Vietnam tries frantically to stave off banking industry collapse

Faced by the impending disintegration of its banking industry, Vietnam goes for a drastic solution.

Vietnam will buy bad debt from banks under a plan approved by Prime Minister Nguyen Tan Dung this month to prevent a collapse of its banking system.

The Ministry of Finance will buy collateralized bad debts from commercial banks to strengthen their balance sheets under a plan to overhaul the industry by 2015. The bailout aims to cut bad debt ratios at state-owned banks to below 3% by 2015, thereby minimizing the risk of a full blown banking crisis that could seriously threaten the economy.

“Restructuring, fixing and strengthening the banking system with the lowest cost will eliminate the risk of a collapse of the banking system” and ensure macroeconomic, social and political stability, Dung said.

Vietnam will clean up and strengthen banks’ balance sheets by 2015, and classify commercial banks into three categories. The State Bank of Vietnam and the Ministry of Finance will be responsible for managing the banks’ bad debt.

In the past months, Vietnam has accelerated efforts to fix its banking system heavily burdened by bad debt after rapid credit growth in recent years fueled a trade deficit and Asia’s fastest rate of inflation.

The State Bank of Vietnam, the central bank, will force mergers among weak banks and keep monetary policy tight yet flexible as it contends with a credit crisis that has shut down thousands of businesses.

The Vietnam Association of Small and Medium-Sized Enterprises estimates about 150,000 companies failed or shut down due to financial difficulties last year, or about a third of the country’s business firms.

Vietnam has 50 banks, including five state-owned banks and five wholly foreign-owned banks. The five largest listed banks had total assets of almost US$63 billion as of Sept. 30.

Dung has ordered the central bank to solve a shortage of funds within the first quarter.