money with your own,” he stressed.

The hot growth of the banking system, the scarcity of high-level human resources with business ethics, coupled with the absence of proper recruitment and training programs, have given rise to operational and moral hazards. On the other hand, most middle-level and top executives of commercial banks are mainly promoted thanks to their professional performance. Indeed, they lack managerial skills to operate either a branch or a bigger system, so their negligence in personnel management will obviously bring about considerable risks for the banks.

“Most banks say they weren’t engaged in or suffered losses from a host of mortgage defaults on the unofficial credit market recently. However, this may not be the case as so far there is no official statistics on this issue and no connection between individuals and businesses sheltering behind those banks involved in this illegal activity has been detected,” said Associate Professor Nguyen Thi Mui.

SGT

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