Early this year, Fitch Ratings affirmed Viet Nam's sovereign rating at B+ with a stable outlook. With Viet Nam determined to restructure the whole economy with a focus on the banking system, Viet Nam News reporter Mai Huong talked with Ambreesh Srivastava, senior director of Fitch Ratings's Financial Institutions, South Asia, about the problems facing the domestic banking system.

What is Fitch's assessment of Viet Nam's banking system? How does it measure up to other nations in the region?

Ambreesh Srivastava. — VNS Photo Truong Vi

Fitch Ratings' scale runs from AAA to F, from excellent to poor, and we have some strong banking systems in the region, like Singapore in the double A category. In the triple B category we have banks of Malaysia and Thailand. In the double B category, we find India, Philippines, China and Indonesia.

In the single B category, we have Viet Nam and Sri Lanka. Based on our scale, Viet Nam's banking system is relatively weak compared with many other banking systems in the region.

There are several components to assess banks, but one of the reasons why the banking system here is relatively weak is because of the macro economic environment itself which is rated B+ by Fitch. That sets the backdrop for most banks, because normally banks and financial institutions are not rated higher than the sovereign itself, because of operating environment risk.

What are the problems and how serious are they?

Banks in Viet Nam have serious issues of asset quality and non-performing loans (NPLs). Some of them are reported in the public media but a large number are not reported because the total number doesn't tell the whole story. So we make our judgement and in our view, the true NPLs and real asset quality is much weaker than what's been reported. It could be because of an accounting standard-related issue.

Most banks in Viet Nam also have some issues with funding and liquidity, which is much more stressed than what we see in other banking systems in the region. With non dong-denominated funding, US dollar-related issues, the funding is even more tight and this is probably because the authority is trying to reduce the dollarisation in the economy. Besides, poor transparency also leads to the asset quality problem.

In February, the central bank reported the bad debt ratio declined from 8.8 per cent in mid-2012 to just 6 per cent. Do you think Viet Nam has made progress in dealing with bad debts?

Transactions are carried out at DongA Bank. Banks in Viet Nam are said to have serious issues with asset quality and non-performing loans. — VNA/VNS Photo The Anh

The figure could be different due to dissimilar accounting standards. For example, from most jurisdictions, most of special mentioned loans can be recognised as NPLs, and in fact this figure is much higher than the official NPLs account.

Given the wide-spread problem in the State-owned enterprise (SOE) sector in Vit Nam, we think a lot of problems related to the account may not have been recognised and classsified. Taking into account other factors, we expect NPLs are a lot higher.

But the good thing is the authority is now trying to address this issue, through establishing a national asset management company to buy bad loans in the banking system, or progressively recapitalising banks and trying to put on credit caps so that banks can not make loans excessively, like they did a few years ago. However, most of these problems are not short-term solutions.

Ratings of big banks in Viet Nam are weak and they even face the risk of another downgrade from international ratings agencies. What are their problems and how do they cope with them?

The problems we've found are reflected in the Vietnamese banking sector. If they're addressed and there're some improvements, then there's a possibility that ratings of Vietnamese banks may even go up. If sovereign rating, for example, goes up for whatever reason, then there's a possibility that ratings of many Government-related banks, which support the sovereign rating will also go up.

On the flip side, if some of the stand-alone financial indicators become even weaker, for example, as we know, negative news happened with the Asia Commercial Bank (ACB) late last year, resulting in some franchise implications, funding issues and liquidity issues.

Our view is that when stand-alone financial strains have deteriorated, its rating B with stable outlook has now been put in B with negative outlook. Not immediately, but chances are if things would not be addressed, then there's a possibility that the rating might be graded downward.

Ratings can go up or down and outlook shows how things can be. At the moment, other than ACB, most of our ratings have a stable outlook.

Confidence in the banking system became rather fragile after the arrest of a prominent Vietnamese banker last August. Can you suggest how to prevent such an incident?

Nobody can suggest such a measure but we can think of some indirect solutions to the problem. For example, transparency. People get cranky when such a situation occurs because they don't know what the real problem is or the extent of it. That's why at that time we put ACB on rating watch negative.

So that's how financial markets work. People tend to react in a negative way to uncertainty. Because Viet Nam's is slightly an ostrich system (less transparent), people feel less certain about how things will turn out.

So if this can be addressed I think the level of confidence will automatically go up.

Viet Nam is determined to restructure the whole economy with a focus on the banking system. How do you assess its progress so far?

It's still early days but, as I said earlier, the good thing is that your Government has recognised the problems and is trying to address them. How you perceive and follow through the whole thing will be the key.

You have recognised the weaknesses in the banking system and the SOE sector and once these weaknesses are addressed, then chances are the overall economy will start growing at a higher rate. At the moment, it seems the authority is serious in pursuing these options and we feel optimistic. — VNS