Under the regulations, which will come into effect this February, founding shareholders of a bank are not allowed to be founders, owners or strategic investors in another credit institution. The restriction aims to prevent conflict of interest in the banking system and to make sure banking founders are not spreading their capital too thin, the central bank said.

Founding shareholders, before applying for a license to open a new bank, are required to make profits for five consecutive years, instead of the present three profit-making years.

According to a central bank statement in October, Vietnam's banking system has 52 commercial banks, 51 branches of foreign banks, and many other non-bank credit institutions.

The central bank plans to restructure the sector, aiming to have 10-15 large banks that can become "pillars" to support the financial system.

News webiste VnExpress cited central bank governor Nguyen Van Binh as saying on Friday that by 2015, Vietnam will have one or two banks with an asset base of around $50 billion that can compete with regional lenders.

Vietnam's largest bank, state-owned Agribank, now has an asset base of just $25 billion, Binh said.

Thanh Nien News - December 20, 2011

Vietnam launches reform of troubled banking system

After years of sky-rocketing credit growth to finance development, Vietnam's banking system is now weighed down by toxic loans that have forced the communist nation to launch tough reforms.

The Southeast Asian country's financial sector consists of about a hundred banks - either state-owned, private or foreign bank branches. But most have only limited capital and many face a substantial shortfall of cash.

In the years to come, the whole set-up will have to change.

"There are too many small banks," said Le Tham Duong, from the Banking University of HCM City. "The challenges are enormous."

After a 14-fold increase in the amount of loans held by banks since 2000, reaching 244 percent of gross domestic product in September 2011 according to the central bank, the system has woken up with a huge quantity of bad debts.

Many result from the inability of state-owned companies and banks to fully follow the market economy principles embraced by the Communist Party in the late 1990s.

The trend was further accelerated by the regime's economic reforms in early 2010, when the government abandoned its sacred dogma of economic growth to tackle macroeconomic imbalances, particularly record inflation, still around 20 percent.

Measures towards credit limitation via higher interest rates in particular have been taken, making it harder for indebted companies. Official figures today show toxic loans represent about 3.2 percent of all of those registered in the country.

But "they are increasing fast" and "could reach five percent by the end of this year," said Cao Si Kiem, vice-President of the Consulting Committee for National Monetary Policy which advises the government.

Many experts distrust the figures, saying bad debts are badly underestimated in a country where opacity still dominates the corporate culture and where transparency of accounts, including the Central Bank, is mere wishful thinking.

Foreign observers suggest at least 10 percent of banks' assets could be bad loans.

"The non-performing loan ratio could easily surpass 15 percent, causing major problems for the banking sector," said the analyst firm Capital Economics in a recent report.

Under pressure from ratings agencies as well as international donors, who have granted Vietnam seven billion dollars of assistance in 2012, the authorities have announced a plan to restructure the sector.

The programme will entail an assessment of the banks' health before merging some of them, Cao Si Kiem told AFP.

"We will strive to halve the number of banks by 2015, in order to have two or three Vietnamese banks capable of competing with regional banks," said the former governor of the Central Bank.

The process has just begun with the announcement of the merger of three small banks in HCM City in early December - a move supported by the state. But analysts say much more painful treatment is needed.

"It is a lot more than putting banks together that needs to be done, you can't put three banks together and magically solve the bad loans situation. Someone has to absorb the bad debts," said Tony Foster, of business law firm Freshfields Bruckhaus Deringer.

Experts stress the need to strengthen the participation of foreign players, who could bring bigger financial capacity and sharper know-how.

A foreign bank is currently allowed to hold a 15 to 20 percent stake in a Vietnamese bank, and all foreign shareholders cannot exceed 30 percent.

The crisis could "get the government to make decisions that are not entirely consistent with its current ideology, but more realistic," said Alain Cany, president of Eurocham, the European Chamber of Commerce in Vietnam.

He said this would include accepting that, "in some specific cases, foreign banks may have more than 20 or 30 percent".

For him, the nightmare scenario of "chaos in the banking system" is not on the agenda. But he urged the authorities to be vigilant, including "drastically" reforming the state sector.

Last year the near bankruptcy of state-owned shipbuilder Vinashin, with debts of over $4.4 billion, damaged Vietnam's financial standing and underlined the haphazard management methods inherited from the planned economy.

Without fundamental reform, another Vinashin cannot be ruled out, observers note, openly worrying about the situation of some state giants such as Electricity of Vietnam (EVN), which recently announced major losses.

Investors are now crossing their fingers that no new disaster will hamper the difficult but necessary reform of the banking sector.

"The reform is likely to succeed. Unless the crisis is deeper than we think," said Cany.

Agence France Presse - December 21, 2011