Creditors may be allowed to go bankrupt

The plan is to gradually inform the market about the bankruptcy in the banking system and warn bank owners to be much more serious in doing business, Thanh said.

Though there had been some distressed credit institutions in the domestic banking system, the country had not seen any bankruptcy issues for the past years as the central bank was concerned that it could have a negative effect on the entire banking system.

Under a restructuring scheme for the banking system from 2011 to 2015, the number of commercial banks cut from 42 to 34. Besides restructuring 10 banks through mergers, the central bank dealt with three ailing banks – Ocean Bank, Vietnam Construction Bank (VNCB) and Global Petroleum Bank (GPBank) – by acquiring them at zero dong.

With the acquisition, the SBV currently holds stakes in eight banks, instead of five it held before 2011. Total charter capital owned by the SBV in the eight commercial banks by the end of last year increased 1.7 times to more than VND113 trillion (USUS$5.15 billion). The figure is equal to roughly 37% of total charter capital of 34 commercial banks in Vietnam.

Thanh said that transparency in the banking system has improved significantly in the past four years. Cross ownership at banks has been put under control and liquidity of the banking system has been secured.

However, Thanh required banks to take more drastic measures this year to enhance their financial and governance status to meet the rising demands.

He said that the central bank this year would also continue to ramp up the merger and acquisition of ailing credit institutions with priority given to those which are done voluntarily. If the institutions did not approach voluntarily, the central bank would intervene.

Spectre of rising rates

The rise in bank deposit interest rates at the end of 2015 is causing anxiety among businesses that there could be a commensurate increase in loan interest rates soon.

Pham Ngoc Hung, deputy chairman of the HCM City Union of Business Associations, said the formation of the ASEAN Economic Community, several free trade agreements taking effect, and the Trans-Pacific Partnership to be signed soon are already creating huge pressure on businesses.

"Profit rates are low and so companies can not cope with high lending interest rates."

For many businesses, bank loans are the major source of working capital.

The average interest rates have fallen considerably compared to three or four years ago, but remain high compared to other countries in Vietnam's neighbourhood.

Nguyen Quoc Anh, chairman of the HCM City Rubber and Plastic Manufacturers Association, said unless policies are changed and interest rates are reduced, or at least kept steady, Vietnamese companies can barely survive the integration.

"Rubber and plastic manufacturers can hardly survive.

"Enterprises want lending interest rates reduced."

At recent programmes by HCM City authorities to bring companies and banks together, the biggest concern was interest rates, particularly on medium- and long-term loans.

Many companies asked for fixed rather than floating interest rates to enable them to invest in new machinery and plants and others.

But in Vietnam, interest rates are fixed for only the first year, and the second at most, and often volatile, making most companies apprehensive about investing using borrowed money.

But Nguyen Hong Minh, deputy director of the State Bank of Vietnam (SBV)'s HCM City branch, said it is not easy to reduce interest rates because the central bank has to defend the dong against the dollar.

By buying the currency to keep it steady against a strengthening dollar, the SBV mops up a lot of dong, causing a shortage in the market and forcing banks, hence to hike deposit interest rates to mobilise dong, he said.

But the SBV uses other tools like open market operations to help commercial banks improve their liquidity, he said, adding banks do not need to increase lending interest rates.

Vo Minh Tuan, chairman of Dong A Bank, said the inflation rate last year, at below 1%, was the lowest since 2001.

Oil prices are unlikely to fall further, the US is likely to raise interest rates, the yuan could depreciate, meaning credit interest rates in Vietnam cannot fall, he said.

"The country's key task now is to channel funds into the main production sectors.

"Money ploughed into speculative fields, including real estate, should be restricted."

Nguyen Phuoc Thanh, deputy governor of the SBV, said credit growth this year will be restricted to 18-20%, a rather high rate in the current economic context.

"The SBV will control lending to real estate, especially medium- and long-term loans."