Dealing with Weak Commercial Banks in Restructuring the System of
Credit Institutions in Vietnam using Consolidation, Merger, and
Acquisition: The Change from Administrative Orders to Market
Mechanisms
VIEN THE GIANG
Ho Chi Minh University of Banking,
Ho Chi Minh City,
VIETNAM
VO THI MY HUONG
Ho Chi Minh City University of Technology and Education,
Ho Chi Minh City,
VIETNAM
Abstract: - The analysis and description of the legal framework combined with the assessment of impacts in
economic and social aspects show that dealing with a weak bank, whatever the cause is, is an expensive and
unpleasant situation, with potential negative impacts on the financial system. Depending on the severity of the
weakness, the State takes appropriate intervention measures. Vietnam's economy is characterized by a small scale;
commercial banks account for a large number, and have a small scale; these banks' financial potentials are not
strong enough to compete with large-scale commercial banks (are usually state-owned or have a control stock) or
foreign-invested commercial banks which have both strong financial potential and modern management skills from
their parent banks abroad. This is the cause leading to the increase of weak commercial banks that need to be
handled to make the market healthy as well as to secure the capital for economic development. Based on the
coordinated approach between economics and law, the paper points out limitations when handling weak
commercial banks through consolidation, merger, acquisition, or compulsory transfer. To meet the safety
requirements and not to cause a breakdown in the restructuring and handling of weak banks, administrative
intervention measures through compulsory consolidation, merger, compulsory acquisition, or compulsory transfer
are used quite effectively. In the current period, we have solved the weaknesses that need to be handled quickly and
decisively. Therefore, organizational restructuring according to criteria of sustainability and market mechanisms
should be quickly implemented, especially forming a legal framework allowing foreign investors to participate in
mergers and acquisitions transactions in a clear, specific, and highly feasible way as well as research to realize the
bankruptcy of commercial banks effectively.
Key-words: - weak commercial banks, restructuring the system of credit, State Bank of Vietnam, Vietnamese laws
and regulations
Received: April 22, 2022. Revised: September 24, 2022. Accepted: October 25, 2022. Published: November 23, 2022.
1 Introduction
The weakness of the banking system becomes an
obstacle in achieving the goals of sustainable growth
of the financial system. A strong financial system
must be based on a banking system with healthy
financial potential, meeting the criteria for the
sustainable development of financial institutions.
This requires financial institutions, especially
commercial banks, to be restructured according to the
characteristics of sustainable development. It means
that countries, in the process of operating the banking
market, must identify and deal with factors that
threaten sustainable development goals, from
financial factors to non-financial factors (such as
environment, society, and management).
Incorporating the factors of environment, society, and
governance into the decision-making process of
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financial institutions will make the financial system
more sustainable, [33].
Having experience in stabilizing the British banking
system since the First World War, policymakers
believe that stabilizing the banking system must be a
combination of structural reform and credit growth
regulation. To ensure the stability and soundness of
commercial banks, the State will apply necessary
measures to control the quality of credit transactions
and ensure the independence of the money market
from the capital market, thereby reducing the
difficulties in loan recovery issued by institutions and
sectors that cause an increase in debt-financed for
long-term investments, [22]. The responses of the
central bank in handling the weak banks vary in each
period, especially with unusual events such as the
case of an economic crisis or an epidemic. For
example, during the recent Covid-19 pandemic,
central banks adopted and implemented a loose
monetary policy, helping to provide large liquidity
and targeted credit support to the economy. This has
played an important role in stabilizing financial and
credit conditions. This intervention can only
indirectly address the core economic policy
challenges of the pandemic, [12]. However, the
borrower's ability to repay loans as committed in the
credit contract has been reduced due to the
application of measures to prevent the spread of
Covid-19, which has halted business activities as well
as disrupted the bank's operations in credit
management. This potentially increases the safety
risk of each credit institution, [5]. Regulatory
uncertainties after the crisis that have not been
thoroughly resolved may be the cause of the increase
in bad debt, and it takes time for economic entities to
recover from the pandemic. This is a big challenge
for credit institutions' ability to endure overdue debt.
To successfully restructure the banking system,
countries need to rely on a clear legal system that is
carefully implemented to avoid repeating the
instability in the past. Thus, the process of building
and reforming financial markets is not the result of a
prior strategic plan, but rather a choice of treatment
based on experience with internal and external crises
as well as political opportunities that can be created
as the case with the restructuring of the national
financial system in Brazil, [24]. In Spain, a large
number of credit institutions were restructured
through consolidation and integration in the period
2009-2013, [11].
After the Asian financial crisis, Malaysia's banking
restructuring was characterized by the consolidation
of the conventional banking sector and Islamic
banking penetration and emphasized that
policymakers should consider both competition
policy and capital regulation to promote the
resilience of the dual banking system, [23]. Debates
related to the choice of restructuring measures were
also focused on clarifying, including the choice of
bankruptcy and financial institution restructuring, [4]
with voluntary consolidation, merger, or acquisition
among credit institutions or according to the
"orientation" of the State. Each choice of banking
resolution through restructuring is different between
countries and depends on the selected target.
However, the restructuring is intended to encourage
mergers between banks and especially among small
banks to create a large bank that can offer a wide
range of banking services, [2].
In Vietnam, the process of restructuring the weak
banking system associated with handling bad debts
was set out after the growth and the impact of the
global financial crisis that took place in 2007. This
process has been deployed through three periods
2011 - 2015, 2016 - 2020, and has been from 2021
through 2025. The legal framework for dealing with
weak banks has also been gradually built and
completed. Notably, the National Assembly
promulgated Law No. 17/2017/QH14 dated
November 20, 2017, of the National Assembly,
amending and supplementing several articles of the
Law on Credit Institutions, effective from 15 January
2018. The practice of restructuring the banking
system in association with handling bad debts has
been implemented on the principle of prudence,
combining the resolution of key issues with building
and completing a unified legal framework for the
effective restructuring of the credit institution system.
The weak bank handling results show that, although
certain results have been achieved, there are still
many special limitations that need to be overcome,
especially to minimize direct interventions by
administrative measures, such as compulsory
acquisition, and forced transfer of weak commercial
banks to find partners, on the principle of equality
and mutual benefit to carry out the consolidation,
merger, and acquisition. Therefore, the 3rd session,
the XV Term of the National Assembly passed the
Resolution on the afternoon of June 16, 2022, with
95.58% of the participants voting in favor of
extending the application deadline for the entire
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Resolution No.42/2017/QH14 on piloting the
handling of bad debts of credit institutions until the
end of December 31, 2023, and assigned the
Government to study and propose legislation on the
handling of bad debts and collateral for bad debts
together with the review, amendment, and
supplementation of the Law on Credit Institutions; it
is submitted to the National Assembly for
consideration at the 5th session (May 2023). These
are necessary steps to continue implementing the
results achieved in the process of restructuring credit
institutions, and at the same time, give the
Government more time to continue studying and
building a legal framework for the restructuring of
credit institutions, the system of credit institutions in
a unified manner, including measures of
consolidation, merger, acquisition and compulsory
transfer.
2 Research Methods
To clarify the research purpose set out above, the
author uses a descriptive legal research method, [15],
in which the law is understood as the rules and
standards existing in society, regulating social
relations arising in the process of restructuring credit
institutions. The source of data is collected for the
analysis of the law on restructuring the system of
credit institutions, which has been carried out since
the Vietnamese banking market opened completely
according to the commitment to join the World Trade
Organization in 2011. In addition, the jurisprudence
comparative method is also used to clarify the change
in legal regulations and the way to use the
restructuring measures during the response to the
financial crisis taking place in Asia in 1997.
In terms of approach, the study is developed based on
the statutory approach through the interpretation of
the concept, the actual implementation of weak
banking handling, and comparison to describe and
clarify the considerations, choosing between
bankruptcy and consolidation and merger in handling
weak commercial banks in the process of
restructuring the system of credit institutions in
Vietnam.
In addition, the article uses a system of general
research methods of the social sciences, including
system, structure-function, history, and logic, [1], to
clarify the research problem carried out through
secondary data collection. It is through library
research or study of documents published in
specialized scientific journals to clarify scientific
arguments and practical implementation of
regulations when handling the weak banks in the
process of restructuring the system of credit
institutions in Vietnam. Data collection also helps to
examine a wide variety of legal documents and other
available documents. The legal approach will help to
provide an overview of the choice of measures to
handle weak commercial banks in the process of
restructuring the credit institution system to draw
accurate conclusions.
3 Research Results
3.1 The Nature and Objectives of Handling
Weak Banks in Restructuring the System of
Credit Institutions
A weak bank is a term commonly used in the banking
market to reflect the situation in which a commercial
bank falls into a state of business loss, capital loss,
and or poor management ability of its executives. It is
a reflection of the loss state, which is shown in that
the revenue from banking activities including lending
interest, investment profit, and fees collected... is not
enough to cover loans costs, management costs,
investment costs, provision costs, and other costs,
[13], and it is necessary to be dealt with to restore
normal operation. When dealing with a weak bank,
depending on the severity of the weakness, the
restructuring objective as well as the authority of the
central bank of each country, the appropriate
measures are decided. For example, the weak
banking situation caused by poor liquidity
management and led to the failure of banks occurred
not only in the 1990s but also for the strong banks in
2011. This forced the Central Bank of Nigeria to
spend more than US$6.8 billion to buy bad loans
from weak banks due to insolvency, [27].
Commercial bank restructuring is a concept referring
to the content of overcoming weaknesses to improve
efficiency, or rebuilding or designing (a certain
problem) based on science and practice, associated
with the characteristics of the object of restructuring
as well as the tradition and level of development of
each country. Restructuring focuses on qualitative
change at management levels and focuses on more
radical solutions for comprehensive and in-depth
change. The content of the main restructuring is to
give the option to close organizations that cannot
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continue to operate (bankruptcy) or develop a legal
framework for debt liquidation or merger to form
commercial banks with real capacity. As such, the
restructuring process focuses on selecting and
applying solutions to address the causes of weakness
or instability. This leads to failure, liquidation, or
merger with other organizations. Commercial bank
restructuring focuses on choosing solutions to
improve and enhance the quality of commercial
banks' operations with the main content which is
restoring solvency and performing well the financial
intermediary function, [2].
Thus, dealing with weak banks in restructuring the
credit institution system is a decision-making process
to choose measures to deal with the weak situation of
commercial banks to restore the normal operating
state. Decisions on choosing measures to handle
weak banks in restructuring the credit institution
system directly or indirectly affect the stability of the
banking market both in the short term as well as in
the long term. This requires that when dealing with
weak banks in the restructuring of the credit
institution system, the following objectives must be
ensured at the same time:
i) Keeping the banking system stable - a necessary
condition to maintain the efficient supply of capital
for the economy;
ii) Accurately identify the weak status of commercial
banks to take appropriate and timely handling
measures;
iii) Minimizing losses to the state budget as well as to
weak commercial banks that must be handled;
iv) Thoroughly handle the causes of weakness, do not
let the weakness “spread” or be transferred to other
credit institutions;
v) The active participation of not only state
management agencies but also designated
commercial banks or active participation commercial
banks is based on the principle of harmoniously
combining principles and rules of the market with
weak banking regulations.
3.2 Dealing with Weak Banks in
Restructuring the Credit Institution System
Utilizing Consolidation, Merger, and
Acquisition
In Vietnam, dealing with bad debts and restructuring
the system of Vietnamese credit institutions is one of
the major policies related to restructuring the
economy and reforming the growth model, [19], [20],
[21], because many risks of the banking system
which are accumulated from many years ago began
to harm macroeconomic stability. This is the reason
why many credit institutions have liquidity
difficulties, and high bad debts which pose a threat to
the safety of the banking system, and it needs to be
handled quickly and promptly. Different handling
measures are applied flexibly, depending on the
status of each weak commercial bank such as special
control, the State acquires credit institutions as well
as compulsory consolidation, merger, and acquisition
at the request of the State Bank. The principle when
dealing with weak banks in restructuring the credit
institution system is prudence, a close combination of
management and administration through
administrative orders with the development and
implementation of the legal framework for dealing
with weak banks associated with handling bad debts.
At the same time, the choice of measures to handle
weak banks in restructuring the credit institution
system has also changed over time, namely:
Firstly, in the period after the Asian financial crisis
(1997-2004), banking mergers and acquisitions in
Vietnam took place very little and were more
mandatory than voluntary, mainly carried out under
the direction of the State Bank intending to improve
the competitiveness of the commercial banking
system in Vietnam under the Project "Restructuring
and rearranging joint-stock commercial banks in
Vietnam" approved by the Prime Minister in
Decision No. 212/1999/QD-TTg dated October 29,
1999, and Decision No. 241/QD-NHNN dated July
15, 1998, of the State Bank on mergers,
consolidation, and acquisitions of Vietnamese credit
institutions to ensure the interests of depositors,
ensure the stability of the economy and the safety of
the banking system, and create a legal basis for joint-
stock credit institutions to implement during
consolidation and rearrangement. During this period,
many commercial banks were merged, helping to
increase the size and reducing the number of
commercial banks in the economy, [32].
Secondly, in the period (2011 - 2015), restructuring
the system of credit institutions and each credit
institution, including weak banks, on the one hand,
overcome the disadvantages arising after a long
period of growth based on credit capital and the
impact of the global financial crisis. Therefore,
restructuring and dealing with weak banks are seen as
a regular and continuous process to overcome
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difficulties and weaknesses and proactively deal with
challenges so that credit institutions can constantly
develop safely, effectively, firmly, and better meet
the requirements of socio-economic development in
the new period. The State encourages the merger,
consolidation, and acquisition of credit institutions
voluntarily, ensuring the interests of depositors and
the economic rights and obligations of related parties
under the provisions of law. To ensure the safety and
stability of the system, several credit institutions with
a high level of risk and insecurity will be applied
special handling measures by the law, and at the
same time, do not allow failure and unsafety of
banking operations beyond the control of the State.
The process of rectification, consolidation, and
restructuring of the system of credit institutions
minimizes losses and costs of the state budget for
dealing with problems of the system of credit
institutions, [16]. During this period, due to a lack of
experience in restructuring the system of credit
institutions associated with bad debt handling,
administrative interventions at the request of the
Government were actively and flexibly used by the
State Bank of Vietnam according to the effectiveness
of the restructuring process as well as the severity of
weaknesses and bad debts of credit institutions. In
addition to the measure of forced transfer or merger
(Table 1), the measure of acquiring the weak credit
institutions for 0 dongs has also been applied (Table
2).
Table 1. Some commercial bank merger transactions in the period 2011 - 2015
Ordinal
number
Commercial banks
participating in the
merger
Name of
commercial
bank after
merger
Implementation
time
1
1. Saigon Commercial
Joint Stock Bank
2. First Joint Stock
Commercial Bank
3. VietNam Tin Nghia
Commercial Joint Stock
Bank
Saigon
Commercial
Joint Stock Bank
January 1, 2012
2
Hanoi Building
Commercial Joint Stock
Bank is merged with
Saigon - Hanoi
Commercial Joint Stock
Bank
Saigon - Hanoi
Commercial
Joint Stock Bank
August 28, 2012
3
Western Bank has also
merged with PetroVietnam
Finance Corporation
(PVFC).
Vietnam Public
Joint Stock
Commercial
Bank
September 8,
2013
4
Dai A Commercial Joint
Stock Bank (DaiABank)
has merged with Ho Chi
Minh City Development
Bank (HDBank).
Ho Chi Minh
City
Development
Joint Stock
Commercial
Bank
The second
quarter of 2015
5
Mekong Delta Housing
Joint Stock
The second
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Development Bank
(MHB) merged into Joint
Stock Commercial Bank
for Investment &
Development of Vietnam
(BIDV)
Commercial
Bank for
Investment &
Development of
Vietnam (BIDV)
quarter of 2015
6
Mekong Bank (MDB)
merged into Vietnam
Maritime Commercial
Joint Stock Bank
(Maritime Bank)
Vietnam
Maritime
Commercial
Joint Stock Bank
(Maritime Bank)
The second
quarter of 2015
Source: Author's summary
It can be affirmed that these administrative
interventions have both immediate effects on
preventing existing weaknesses as well as the risk of
generating more bad debts for commercial banks
subject to restructuring. Dong A Commercial Joint
Stock Bank has been still under special control from
the end of 2015 until now. The reason leading to the
fact that Dong-A Commercial Joint Stock Bank was
put under control, especially in 2012 and earlier, the
management of this bank has violated the law when it
comes to financial management as well as credit
granting and business activities, which seriously
affected the financial situation as well as the banking
operation, resulting in negative equity.
Table 2. List of commercial banks acquired by the State Bank for 0 dong
Ordinal
number
The name of the
acquired bank
Bank name after
being acquired
Causes
1
Vietnam
Construction Joint
Stock Commercial
Bank
Construction
Commercial One
Member Limited
Liability Bank under
License No. 250/QD-
NHNN dated March 5,
2015, of the Governor
of the State Bank of
Vietnam
This is the first bank in Vietnam to be
compulsorily acquired by the State Bank of all
shares at the price of 0 dongs since February 2,
2015.
According to the State Bank, at this time, there is
not a single investor who intends to buy the
Construction bank and according to the valuation
basis, the redemption level is 0 dong with a
negative real value of more than 80,000 dong/
share.
2
Ocean Commercial
Joint Stock Bank
Ocean Commercial
One Member Limited
Liability Bank
under License No.
663/QD-NHNN dated
May 6, 2015, of the
Governor of the State
Bank of Vietnam
Ocean Commercial Joint Stock Bank is the
precursor of Hai Hung Rural Bank. In 2007, this
bank changed to an urban joint-stock commercial
bank and developed very rapidly until 2010.
Ocean Commercial Joint Stock Bank is the second
bank purchased by the State Bank at the price of 0
dongs since April 25, 2015.
Since the end of 2010, the State Bank has
discovered many violations at this bank. With a
negative charter capital and the bank itself was no
longer able to compensate for this capital.
3
Global Petro Sole
Joint Stock
Commercial Bank
Global Petro Sole
Member Limited
Commercial Bank
According to License
1304/QD-NHNN
dated 7/7/2015 of the
Global Petro Sole Joint Stock Commercial Bank is
the third bank to be compulsorily acquired by the
State Bank of all shares at the price of 0 dongs
from July 7, 2015. According to the 2014 financial
statements, as of April 2, 2015, GP Bank's total
accumulated loss has reached VND 12,280 billion,
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Governor of the State
Bank of Vietnam
and the loan balance sharply decreased to VND
6,669 billion.
Source: Author's summary.
Thirdly, in the period 2016-2020, the handling of
weak banks in restructuring the system of credit
institutions is associated with the focus on
fundamentally and thoroughly dealing with bad debts
and weak credit institutions by suitable forms to the
market mechanism on the principle of prudence,
ensuring the interests of depositors and maintaining
system stability and safety; It needs to reduce the
number of weak credit institutions to have a suitable
number of credit institutions, of size and reputation,
with the healthy operation and ensuring liquidity. The
State encourages and creates favorable conditions for
domestic and foreign investors and foreign financial
institutions to acquire and merge weak credit
institutions in Vietnam. Possible restructuring
measures include: putting under special control as
prescribed by law; merger, consolidation, and
acquisition voluntarily. In case, a joint-stock
commercial bank is unable to recover, and cannot
continue to operate, there is a risk of insolvency, thus
greatly affecting the safety and stability of the system
of credit institutions, the State Bank of Vietnam shall
submit to the Prime Minister for guidelines and
approved the plan for compulsory transfer of weak
joint-stock commercial banks to newly appointed
credit institutions and investors. In case a joint-stock
commercial bank cannot be merged or consolidated
with a healthy credit institution, cannot be sold to
qualified investors, or cannot be forced to transfer, or
cannot declare bankruptcy, it needs gradually
narrows down activities to handling, dissolving,
terminating activities, [17].
Fourthly, from 2021 to 2025, the general goal of
restructuring the system of credit institutions
associated with dealing with bad debts of credit
institutions is to deal with weak banks, prevent new
weak banks, a healthy system of credit institutions,
and sustainable development to meet the goal of
restructuring the commercial banking system in depth
towards forming healthy commercial banks "towards
the development level of the Group of 4 leading
countries in ASEAN", [18]. In this period, study,
review, amend and supplement regulations on debt
trading market development and management and
supervision of debt trading market, encouraging
parties to participate in debt trading market to
perfecting the legal framework for buying, selling
and dealing with bad debts, creating conditions for
the debt trading market to develop is a solution to
create a legal framework to support the restructuring
and handling of bad debts. Weak credit institutions
may consider applying early intervention measures,
special control, and other measures by the provisions
of law, ensuring the stability of the system of credit
institutions, political security, and social order and
safety, [18].
3.3 Legislation of Measures to Handle Weak
Banks
The content of the legalization of measures to handle
weak banks is reflected in the National Assembly's
passage of Law No. 17/2017/QH14 dated November
20, 2017, of the National Assembly, amending and
supplementing several articles of the Law on Credit
institutions, effective from January 15, 2018.
Accordingly, the handling of weak banks is carried
out methodically, with a strict process, in which, the
regulation of many handling measures helps to
choose a feasible and suitable option for the specific
characteristics of each credit institution, including
measures:
3.3.1 Early Intervention
Early intervention is the State Bank's request for
credit institutions, and foreign bank branches to
remedy the situation, [8, Article 130a.(1)]: i) failure
to maintain the solvency ratio for 3 consecutive
months; ii) failure to maintain capital adequacy ratio
for 6 consecutive months; iii) rated below the average
according to the regulations of the State Bank. In the
early intervention stage, credit institutions must
report to the State Bank on the situation, causes, and
remedial plans and organize the implementation
within 01 years. During the implementation of the
remedial plan, the State Bank may request the credit
institution to adjust the remedial plan if it deems it
necessary. The remedial plan includes one or more of
the following measures, [8, Article 130a.(4)]:
- Narrow content, the scope of activities, limit large
transactions;
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- Increase charter capital and allocated capital;
increase the holding of highly liquid assets; sell,
transfer assets and implement other solutions to meet
safety requirements in banking activities;
- Limit dividend payment, and profit distribution;
- Cut operating costs, and management costs;
Restrictions on remuneration, salary, and bonus for
managers and executives;
- Strengthen risk management; reorganize the
management apparatus, reduce personnel;
- Other measures as prescribed by law.
Although early intervention is a measure officially
recognized in Law No. 17/2017/QH14 dated
November 20, 2017, of the National Assembly,
amending and supplementing several articles of the
Law on Credit Institutions, in practice market
management, this measure has been widely used and
relatively effective. In the early stages of changing
the banking model from a one-tier bank to a two-tier
bank model, due to a lack of experience in operating
the banking market, administrative interventions
were commonly used. The State Bank applies many
direct intervention measures when credit institutions
show signs of violations or pose a threat to system
safety.
3.3.2 Plan to Restructure Credit Institutions
under Special Control
This is a new regulation added in Law No.
17/2017/QH14 dated November 20, 2017, of the
National Assembly, amending and supplementing
several articles of the Law on Credit Institutions.
There are five recognized credit institution
restructuring options as follows:
First, the recovery plan
This is a plan to apply measures for a specially
controlled credit institution to overcome the situation
that led to that credit institution being placed under
special control related to the increase of charter
capital and the time limit for implementing the plan
to increase charter capital in the following cases: the
actual value of the charter capital is lower than the
legal capital; capital adequacy ratio below the level
prescribed by the State Bank; at the request of the
State Bank to ensure the safety of the credit
institution's operations. In addition, there must be a
business operation plan in the recovery period;
organizational structure, management, and
administration plan; a plan to deal with financial
deficiencies, weaknesses, bad debts, security assets
and measures to remedy violations of the law;
payment plan according to the schedule for deposits
of customers who are legal entities, deposits, and
loans of other credit institutions; the plan for
handling special loans borrowed, including special
loans and the roadmap and time limit for
implementing the recovery plan [8, Article 148a.(1)].
Second, the plan for merger, consolidation, and
transfer of all shares and the contributed capital. This
is the plan applied when there is a credit institution
that receives a merger or consolidation, and an
investor receives the transfer of all shares and
contributed capital of a specially controlled credit
institution. This plan is implemented when it is
decided on the policy of merger, consolidation,
transfer of all shares and contributed capital; there is
a credit institution that receives the merger or
consolidation, and the investor receives the transfer
of all shares and contributed capital that meets the
conditions as prescribed by law, and the credit
institution after the merger or consolidation ensures
the actual value of the charter capital is at least equal
to the legal capital and meets the safety ratios.
Third, the plan to dissolve the specially controlled
credit institution. This option is decided by the
Government at the request of the State Bank of
Vietnam [8, Article 150. (1)]. After the Government
decides on the dissolution policy, the State Bank
shall direct, inspect and supervise the implementation
of dissolution of the specially controlled credit
institution and supervise the liquidation of assets [8,
Article 150a.(1)].
Fourth, the compulsory transfer plan. A compulsory
transfer plan means a plan where the owner, capital
contributor, and shareholder of a specially controlled
commercial bank must transfer all shares and
contributed capital to the transferee. Accordingly, the
State Bank shall submit to the Government for a
decision on the policy of compulsory transfer of a
specially controlled credit institution, which is a
commercial bank, to the transferee when satisfying
the following conditions: i) the net value of charter
capital and negative reserve funds; ii) at the request
of the transferee [7, Article 151. (1)]. The State Bank
requires the specially controlled commercial banks to
hire an independent auditing organization to review
and assess the financial situation and determine the
real value of charter capital and reserve funds, except
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for the following cases: there has been a report of an
independent auditing organization and such audit
report is issued within 06 months before the date the
Government decides on the policy of compulsory
transfer [8, Article 151a.(1)]. The State Bank shall
issue a decision on compulsory transfer after the
compulsory transfer plan is approved. From the time
the State Bank issues a decision on compulsory
transfer, all rights and interests of owners, capital
contributors, and shareholders of the commercial
bank that are transferred must be terminated [8,
Article 151d.(1)].
Fifth, the bankruptcy plan for the specially controlled
credit institutions. The State Bank considered this
plan and submitted it to the Government for a
decision on the bankruptcy policy of specially
controlled credit institutions, [7, Article 152. (1)].
Within 30 days after the Government decides on the
bankruptcy policy of the specially controlled credit
institution, the Special Control Board is responsible
for presiding over and coordinating with the specially
controlled credit institution, Vietnam Deposit
Insurance to develop a bankruptcy plan for a
specially controlled credit institution, and submit it to
the State Bank for consideration. In case of
formulating a plan for bankruptcy of a people's credit
fund, the Special Supervisory Board shall assume the
prime responsibility for, and coordinate with the
specially controlled people's credit fund, Deposit
Insurance of Vietnam, and Cooperative Bank of
Vietnam to implement, [8, Article 152a.(1)]. The
State Bank shall direct, inspect and supervise the
implementation of the approved bankruptcy plan,
including requesting the specially controlled credit
institution to file a request for the Court to open the
bankruptcy procedure under the bankruptcy law. In
case of necessity, the State Bank shall submit to the
Government for a decision on amendment and
supplementation of the bankruptcy plan. The
bankruptcy of a specially controlled credit institution
shall be applied according to the provisions of the
law on bankruptcy of credit institutions [8, Article
152c].
Surveying the content of regulations on measures to
restructure credit institutions in current Vietnamese
law shows that the handling of weak credit
institutions, and credit institutions placed under
special control are still carried out in a cautious spirit
and emphasized the management and executive role
of the State Bank of Vietnam in deciding the
restructuring plans to submit to the Government for
consideration and decision. Emphasizing the role of
the State Bank and the Government in deciding to
apply measures to deal with weak commercial banks
directly is necessary, but only suitable for the initial
stage of restructuring. In the current period, the
weaknesses of each commercial bank as well as the
whole system of credit institutions have been clearly
shown. At the same time, according to the orientation
for the period 2021 - 2025, which emphasized the
handling of weak commercial banks based on market
principles, it is necessary to minimize administrative
interventions as in the current law.
3.3.3 The Order and Procedures for Implementing
the Restructuring Plan at the Controlled Credit
Institution
According to current regulations, when a credit
institution is in danger of insolvency, it must
promptly report to the State Bank the situation, its
causes and the applied measures, the proposed
measures to overcome, suggestions, and
recommendations to the State Bank. The State Bank
considers putting in special control when falling into
one of the following cases: i) loss, at risk of
insolvency or loss or risk of insolvency by
regulations of the State Bank; ii) the accumulated
loss of the credit institution is greater than 50% of the
value of the charter capital and reserve funds
recorded in the most recent audited financial
statement; iii) fail to maintain the capital adequacy
ratio specified at point b, clause 1, Article 130 of the
Law on Credit Institutions for 12 consecutive months
or the capital adequacy ratio is lower than 4% for 06
consecutive months; iv) weak rating for 02
consecutive years according to the regulations of the
State Bank, [7, Article 45. (1)].
3.4 Effectiveness of Handling Weak
Commercial Banks through Consolidation,
Merger, Acquisition
Dealing with weak commercial banks in the
restructuring of Vietnam's banking system took place
in the context of a small and transitioning economy,
so the privatization of state-owned commercial banks
does not affect improving efficiency because the
government still holds the majority, even state
intervention is the cause of the inefficiency of the
state-owned banks. Therefore, to thoroughly handle
weak commercial banks, it is necessary to take a
master approach and pose the problem of
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restructuring the banking system with the
restructuring of the economy. However, this
requirement was not fulfilled in the process of
restructuring the system of credit institutions in the
past period [25]. This explains why the compulsory
merger and consolidation measure in the
restructuring of the credit institutions system has the
purpose of system consolidation and is arranged by
the State Bank of Vietnam as well as other relevant
government agencies to achieve a secure financial
system, [28], [31], is always preferred. Therefore,
applying measures of consolidation, merger,
acquisition, and forced transfer to deal with weak
commercial banks has reduced the number of weak
commercial banks, and also increased the size of
commercial banks through consolidation and merger
transactions, thereby helping to ensure the safety of
the banking system and improve competitiveness,
[6],[10].
However, reality has proven that the effectiveness of
bank consolidation and mergers can only be achieved
if it is based on the needs of the parties. Therefore,
when using consolidation and merger as a method to
restructure the system of credit institutions, credit
institutions need to move towards more market-
oriented solutions, [14], because, if the actual
consolidation and merger activities not only have no
support banks to reduce risks, but also increase risks
for banks being acquired, [26], this results in the risk
of bad debt, and the liquidity of banks having
difficulties leads to a decrease in bank consolidation
efficiency, [29], [3]. This is the biggest challenge
posed in handling weak commercial banks in
Vietnam through consolidation, merger, and
acquisition.
3.5 Consolidation, Merger, and Acquisition
Become Effective Measures to Deal with
Weak Commercial Banks and Improve
Competitiveness under the Market
Mechanism
The biggest obstacle to consolidating, merging, and
acquiring banks, including weak commercial banks,
is that Vietnam has not yet formed a market for bank
mergers and acquisitions and a debt trading market
according to the market mechanism. This fact makes
the goal of developing a system of multi-purpose
credit institutions in the direction of modernity, safe
operation, and solid efficiency with a diversified
structure of ownership, size, and type, which have
greater competitiveness and based on technology,
advanced banking management in line with
international practices and standards on banking
activities, to better meet the demand for financial and
banking services of the economy. It becomes very
difficult.
For the banking system to develop safely,
sustainably, and effectively, before and after
restructuring and handling weak banks, it is
necessary to have research solutions and establish a
legal basis for expanding the subjects who are
eligible to participate in the restructuring and
handling of weak banks. Moreover, it needs also
complete the legal framework for the debt trading
market. This is explained by:
Firstly, in the previous period, state-owned
commercial banks and healthy joint stock
commercial banks were the "key forces" involved
with the appropriate support of the Government and
the State Bank of Vietnam in terms of mechanisms,
policies, and resources to handle weak commercial
banks. This approach leads to unsustainability due to
the mentality of being "sponsored", and "subsidized"
by the state, and at the same time, it discourages
investors from actively participating in consolidation,
merger, and acquisition transactions of credit
institutions. However, most commercial banks after
consolidation, merger, and acquisition have lower
profits and high credit risk. In other words, most
commercial banks face more difficulties [30], [9], so
they may not create incentives for commercial banks
to actively participate in consolidation, merger, and
acquisition transactions.
Secondly, currently, the project "Restructuring the
system of credit institutions associated with handling
bad debt for the period 2021-2025" identifies
viewpoints and solutions: encourage and create
conditions for credit institutions with sufficient
financial and governance capacity to participate in
consolidation, merger or acquisition of credit
institutions with small scale or potential risks in their
operations, and encourage participation in the
purchase, sale, consolidation, and merger of credit
institutions voluntarily to increase the scale, scope of
operation and competitiveness. This is a very difficult
solution to implement in the context that Vietnam
still lacks a real debt trading market when credit
institutions still mainly sell the debt to one member
limited liability company - Vietnam Asset
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Management Company for credit institutions
1
and
Vietnam Debt Trading One Member Limited
Liability Company
2
. These are two state-owned
companies. These companies are considered special
tools of the State to contribute to the quick settlement
of bad debts, and financial health, minimizing risks
for credit institutions and businesses and promoting
legitimate credit growth for the economy. It also
means that, in addition to business functions as
enterprises in the economy, these enterprises must
also perform the assigned "political tasks" in ensuring
the healthy development of the market economy in
general and the banking market, in particular,
Meanwhile, Resolution 42/2017/QH14 stipulates that
credit institutions are allowed to sell bad debts and
related collateral in a public and transparent manner,
by the law and at an appropriate selling price at
market value, above or below the principal balance of
the debt. Debt trading between credit institutions and
between investors, especially foreign investors, and
credit institutions has not yet taken place.
1
Article 3(2) Decree No. 53/2013/ND-CP dated May 18,
2013, of the Government on the establishment,
organization, and operation of Vietnam Asset Management
Company for credit institutions stipulates: Vietnam Asset
Management Company for Credit Institutions is a special
enterprise, organized in the form of a one-member limited
liability company, 100% of charter capital owned by the
State and under the management, inspection, and
supervision of the State Bank.
2
Vietnam Debt and Asset Trading One-member limited
liability Company with 100% of charter capital held by the
State, performs the function of supporting the
restructuring, arranging the transformation of enterprise
ownership in which 100% of charter capital is held by the
State through activities of receiving, purchasing, handling
debts and assets, and purchasing and handling debt and
assets (Article 5 of Decree No. 129/2020/ND-CP dated
October 27, 2020, of the Government on functions, tasks
and operation mechanism of Vietnam Debt and Asset
Trading One-member limited liability Company).
The purchase and handling of debts and assets of
organizations and individuals do not coincide with the
objectives and political tasks of the Vietnam Asset
Management one-member limited liability company for
credit institutions (Article 6.1(b) Decree No.
129/2020/ND-CP dated October 27, 2020, of the
Government on the functions, tasks and operation
mechanism of Vietnam Debt and Asset Trading One-
member limited liability Company).
4 Conclusion
Based on the principle of prudence and avoiding
failure in the process of handling weak banks, it can
be confirmed that dealing with weak banks through
consolidation, merger, compulsory acquisition, and
compulsory transfer of administrative orders in
Vietnam proved to be an appropriate choice to
immediately solve hot spots of weakness, reduce the
number of commercial banks, as well as ensure
uninterrupted capital flow for economic development
goals. The choice of measures for consolidation,
merger, compulsory acquisition, or compulsory
transfer based on administrative orders will help state
agencies have conditions to observe the market and
identify legal issues arising in the process of
restructuring to have a roadmap to build and perfect
the legal framework for systematically dealing with
weak banks. However, the choice of measures for
consolidation, merger, forced acquisition, or
compulsory transfer based on administrative orders
can only deal with "clinical" manifestations without
going into the most fundamental causes.
Consequently, the weak state of commercial banks
occurs. It means that the weak state of the banking
system cannot be completely dealt with. The practical
analysis of business results before and after the
consolidation, merger, forced acquisition, and
compulsory transfer is proof of shaping perception.
The shift of measures to handle weak banks and
restructuring of the banking system from 2021 to
2025 through consolidation, merger, and acquisition
according to the market mechanism, that is, based on
the proactive agreement of the parties involved in the
transaction, based on the considerations of benefits
obtained, will create motivation for the process of
restructuring the system of credit institutions quickly
and effectively. Establishing a legal framework for
consolidation, merger, and acquisition of credit
institutions according to the market mechanism is an
important condition and premise for the formation of
a market for buying and selling credit institutions
according to the needs of the parties based on the law
of the current market economy in Vietnam, in which:
- Healthy commercial banks should not be used as a
tool to handle weak commercial banks as
implemented in the previous period to avoid bad
debts running around from one commercial bank to
another. Therefore, it will not completely address the
existing weaknesses, but only be transferred to "a
new state of existence". In other words, the
effectiveness of handling weak commercial banks
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through consolidation, merger, acquisition, or
compulsory transfer based on administrative
decisions and direct intervention from the State Bank
of Vietnam has only immediately solved serious
weaknesses but has not completely solved the causes
of weakness.
- It is necessary to focus on building a legal
mechanism to ensure the attraction of investors,
especially foreign investors to participate in handling
the weak commercial banks to make banks healthy
from the inside, by attracting potential investors, and
strategic investors. To attract investors to participate
in handling weak commercial banks, it is necessary
to limit administrative interventions from the State
Bank to create confidence for investors.
- In the long term, the option of dealing with a weak
commercial bank through bankruptcy proceedings
should be quickly reached. Due to its sensitive nature
and great impact on socio-economic life, the
bankruptcy of commercial banks needs to be quickly
resolved through bankruptcy proceedings with the
active participation of the Deposit Insurance and the
State Bank of Vietnam.
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