INDUSTRIAL REVOLUTION 4 0 DEVELOPING OPPORTUNITIES FOR VIETNAMESE COMMERCIAL BANKS Doan Phuong Thao, PhD Ngo Thanh Xuan, MBA National Economics University Abstract Today, the world is entering the Ind[.]
INDUSTRIAL REVOLUTION 4.0: DEVELOPING OPPORTUNITIES FOR VIETNAMESE COMMERCIAL BANKS Doan Phuong Thao, PhD Ngo Thanh Xuan, MBA National Economics University Abstract Today, the world is entering the Industrial Revolution 4.0 This revolution is a great trend, affecting the socio-economic development of each country, each region and the world, including Vietnam This wave of revolution also creates opportunities for significant changes in the banking sector in Vietnam, although it is not in the strongly influenced areas As the matter of fact, this paper studies the current status of Viet Nam's commercial banking system in the period of 2014-2017, thereby, proposing some recommendations for the improvement of Vietnamese banking system in the context that influence of Industrial Revolution 4.0 is becoming increasingly powerful in Vietnam Keywords: Industrial Revolution 4.0, commercial banks, State Bank of Vietnam Introduction Industrial Revolution 4.0 was first mentioned in the High-Tech Strategy Action Plan adopted by the German government in 2012 According to Professor Klaus Schwab, President of the World Economic Forum, Industrial Revolution 4.0 is a term that encompasses a wide range of modern automation technologies, data exchange and manufacturing Industrial Revolution 4.0 is a combination of technology in the fields of physics, digital and biotechnology, creating entirely new possibilities and profound impact on the political, social, economic aspects of the world Then, robots and computers with artificial intelligence can possibly evolve to replace human beings in the judgment and management of complex systems As the result, Industrial Revolution4.0 has been affecting the socio-economic development of each country, each region and the world, including Vietnam 534 Responding to impacts from the Industrial Revolution 4.0, the commercial banking system has made some significant changes in order to promote the socio-economic development of Vietnam in the context of international economic integration In fact, with strong growth both in terms of quantity and size, by the end of 2017, Vietnam’s banking system has narrowed down to two policy banks, five state-owned commercial banks, and increased to about 40 joint-stock banks, 10 joint-venture banks along with the availability of other 100% foreign-owned banks and foreign branches in Vietnam However, in the process of development, the banking system of Vietnam still has many limitations, forcing banks to take vigorous steps to ensure sustainable growth Furthermore, on the management side, the State Bank of Vietnam has been actively putting through many activities of the sector to concretize tasks under Directive No.16/CT-TTg dated May 4, 2017 of the Prime Minister on enhancing the capacity to approach the Industrial Revolution 4.0 Accordingly, the legal corridor was born to support the operation of commercial banks such as payment system, development of information technology infrastructure, security, confidentiality, etc and in particular, reinforcing the communication and scientific research on the application of 4.0 technology in the banking industry Research Methodology The article uses the method of data synthesis and analysis Based on the data collection, statistics and synthesis regarding the impact of Industrial Revolution 4.0 on system operations of global commercial banking system and of Vietnam, which are found in reputable articles, scientific journals, archives and mass publications of commercial banks as well as financial organizations, the authors then analyze impacts from the Industrial Revolution 4.0 to commercial banks in Vietnam Research Content 3.1 Opportunities for Vietnamese Commercial Banks in the Context of the Industrial Revolution 4.0 In the period of 2014-2017, Vietnam's economy achieved a macroeconomic stability with an average economic growth rate of 5.8%, moderate inflation and export surplus, increasing foreign exchange reserves and stabilized exchange rates This contributed 535 significantly to the positive change in the operation of the commercial banking system with regards to the successful restructuring program of commercial banks In the context of the Industrial Revolution 4.0, the opportunities for the commercial banking system in Vietnam are still at early stage compared to other countries in the region in terms of: First, there is an opportunity to change the scale of capital Vietnamese largest banks by capitals such as Agribank, Vietcombank and BIDV are still smaller compared to the largest banks in the region (Malaysian Maybank has more than 4,000 million US Dollars in capitals, BDS Bank of Singapore has over 9,000 million US Dollars in capitals, Bangkok Bank of Thailand has more than 3,000 US Dollars in capitals), so the pressure to increase working capitals is mandatory task for both state-owned as well as joint-stock commercial banks to ensure financial solidity to respond to sustainable development challenges (Figure 2.1) Figure 2.1 Operational Scale of some Vietnamese Commercial Banks in 2017 Unit: billion VND 1400000 1200000 1000000 800000 Charter's Capital 600000 Owner's Equity 400000 Total Assets 200000 Source: Compiled by the authors from the annual reports of commercial banks in 2017 Secondly, commercial banks are obligated to adhere to the international standards of operations and compliances to ensure sustainable development among fierce competition (i) The number of commercial banks currently implementing capital adequacy under Basel II started from 10 pilot banks in February 2016 and will be 536 extended to other banks by 2020 As the result, commercial banks need to prepare strategy to increase capital along with reasonable plan of use; (ii) Bad debts are gradually being processed On May 31, 2013, the Government issued Decision No 843/QD-TTg approving the project of "Credit Institutions Dealing with Bad Debts" and the project of "Establishment of Asset Management Company of the Credit Institutions of Vietnam" with the aim of helping commercial banks to deal with bad debt and has reached a record level and contributed successfully to the objectives of the "System Restructuring Plan of Credit Institutions in the Period of 2011 2015"under Decision No 254 / QD-TTg dated March 1, 2012 However, by the end of 2014, the State Bank of Vietnam (SBV) announced bad debt ratio remained at 3.9% Figure 2.2: Bad Debts of Vietnamese Commercial Banks Unit: % 20 15 10 2014 2015 2016 Overdues 2017 Bad debts Source: National Financial Supervisory Commission, State Bank of Vietnam and author’s estimates In early 2015, the State Bank of Vietnam continued issuing Directive No 02/CTNHNN on enhancing the handling of bad debts of credit institutions together with documents to direct the resolve of non-performing loans (NPLs) rate in 2015 with the objective of less than 3% However, the NPLs ratio was 11.5% in 2016 and in 2017 it was 9.5% (according to Vietnamese accounting standards), showing that NPLs ratio did not decrease but increased since 2014, and carried many potential pitfalls Comparing bad debt figures between official sources of Vietnam and from statistics and analysis of foreign economic experts and international financial institutions showed huge differences According to international experts, Vietnamese bad debt ratio could possibly reach20% (according to international standards) Bad debt 537 becomes a matter of concern and controversy The bad debt ratio of the commercial banking system does not show concentration in the state-owned group or joint-stock banks; in small-size or large-size banks; spread or concentrated scale of operations; modern or traditional banks Instead, bad debts occur in all type of commercial banks.(iii) There is a stress on the liquidity concern of the commercial banking system Liquidity shortages and liquidity problems are common and lasting in many commercial banks due to the imbalance between lending and mobilization The loanto-deposit ratio is generally at 105% while for most countries it remains below 100% and the safety standard is at 80% In addition, the liquidity risk arises due to the imbalance between the maturity of funds and the use of capitals Most of the funds are short-term while the actual lending demand is medium and long term This has a great impact on the business performance of commercial banks, creating pressure to slow down the process of deploying new applications in banking operations The ROA, ROE (used to assess the performance of the bank) are about 0.6% and 0.9% which is relatively low compared to international standards Thirdly, Industrial Revolution 4.0 provides the opportunity to make changes to the distribution channels and traditional banking products Industrial Revolution 4.0 completely changes the distribution channels and traditional banking products In recent years, the emergence of smart phones has changed the way people communicate and interact, resulting in changes in distribution channels, sales networks, and product design of commercial banks Internet banking, mobile banking, social networking, digital banking and paperless transactions will become a strong inclination Thanks to the digital conversion application, the banking products can be integrated with many ancillary products to complement to customer satisfactions Applying the principles of Industrial Revolution 4.0, matters such as application programming interfaces (APIs), seamless delivery, or intelligence analytics will be a common trend in applications and productsdevelopment, especially high-tech banking products On top of that, Big Data and customer behavior analysis are also becoming a tendency in the digital age due to the fact that supportive technology can capture both internal and external data through customer behavior analysis in order to improve 538 service quality, bring added value, contribute to cost reduction and support for decision-making processes Fourthly, commercial banks are forced to accelerate the development of payment system, especially electronic payment In addition to fulfilling traditional payment services, most commercial banks in Vietnam have been deploying new and modern payment facilities based on the application of information technology and telecommunications with many products, new facilities, ensuring the safety and convenience, better meet the needs of customers in accordance with payment trends of countries in the region and in the world By the end of 2017, the number of personal accounts opened at commercial banks nationwide reached about 70 million accounts; about 70 commercial banks have provided online payment services and about 36 commercial banks provide mobile payment services Besides, the security and safety in the field of payment are receiving attention SBV issued Directive No 03/CTNHNN dated January 10, 2017 on enhancing the security and safety of electronic and card payment, requesting related units to implement procedures to ensure security and safety in card payment and online transactions Fifth is the opportunity to promote safety management of banking operations The issues of liquidity risk management, credit risk, interest rate risk, operational risk have received high attention Currently 100% of commercial banks have captured the State Bank of Vietnam's implementation of the Basel II monitoring framework Although, the implementation of Basel II at commercial banks faces two major constraints: the high cost of implementation, in which only financially stable banks can afford, and the lack of historical data; many other banks are also implementing risk management in the initial work such as researching process set up, developing risk management operational procedures, monitoring risks and warning, etc The implementation process shows that the operational risk management model of banks is unclear, overlapping functions and duties The three-round model of control at banks is relatively new, so it has not been implemented as effectively as expected The approach to implement the risk management framework mainly depends on the specialized functions Therefore, there are still existing risks in retailing activities, 539 especially with banks stressing to increase market share, pressure on business targets, building products quickly to market while risk and quality management have not been keeping up Sixthly, Industrial Revolution 4.0 brings the opportunity to improve information technology support in banking operations Artificial intelligence is the focus of development of many large technology companies in the world Consequently, commercial banks must apply information technology in the portfolio risk management, consumers management, data facilities management and above all, they must always grasp the trend, the application of information technology to ensure the safe and effective banking operations Presently, many Vietnamese banks have started the digital transformation process, deploying a number of innovative banking services such as TPBank with LiveBank; VPBank with Timo digital banking application; Vietcombank with digital space; MB with ChatBot virtual assistant application to serve 24x7 customers on social networks, etc With this requirement, the digital banking model operating on the basis of technology through digital devices connected with computer software through the Internet environment has in fact been and will change the whole system structure of the banks Industrial Revolution 4.0 will also provide new insights into how communication and business processes can be transformed through interactions and communication As the telecommunications infrastructure grows, conversations tend to be video-calls with increased levels of quality and stability Therefore, customer care at banks may also be required additional telemarketing skills In the distant future, virtual-reality and holographic technology will be able to completely replace human communication Besides, 3D calls like in fiction films may not be far off In addition, information technology is also increasingly involved in matters such as liquidity risk management, credit risk, interest rate risk, and operational risk at international standards In response to these requests, in recent years, the number of IT staff and IT infrastructure serving the bank have been constantly growing in both quantity and quality; the database has been encrypted and computerized Better support in ensuring information is provided for the planning and implementation of policies Core-banking systems are applied in risk management, accounting system, payment operations, etc at most commercial banks 540 ... billion VND 1 40 000 0 1 200 000 100 000 0 800 000 Charter''s Capital 600 000 Owner''s Equity 40 000 0 Total Assets 200 000 Source: Compiled by the authors from the annual reports of commercial banks in 201 7 Secondly,... Vietnam Research Content 3.1 Opportunities for Vietnamese Commercial Banks in the Context of the Industrial Revolution 4. 0 In the period of 20 14- 201 7, Vietnam''s economy achieved a macroeconomic... of commercial banks as well as financial organizations, the authors then analyze impacts from the Industrial Revolution 4. 0 to commercial banks in Vietnam Research Content 3.1 Opportunities for