State Bank of Viet Nam statistics show that the average capital adequacy ratio (CAR) of the banking sector has been consistently falling since the beginning of this year.

It had dropped from 12.84 per cent at the end of last year to 12.66 per cent at the end of May and this despite not including in the list some lenders with seriously eroded equity.

CAR is expressed as a percentage of the bank’s capital to its risk-weighted assets and is one of the main metrics used to promote the stability and efficiency of financial systems.

The SBV has issued a circular according to which banks must maintain a CAR of at least 8 per cent starting from 2020.

The new circular will replace Circular 13/2010/TT-NHNN that stipulates a minimum CAR of at least 9 per cent.

According to a recent report from the National Financial Supervisory Commission (NFSC), the minimum CAR of the entire banking system this year is estimated at 11.3 per cent.

However, experts warn that when BASEL II norms are applied, banks’ CAR will plunge due to an increase in the amount of their risky assets.

The NFSC report said the CAR of the big four State-owned lenders – Vietcombank, BIDV, Vietinbank, and Agribank – stands at nearly 9 per cent but falls to below 8 per cent when BASEL II standards are applied.

Why is this happening?

Analysts said it is because their credit has increased much more rapidly than their equity.

In 2016, the sector’s total assets went up by 16 per cent but chartered capital by only 6.11 per cent.

In the first five months of this year credit growth was 6.63 per cent while legal capital increased by only 2.28 per cent.

For instance, BIDV’s first half results show that its chartered capital was up marginally while its loans and investments rose by 11.56 per cent.

Vietcombank’s legal capital was unchanged during the first half of this year at VND35.977 trillion ($1.58 billion).

Vietcombank’s equity increased slightly during the first half of this year to VND52.109 trillion while its outstanding loans soared by 13.1 per cent to VND534.108 trillion.

As a result its CAR fell from 11.13 per cent last year to 9.81 per cent as of June 2017.

Vietcombank has found it difficult to increase its capital by selling stakes to foreign partners or issuing more shares in the market.

Neither tier 1 or core capital nor tier 2 or supplementary capital has been augmented.

In the face of the situation, experts said Vietcombank’s credit growth would be curtailed to ensure its CAR remains at over 9 per cent as required by the SBV.

This is also the reason why the NRSC has warned that if State-owned banks do not increase their capital their consumer credit plans as well as the whole sector’s will be badly affected.

To resolve this situation, many banks will have to find ways to hike their chartered capital but also achieve the year’s credit growth target of 21 per cent.

Experts warn however it will be difficult to increase the capital at this difficult juncture.

They point out that the high bad debt levels mean investors are apprehensive about putting their money in banks.

Sin tax on instant coffee?

The Ministry of Finance has proposed a special consumption tax on instant coffee and teabags, sparking outrage among experts and consumers.

In Viet Nam, special consumption tax is akin to a sin tax and slapped on items like alcohol and tobacco besides luxury items like cars.

Not surprisingly, the inclusion of teabags and instant coffee in the list has sparked a controversy.

Analysts said a tax of 10-20 per cent on processed coffee, especially instant coffee, from 2019 would severely affect the industry’s exports.

Viet Nam has set a target of increasing processed and value-added products to 50 per cent of all agricultural exports.

Coffee is one of the country’s main export earners.

In 2016 instant coffee exports accounted for around $350 million or 10 per cent of coffee exports.

Viet Nam’s export of processed coffee is expected to grow in the coming years when several free trade agreements take full effect.

Aware of the opportunities, many enterprises have stepped up or plan to step up investment in processing.

The finance ministry, explaining its proposal to slap the tax, said it is meant to reduce people’s consumption of beverages with sugar which are detrimental to health.

Experts said the decision to invest in the processed coffee industry is often based not only its profitability, business environment and economy but also on tax policies.

Consumers worry that they would have to pay VND2,000-4,000 more per cup if the proposal is approved.

Do Ha Nam, vice chairman of the Viet Nam Coffee and Cocoa Association, slammed the ministry’s proposal saying processing is an expensive business to begin with in terms of technology and packaging.

If investors shy away from the industry, coffee farmers would be hit hard, he said.

He added that since the industry uses domestically grown coffee unlike beer and other alcoholic drinks which depend mainly on imports, it should not be subject to more tax.

Many experts said since in Viet Nam instant coffee is very popular and not a luxury product, it should not be slapped with a special consumption tax. — VNS