“Zombie banks” exist as State Bank prevents them from going bankrupt Vietnam has not allowed banks to go bankrupt, leaving many virtually dead banks, or as some people call them, “zombies”.   Government agencies cannot give a reasonable explanation why these zombies still exist. A report from the Ministry of Planning and Investment (MPI) showed that 37,162 businesses were dissolved or suspended operations in the first seven months of the year, an increase of 9.8 percent over the same period the last year. The increasingly high number of dead businesses has pushed banks into a more miserable situation. “Businesses went bankrupt but their unpaid debts still exist, which have turned into banks’ bad debts,” said the director of a commercial bank which has a bad debt ratio of approximately 20 percent. “Banks have been told to hold out because of the government’s policy on not letting banks go bankrupt,” he said. The State Bank of Vietnam has never admitted the policy. Its senior officials, when speaking at official events, repeatedly sat that commercial banks must take responsibility for their operations and follow the market economy’s rules. However, an analyst said that the central bank deals with weak banks in different ways rather than allowing them to go bankrupt, which may create negative impact on society. Under international practice, a commercial bank will be put under the central bank’s special control once its bad debt ratio accounts for one percent of its outstanding loans, and it will be dissolved when the bad debt ratio reaches 3 percent. However, the analyst noted that in Vietnam, banks with the high bad debt ratios of 5-7 percent still exist. Reports from the eight biggest listed banks in Vietnam, Vietinbank, Vietcombank, ACB, Military Bank, Sacombank, Eximbank, BIDV and SHB, showed that their bad debts had increased by VND13.4 trillion by the end of the second quarter of the year. The figure would be even higher and account for 9.71 percent of the total outstanding loans, if the banks applied the Decision 780 when classifying their non-performing loans. The decision is believed to follow international practice in debt classification, setting up higher requirements for the classification. The analyst noted that many commercial banks have not been punished even though they broke the laws. Some banks stayed safe though they lent money at interest rates higher than the ceiling lending interest rates. Under the Civil Law, the ceiling lending interest rates offered by commercial banks must not be higher than 150 percent of the prime interest rates stipulated by the State Bank of Vietnam. Keith Pogson, deputy CEO of Ernst & Young Hong Kong, noted that Vietnam should apply the bankruptcy law when dealing with zombie banks, i.e., the banks which do not exist in reality, in order to ensure the healthy operation of the banking system. The Bankruptcy Law, to take effect on January 1, 2015, contains provisions on the bankruptcy of banks. However, as a lawyer pointed out, the provisions are not enough to solve banks’ problems, because commercial banks are different from businesses. DNSG