THE CURSE OF THE FIRST
BUTTON: VIETNAM'S BANKING SYSTEM BEFORE THE GROWTH STORM
There is a simple yet ruthless truth: when you button the
first button wrong, every subsequent effort only results in a skewed whole. For
Vietnam's financial system, this metaphor is not merely a rhetorical device.
Over the past three decades, this system has not just missed a beat; it has
accumulated countless overlapping anomalies, weaving a massive risk trap where
opportunities for unraveling it were sequentially missed.
Now, as Vietnam wagers on a historic ambition—achieving an
average GDP growth of 10% or more annually during the 2026–2030 period—the
existential question is no longer whether the economy is
"capital-starved." The real question is: Can a financial system
buckling under a credit-to-GDP ratio of 134% (a risk level explicitly warned
about by the State Bank Governor in late 2024) withstand the intense pressure
of such an economic sprint?
1. The Forgotten Historical Crossroads
We must be fair to the past. Placing banks at the
"heart" of the financial system in the 1990s was not an intentional
blunder. When the economy was just emerging from the centralized planning
mechanism, the stock market was practically a blank slate (the first trading
session did not occur until July 28, 2000), and corporate bonds were a luxury
concept. Commercial banks were the only viable mobilization channel.
However, the tragedy lies in "institutional
inertia." When the time was ripe, the system chose to turn a blind eye to
four golden opportunities for transformation:
- The 1997–1998 Shock: The Asian Financial Crisis
devastated the region, but Vietnam escaped relatively unscathed due to its
lack of deep integration. Instead of building a bunker, this stroke of
luck was interpreted as proof of the current model's superiority.
- The 2007–2008 Madness: As the VN-Index hit a peak
of 1,170 points, credit pumped into the market surged by 53.9%, triggering
a terrifying inflation rate of nearly 20% the following year. The warning
was clear, yet policies remained trapped in a short-sighted "tighten-and-loosen"
loop.
- The 2011–2015 VAMC Illusion: To clean up a mountain of
bad debt, the Vietnam Asset Management Company (VAMC) was established in
2013. Ultimately, however, this was merely an "accounting
makeup" trick, hiding bad debts under the guise of special bonds
without truly resolving the core collateral assets.
- The 2020–2022 Collapse: The corporate bond crisis
and the shadow of Van Thinh Phat exposed fatal vulnerabilities. Once
again, the system opted for temporary "firefighting" rather than
a structural overhaul.
2. Seven Tumors Destroying the Structure
On the surface, cash still flows. But deep inside, seven
fatal anomalies are eroding the economy's vitality:
- Gambling with Maturities
("Using short to feed long"): Banks primarily mobilize
deposits with terms under 12 months, yet they pump out medium and
long-term loans. The State Bank had to use administrative mandates to drag
this ceiling ratio down from 40% (in 2020) to 30% (as of October 1, 2023),
exposing the fragility of liquidity.
- The Labyrinth of Cross-Ownership: This is the most malignant
tumor. The SCB – Van Thinh Phat scandal is a horrifying testament: over
2,500 loans, an outstanding debt exceeding 1 million billion VND, and
damages of 498,000 billion VND (according to the appellate verdict).
Hundreds of shell companies blinded the entire supervisory system for a
decade.
- The Mortgage Bubble: Capital does not flow
according to project cash flows but chases land values. As real estate
prices rise, banks lend more; the money then pours back into land, pushing
prices even higher. When the bubble bursts, the bad debts detonate.
- The Black Hole of State-Owned
Enterprises (SOEs): The "implicit guarantee" mechanism has turned this
sector into a sponge that recklessly absorbs capital. The collapse of the
Vinashin empire with an 86,000 billion VND debt (in 2010) is a bloody
lesson in the distortion of capital allocation.
- The Credit Addiction: The pressure for
"growth at all costs" drove the credit-to-GDP ratio from 60% (in
the 2000s) to 134% today, turning the system into a ticking time bomb
highly sensitive to any interest rate shocks.
- The Neutralization of Discipline: In 2015, the State Bank's
acquisition of three weak banks (VNCB, OceanBank, GPBank) for zero dong
salvaged immediate panic but sowed a toxic belief: "No bank will be
allowed to fail." This reliance killed market discipline.
- The Obscurity of the Cash
Economy: Only 30–35% of small and medium-sized enterprises (SMEs) can
access bank loans. Lacking collateral and transparent credit histories,
they are marginalized from the financial playing field.
3. The Spiral of Doom and the Trap of the Future
These seven anomalies do not operate independently; they
feed off one another. Information obscurity encourages cross-ownership;
reliance on collateral fuels the real estate bubble; SOEs drain capital away
from private enterprises. The economy sinks deeper into the trap of short-term
credit. The root of this tragedy lies not in technical execution, but in the
institutional tolerance for interest groups and short-term growth achievements.
If we keep this ill-fitting "shirt" to force the
economy to run at a 10% annual pace, we are single-handedly opening the door to
three disastrous scenarios: (1) An interest rate shock due to
short-term liquidity shortages; (2) The detonation of the real
estate bubble, dragging along severe bad debt consequences; and (3) Inflationary
pressures forcing monetary policy to "slam the brakes" as witnessed
in the 2007–2008 tragedy.
It is time to stop debating whether we should reform. The
real question now is: Do we have the courage to endure short-term pain,
dismantle entrenched interest groups, and begin the arduous task of tearing off
this old shirt to button the first one correctly?
