Establishment of Asean economic community: Opportunities and challenges for banking sector – The case of Vietnam

3. Challenges for banking sector in Vietnam
First, integration into AEC will bring cause fierce competition in Vietnamese banking market. Uncompetitive domestic banks will be taken over by or lose their market shares to foreign banks. The presence of foreign banks has increased competitive pressure in banking sector. Foreign banks not only compete with local banks in providing modern banking services but also compete in traditional products such as credit, payment, and deposit. 
Although the banking system in the country has made certain development steps, the gap between domestic banks and banks in other AMS and the world is still very large in all aspects. As the free movement of services and labor in the AEC, the higher-growth economies like Singapore, Thailand, and Malaysia will get more benefit from providing their financial services. Therefore, banks in Vietnam will be placed in a fierce competition environment, and Vietnamese banking system will face a lot of challenges. Recently, many commercial banks in other ASEAN countries have continued to develop their branches and representative offices or establish 100% foreign-owned banks in Vietnam such as Thailand's Kasikorn Bank, Singapore's UBO Bank, and Public Bank Berhad (PBB) and Bank of Maybank of Malaysia.[10]  This situation creates some challenges for domestic bank system.
Firstly, the majority of Vietnamese banks have small capital in comparison with banks in other ASEAN countries and in the world while their non-performing debt ratio stands at high level. According to the current law, Vietnamese banks are under high pressure of increasing capital up to the legal capital.[11]  While many banks in ASEAN region equity capital at hundreds billion US$, there is no Vietnamese bank with equity capital reaching a 100 billion US$. In 2014, the total assets of some of Vietnam's biggest commercial banks ranged between 25 billion US$ and 30 billion US$ that is one tenth of UOB Bank's assets (306 billion USD) in Singapore, one fifth of Maybank (146 billion USD) in Malaysia and nearly one third of Kasikorn Bank's assets (72.5 billion USD) in Thailand.[12]  With small capital assets, Vietnamese banks will be able to focus only on credit activities, strong consumer lending, securities and real estate lending but not on development of non-credit services. Therefore, it is difficult for them to resist the unrest of the economy. Meanwhile, the non-performing debt ratio of Vietnam’s banking system in 2014 was at high level, i.e. of 4.11% with the total non-performing debt about 162.2 trillion VND. Bad debts of the Vietnamese banks increased rapidly in many banks, concretely, Agribank, Vietinbank (9.575 billion VND), Vietcombank (7.047 billion VND), and Asia Commercial Joint Stock Bank (3.479 billion VND).[13] The high level of non-performing loans resulted in loss of equity in some banks, therefore, it is difficult for them to maintain capital mobilization and lending as well to compete with foreign banks in the context of ASEAN economic integration.
Secondly, low quality of Vietnamese banks’ banking services puts them under high competition pressure. Domestic Banks’ services like retail service, account management service, financial advisory and support, derivative financial services, financial information services and international payment services are still primitive and unsuitable to needs of customers. Payment by bank card and internet banking are popular only in several major cities like Hanoi, Ho Chi Minh or Danang. In addition, according to Global Competitiveness Report 2014 - 2015 of World Economic Forum, Vietnam ranks at 68th out of surveyed 144 countries. The ranking is based on 12 competitive criteria including legal institution, infrastructure, health and education, market size, macroeconomic environment, the development of financial market, and the efficiency of labor market.[14]  Thus, compared to other ASEAN countries, the competitiveness index of Vietnam is still low. This will reduce the ability of attracting investment capital, modern technology for banking industry, increasing the capacity of human resource and the level of risk control over banking operations. However, Vietnamese banks have broad network of services and the knowledge of local customers and business environment. However, these advantages are not long-term and meaningful since they may easily lose to foreign counterparts when the domestic market will be fully opened.
Thirdly, the integration into AEC poses many challenges for the management and supervision of banking operations which are important for ensuring safety and the efficiency of the banking system. Vietnamese banks will face with the needs in controlling capital inflows and outflows. The increase of capital inflows also raises concerns about asset price bubbles, the risk of a sudden reversal of the capital inflows that destabilizes the financial markets. Deeper integration will increase risks in capital transactions and banking system risks given to incomplete management mechanism and lack of coordination between inter-ministries.
Fourthly, integration into AEC requires Vietnamese banks to have highly qualified human resources, knowledge of international trade law, and research and analysis skills meeting international standards. It is a fact that human resource of Vietnamese banks is lacking off appropriate knowledge and skills. 
Fifthly, within the framework of AEC, the member-states are committed to create fair operation environment for banks of other member countries by eliminating the discriminatory rules and policies between foreign and domestic ones. However, merge and acquisition of banks in AEC will not easily happen because of the large differences in law and the extent of liberalization of financial market among the involved countries. For example, Capacity Adequacy Ratio (CAR) which reflects the financial capacity of the bank, will be used for determining banks' ability to cope with the risks that the bank might face with, are different among member countries and among banks within each country.
In Vietnam, under the Circular no. 36/2014/TT-NHNN, minimum CAR is 9% which is higher than the requirements of Basel II and Basel III (which are applied by Singapore and Malaysia). However, the content of each constituent of CAR is different according with Vietnam and Basel regulations. By Basel's terms, a minimum CAR of 8% must cover both credit, market risk and operational risk. Meanwhile Vietnamese regulations do not mention about market risk and operational risk. Therefore, banks operating in AEC will struggle to comply with these very different legal requirements.[15]
In general, the liberalization of the financial service market will have a strong effect if rationally linked to domestic institutional reform, attracts new investors (both domestic and foreign investors) and thereby improve the efficiency of the market. However, in order to minimize the risk in the integration process, along with the financial market liberalization, it is necessary to maintain financial security regulations, to improve the market surveillance of financial services in order to timely deal with the fluctuations of capital flows and the impact of a financial crisis occurred in any country-member.
The analysis of opportunities and challenges of Vietnamese banks resulted from integration into AEC leads to the following suggestions for improving banking law of Vietnam.
Firstly, it is important for Vietnam to improve the regulations on the financial capacity of banks. In order to improve financial capacity of banks, the regulations should aim at increasing of charter capital and measures for dealing with bad debts and thereby improving their competitiveness and capacity of risk prevention. 
Secondly, banking laws in Vietnam need to eliminate foreign ownership restrictions for encouraging process of restructure of the banking system with the active participation of other banks in AEC. 
Thirdly, in order to strengthen the banking system, it is necessary to set forth effective legal basis for resolving bad debts of banks, for allowing other organizations and individuals to participate in the debt market. In addition, the State Bank of Vietnam also needs to improve the efficiency of supervising over the operations of banks in classification of debts, deduction and use of risk reserve to handle with bad debt.[16]
Fourth, banking laws of the country should minimize the risks of financial market when integrating into AEC. In common market for the whole ASEAN, identifying and monitoring the risk of the banking system are essential for each member-country. Therefore, law should regulate application of quantitative and early warning, and risk analysis models based on international standards for each bank and the whole banking system. This is necessary for improving the efficiency of remote monitoring and the stability of the banking market, especially when capital inflows are reversed abruptly.
Fifthly, international economic integration has increased the capital and banking system risk while the management mechanism has not been completed, so it is crucial to improve the regulations on inspection and supervision mechanism and the close coordination among the related ministries. In addition, authority in banking sector of each AMS should have cooperation mechanism with other AMS authorities to improve the framework for financial supervision, timely preventing and dealing with crisis situations in banking operations.
Sixly, Vietnam needs to improve law on on monetary policy and its implementation to stabilize the value of the currency, control inflation, and maintain macroeconomic stability and economic growth.
Seventhly, it is necessary to improve regulations on CAR and tconstituents of CAR in the way of gradually approaching the requirements of Basel II to Basel III during the restructuring of banking system of the country in order to accelerate the integration process of local banks.
Finally, Vietnam needs to improve the regulations on the technology synchronization for domestic banks. Banks need to set up research centers or departments that make research on application of morden technology in order to ensure safe operations, to save time and operation costs and to improve the competition capacity.