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Outward foreign direct investment by Vietnamese commercial banks (Part II)

Thursday 23, 07 2020
With the information and results mentioned in Part I, Part II will give the reasons and some recommendations to help the commercial banks' offshore investment better.
Outward foreign direct investment by Vietnamese commercial banks (Part II)

III. Reasons

The foreign direct investment of a commercial bank is a business decision because its main purpose is to find and increase profits. Most countries have preferential policies to attract foreign investment, but investments in the financial sector in general, and banks, in particular, do not enjoy many preferential mechanisms of receiving countries. The difficult situation in OFDI of Vietnamese commercial banks is due to many causes, subjective and objective, of which the main difficulties include:
 
Firstly, the business environment in Cambodia, Laos, and Myanmar is still difficult. The first difficulty to mention is that the political, economic, and legal changes in these countries are constantly amended and supplemented, causing many negative impacts on the business community. Vietnam in general and Vietnamese commercial banks in particular. Besides the legal factor, the element of competition is also a great difficulty for Vietnamese commercial banks in foreign countries. In foreign markets, typically Cambodia has a large openness, free members compete in the market while the management and regulatory role of the Central Bank is quite limited. In Myanmar, foreign banks are currently still subject to certain limitations in business activities compared to local banks. Accordingly, Vietnamese commercial banks often suffer from losses in competing with local banks and especially other national banks such as China. Foreign banks are often more restrictive when carrying out court proceedings when disputes occur. As is the case in Laos and Cambodia, there is no credit information center like CIC to look up as an example of the lending risk of commercial banks. Therefore, banks need to have methods of risk prevention, must carefully analyze individual borrowers, countries, and governments where borrowers settle.
 
Second, the market access strategy of Vietnamese commercial banks is still passive. Specifically, most Vietnamese commercial banks carry the same business model, product system, management methods of the domestic market to foreign markets for business. This problem has made the operation of Vietnamese commercial banks in foreign countries only confined to Vietnamese corporate customers in foreign countries, which is difficult to penetrate into the local customers. This leads to the risk of focusing too much on a small group of customers. Not only that, in foreign business activities, the cultural, business and legal environment has many differences compared to Vietnam, leading to inadequate daily activities as well as to conflict issues. business culture.

 Second, the market access strategy of Vietnamese commercial banks is still passive.

Finally, the macroeconomic instability of the domestic economy also affects OFDI. In the period of 2010-2015, Vietnam's economy had many changes. The CPI rose sharply, sometimes it reached 18.15%, the exchange rate fluctuated unpredictably, the budget deficit increased, the social investment decreased and difficulties continuously appeared in real estate markets. securities ... affect the financial system in general, the banking system in particular. Thousands of businesses were affected, leading to an inability to repay bank loans, causing bad debts to soar. The banking system has to restructure with a focus on dealing with bad debts. Meanwhile, the macro factors needed to promote foreign direct investment activities in Vietnam are still lacking and weak at present. Specifically, Vietnam's economic growth is still very dependent on capital (ICOR up to more than 5) and Vietnam still lacks the capital to invest in economic development, while investment activities abroad have It is likely that the domestic development investment capital will be reduced if effective management policies are not available. The capital accumulation of businesses is small, mainly based on loans and the management capacity of enterprises is still limited, so the risk of implementing projects abroad is very large.

IV. Recommendations

Firstly, before investing, banks need to thoroughly study systematization of legal documents, laws, culture, markets, competition, risks ... in foreign markets and especially need to have thorough preparation of personnel, products, organizations, strategies, and capital. In addition, Vietnamese commercial banks need to proactively connect with local banks to learn about the institutional and political activities of the legal system here.
 
Secondly, identify the right market access strategy: As analyzed above, the common strategy of Vietnamese commercial banks in OFDI is to follow customers, but in fact, it is too dependent on the customer group. Vietnamese businesses in foreign countries will bring great risks. Accordingly, Vietnamese commercial banks need to have a strategy of approaching the balanced market between the group of customers who are Vietnamese enterprises/individuals in foreign countries and groups of enterprises/individuals in foreign countries to be able to promote their advantages Existing availability can grow, expand and diversify. In addition, it is also important to identify a suitable management model for overseas operations, with an appropriate authorization hierarchy, in order to promote the autonomy of business units in foreign markets. in addition to being able to strictly manage, ensure operational safety.

 Secondly, identify the right market access strategy:

Thirdly, determine prudent business direction: Accordingly, commercial banks should pay close attention to issues of legal risks, cultural conflicts, and competition with other banks in overseas business activities. Banks need to prepare carefully business plans and especially capital and accept to be able to cope well with possible risks. Accordingly, banks should choose a suitable growth rate in a safe way rather than a fast growth to gain market share. The choice of this orientation helps banks not to face much pressure on capital sources for business, leading to dependence on the support of the parent bank in Vietnam or unsustainable loans. Not only that, but the safe growth rate also helps banks to control risks well, especially credit for the first time when they do not have much experience in risk assessment in foreign markets.
 
Fourthly, improve the competitiveness in the international environment: Vietnamese banks need to invest in developing branch networks, ATM systems everywhere so that many foreign customers know the brand and access to services. bank service. In parallel, banks need to invest, develop modern technology and human resources to catch the development opportunities of these early markets in the next periods. Banks should also promote a cross-sale method to exploit the needs of existing customers and sell more products and services that customers have not used.
 
Fifthly, regarding the mechanism to encourage investment abroad, the Government should consider developing a scheme on supportive and incentive mechanisms to promote FDI activities, including breakthrough solutions. to encourage FDI activities not only for commercial banks but also for businesses. Policies and laws must be suitable for the market situation to promote investment activities. Consideration of setting up offshore investment assistance funds The Government may also consider establishing a national welfare fund. We can also consider studying the Chinese model when we do not have specific financial solutions to support Vietnamese businesses when expanding operations to the international market.

>> Outward foreign direct investment by Vietnamese commercial banks (Part I)

Alice Hoang - Vietnam Credit

Categories:
Investment

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