The Silk Glove That Needs An Iron Fist
Vietnam's Central Bank Governor Will Have To Toughen Up As The Country's Banking Sector Continues To Develop At A Rapid Pace.

 By Karina Robinson

Crossing the street in Hanoi is best done with closed eyes and a prayer that the tsunami of motorcycles will swerve to avoid you. The Vietnamese are a kind people and your chances are good. But central bank governor Nguyen Van Giau needs to be less than kind as he deals with another overwhelming phenomenon: applications for banking licences.

He is currently facing a record 46 submissions, of which 22 are domestic bank applications and 24 are from foreign entities. His affable nature is being put to the test by requests from organisations as diverse as Vietnam Seafood Corporation, a state-owned enterprise, and provinces such as Binh Duong, which has a population well under one million.

Seafood may well be the fourth largest Vietnamese export by value and the Vietnam Seafood Corporation an important profit centre for the government, but how such diversification might serve either its business model or the country's developing banking market is not clear.

The attraction for applicants is the perceived easy pickings in banking, as the economy booms, credit grows at more than 40% a year and there are insufficient motorcycles in the shops to satisfy demand. But not everyone can have a licence so how will Mr Giau resist all these demands?

Friends in high places

Mr Giau's resistance to political pressure from these new powerful interests in Vietnam may be aided by his close relationship with prime minister Nguyen Tan Dung, the main economic policy maker, who was himself governor of the State Bank of Vietnam in the late 1990s and also happens to be from southern Vietnam, like the present governor. "Mr Giau certainly enjoys the prime minister's ear," notes the CEO of a foreign bank.

Under Vietnam's World Trade Organisation obligations - it became a member in November 2006 - the country is progressively loosening the restrictions on foreign banks so that by 2010 no distinction will be drawn between them and their local competitors. All 39 foreign banks currently present in Vietnam have so far have been niche players, hemmed in by a series of restrictions. But from April this year, the central bank gave five foreign banks that already had a presence - out of 24 applications - permission to complete the application process to incorporate locally. This would mean no restrictions on the number of branches they could open, among other things.

Australian growth

Australian bank ANZ is one of those banks, and it hopes to add another 10 branches to its current two branches in 2008, assuming its licence comes through by the end of this year. However, ANZ Vietnam's country head Thuy Dam fears constraints may arise on the number of branches foreign banks are allowed to open, as state-owned enterprises will use their political muscle to stem too much competition for their new banks. The five large state-owned commercial banks, which have a 60% market share, may also use their influence, say other bankers.

The be-suited governor was amused at the suggestion and adamant this will not be the case: "I will firmly say no to pressure on the central bank to limit the branches of foreign banks to create advantages for state-owned banks." He reaffirmed the central bank's commitment to opening up its financial sector in accordance with WTO accession.

The amiable 50 year old, who took office in August, is facing a brimming in- box of reform proposals aimed at modernising Vietnam's financial system. The State Bank of Vietnam is currently drafting or amending four laws to do with the central bank, credit institutions, banking supervision and deposit insurance. These laws, which are crucial in order for the country to deal with the huge interest and change in its financial sector, will be submitted to the government and then to the National Assembly, a form of Parliament, in 2008-09.

"Issues that the authorities are confronted with include the role of exchange rate policy in the face of large capital inflows, the role of monetary policy and how best to conduct it, how to safeguard financial sector stability (rapid credit growth is a concern here) and, at a more general level, how best to interact and communicate with financial markets to achieve their policy objectives," says Ben Bingham, the IMF's senior resident representative in Vietnam.

Rich experience

Mr Giau is as ideally placed as anyone in the country to deal with the challenges due to his varied background. He knows about commercial banking, having worked at the Bank for Agriculture and Rural Development for more than 20 years, rising to CEO in the latter half of the 1990s. He is familiar with issues to do with monetary policy and banking supervision following on from his subsequent five years as deputy governor of the central bank, which is housed in the former headquarters of the Banque de l'Indochine, built in the 1920s during the French colonisation of Vietnam. Finally, his last job as secretary of the Provincial Committee of the Party for Ninh Thuan Province and chairman of the Ninh Thuan Province's People's Council, gives him political wisdom and influence, an imperative in a country that, according to the ruling Communist Party of Vietnam, is run as a "market economy with a socialist orientation".

His appointment to head the State Bank of Vietnam may mean that co-operation on monetary policy between the different arms of government will improve - bankers say it has been lacking and that, additionally, some monetary policy instruments are in the purview of the Ministry of Finance. Mr Giau points out that there is a monetary and financial policy council which advises the three entities in charge - the central bank, the Ministry of Finance and the Ministry of Planning and Investment - and that co-operation has been going well in the past eight months.

There is, however, the charged topic of interest rates, one that admittedly also affects developed country monetary authorities such as the European Central Bank, whose tight monetary stance is less than popular with a number of eurozone countries. However, for the growth-obsessed Vietnamese government - well aware that its GDP growth of more than 8% a year in the past two years and forecast at a similar rate this year does not match that of neighbour China - any increase in interest rates is anathema, even though the gains from growth are being eroded by inflation, which in the first ten months of the year hit 8.1%.

Over sickly sweet strawberry tea in the formal visitors' reception room, Mr Giau spoke about the awkward subject. The State Bank of Vietnam's target for 2007 is to have inflation come in at less than 8.5%, although the governor admits that if oil continues climbing then the inflation rate could be higher. Either way, raising interest rates looks like an evident move - along with action already taken to raise reserve requirements for banks and issue bonds to soak up liquidity.

"In my opinion, the raising of interest rates is unlikely to happen for the year 2008. The basic guided interest rate is 8.25% and, although it is difficult to foresee the future, if there are going to be adjustments to it, it would not be to a large extent," says Mr Giau.

Central bank independence is, obviously, work in progress.

Figures under scrutiny

Booming credit growth and the build up of non-performing loans is another major issue confronting Mr Giau. Some foreign bankers say that, under international accounting rules, official statistics showing NPLs of only 2.1% in the financial system in the year to date would more likely be as high as 25%.

Mr Giau admits the rate "may be higher but I do not think significantly higher". He is, though, on the case. On the very day of the interview, he told the board of the Bank for Investment and Development of Vietnam, which met at the central bank, closely to monitor their credit quality, an admonition he has been repeating to all banks.

"I think that, with this warning, banks will be able to make the necessary adjustments," he says. The married father of one daughter has also told the banks to monitor liquidity closely due to market conditions, strengthen internal governance, and improve their technology to introduce cashless payments as he seeks to transform the financial system.

That system does not need a plethora of new banks. The central bank has been stalling on unwanted applications, say bankers, but it now needs to put its foot down.

From next year, helmets will be obligatory on motorbikes, a law that will save many lives. Mr Giau, however, may be well advised to purchase one immediately as he negotiates the application traffic.