Why does Vietnam not apply the Bankruptcy Law to commercial banks?

On April 8, 2023, the Government issued Resolution 50/NQ-CP requesting the State Bank to urgently develop a restructuring plan for SCB in accordance with the procedures of the Law on Credit Institutions. According to the law, the restructuring plans for a commercial bank include: Recovery; Merger - consolidation - transfer of all shares; Dissolution; Compulsory transfer and Bankruptcy. Although the State Bank has not announced any plan, it is highly likely that it will not apply the bankruptcy plan.

Avoid the risk of a nationwide financial system collapse

Although the Bankruptcy Law for Credit Institutions was issued in 2014 and officially took effect from January 1, 2015, it seems that this is a measure to limit bankruptcy as well as avoid its consequences. And in fact, since the Bankruptcy Law was issued, there have been many poorly performing commercial banks that have negatively affected the entire system of credit institutions in particular and the economy in general, but the State Bank of Vietnam has never "allowed" any commercial bank to go bankrupt.

The reason is that the banking system in Vietnam today is a large-scale economic organization, holding a huge amount of assets, promoting investment activities, developing production, business and import and export activities; actively contributing to maintaining economic growth. The banking system both controls inflation, stabilizes the macro economy; and provides capital for the economy. Therefore, the influence and ability of commercial banks on the economy is very large.

Transaction at a bank in Vinh city. Photo: Thu Huyen

Commercial banks themselves, as financial intermediaries, must create high trust from depositors. In a country with a developing economy, the average income per capita is only at a fairly average level; therefore, for an organization or individual, having a certain amount of money, no matter how small or large, is considered a valuable asset, and the amount of money deposited in banks is considered as great as life.

Therefore, the bankruptcy of a commercial bank will cause a domino effect that will not only negatively affect the entire national financial system but also create social instability. Depositors in bankrupt commercial banks will lose all their money, causing panic and fear of a similar scenario for depositors in other commercial banks. This will lead to people's hearts wavering, and premature withdrawals from all commercial banks nationwide, causing the commercial banking system to be overloaded and paralyzed.

The bankruptcy of weak commercial banks has never happened, but there have been many cases of them being acquired by the State Bank. Such as the case of the State Bank acquiring CBBank and GPBank in 2015, or OceanBank in 2017 to reform operations and restructure, helping to stabilize financial security, thereby protecting the interests of depositors, and at the same time, creating a common driving force for the entire commercial banking system.

Define a stable profit channel

Many opinions say that you should not deposit money in commercial banks but invest in gold or real estate to avoid risks and gain more profits. This is not necessarily true, because the economy is like the human body, then money will be like the blood that runs to nourish that body. The healthier and smoother the blood, the healthier the body. When money is deposited in the bank, the bank will lend it to businesses to operate production and business effectively. All have an impact on each other to develop sustainably.

Therefore, buying gold for storage is only a short-term benefit. The Government issued Decree No. 24/ND-CP dated April 3, 2012 on the management of gold trading activities and took effect from May 25, 2012. Thus, our country has had to spend more than 10 years to fight against goldization and form a monopoly gold market with prices always higher than the world, while liquidity is low, meaning buying high - selling low, all for the purpose of limiting gold speculation.

Bank deposits are still a highly profitable channel and contribute to sustainable development. Photo: Thu Huyen

It cannot be denied that investing in gold, USD or real estate has the potential to generate higher profits than depositing in commercial banks. However, the potential for high profits comes with instability and high risks. For example, the real estate market is currently very difficult when many businesses cannot borrow capital and have to borrow everywhere to maintain operations. And when the market has no liquidity, while loans and corporate bonds cannot be issued, the collective or individual holding real estate will likely collapse along with that valuable real estate.

Meanwhile, bank deposits have a slower rate of return, but are very safe and the depositor always has a fixed amount of money and continuous profit. Currently, investment channels that used to bring high profits such as real estate, gold or stocks are becoming quiet, but bank deposits are still a high-profit channel and have the effect of contributing to sustainable development. This is also the goal that the Vietnamese banking system is aiming for.

Strictly implement Article 20 of the Law on Credit Institutions 2010

In our opinion, at present, Vietnam should not apply the Bankruptcy Law on Credit Institutions to eliminate weak commercial banks from the system, but there must be supervision from the State Bank to detect early and handle immediately when a commercial bank begins to fall out of control.

However, the key point lies in the need to seriously implement the provisions of Article 20 of the 2010 Law on Credit Institutions on the conditions for granting a License to a joint stock commercial bank, especially the“have a feasible establishment plan and business plan that does not affect the safety and stability of the credit institution system; does not create a monopoly or restrict competition or unfair competition in the credit institution system”.

In addition to developing scale and sales, improving management capacity, especially risk management, will create the strength of a commercial bank, thereby creating a strong brand value, creating solid trust for customers.

Realizing the great influence of commercial banks on the country's socio-economic situation, the bankruptcy of these enterprises has been meticulously and strictly regulated by law. The bankruptcy procedure for credit institutions is not as pure and simple as the bankruptcy procedure for enterprises and cooperatives. When a commercial bank, even though in bankruptcy, is still required to go through a special control procedure, which the Court cannot immediately accept. With this special control procedure, along with the current policy of the State, the recovery and "revival" of commercial banks is completely possible./.