The time for half-measures has passed. The future belongs to those bold enough to implement the reform agenda fully, transparently, and without compromise.

Douglas Jackson, Managing Director and Head of Vietnam, Alvarez & Marsal Southeast Asia and Australia

Following years of robust economic growth, the country’s banks and capital markets now face mounting challenges: a sharp rise in non-performing loans (NPLs) from around 2 per cent in 2022 to over 4.5 per cent by late 2024 dented eroded investor and depositor confidence due to recent financial scandals, shallow capital markets, and a regulatory landscape that, while reform-oriented, continues to struggle with inconsistent enforcement.

These vulnerabilities underline the urgent need for a credible, transparent, and well-enforced regulatory framework capable of restoring trust and steering the financial sector towards a more resilient future.

In the face of deep-rooted structural weaknesses, Vietnam has embarked on an ambitious journey to strengthen the foundations of its financial system. A sweeping package of legislative reforms aims to modernise regulation, improve transparency, and restore public trust.

Central to these efforts is the 2024 Law on Credit Institutions, a landmark overhaul that introduces stricter ownership caps, tighter lending practices, and early intervention tools for troubled banks. Complementing this, amendments to securities laws, effective from early this year, are designed to curb insider trading and market manipulation while enhancing protections for minority shareholders.

Official NPL ratios mask the real extent of distress, as banks resort to cosmetic restructuring, offloading bad debts to related asset management companies, or engaging in reciprocal interbank NPL sales. These practices not only distort financial statements but also further undermine investor confidence in the banking sector.

Capital adequacy, meanwhile, remains a stubborn vulnerability. Despite adopting Basel II standards, Vietnamese banks generally meet minimum requirements but lack transparency in how their capital buffers compare regionally. Vietnamese banks still trail regional peers in capital buffers, while the risk-weighting approach remains conservative but lacks sufficient public disclosure to evaluate impact. The deepening credit risks are not being met with commensurate equity growth, largely due to shallow domestic capital markets.

Vietnam’s capital markets, which should offer a safety valve for the banking system by enabling long-term financing and risk sharing, remain underdeveloped. After a regulatory crackdown in 2022-2023 that followed revelations of mis-selling and poor disclosure, the corporate bond market remains subdued. High-risk premiums continue to weigh on issuance, particularly in the real estate sector.

Meanwhile, the stock market is heavily reliant on retail investors, with institutional participation still limited. Despite legal efforts to improve corporate governance, enforcement is patchy, and violations like insider trading often go undetected or unpunished, discouraging serious capital inflows.

In this context, the government’s decision to raise foreign ownership caps in selected banks, particularly those undergoing restructuring, to 49 per cent is a welcome step. However, key questions remain around how these caps will be implemented, what governance rights foreign investors will receive, and how they can exit their investments.

Safeguarding the long-term stability of Vietnam’s financial system requires a comprehensive reform agenda that tackles six following interrelated challenges.

Strengthening enforcement remains a foundational task. Legal frameworks, no matter how well crafted, will falter without credible and consistent implementation. Regulatory bodies such as the State Bank of Vietnam and the State Securities Commission must operate with institutional independence. Penalties must be timely, proportionate, and enforced without exception.

At the same time, more stringent capital standards are needed to reflect the growing complexity and interconnectedness of the financial system. Aligning with Basel III norms, institutionalising regular stress testing, and ensuring transparent public disclosure of results will help insulate banks from external shocks while enhancing investor confidence.

Vietnam’s capital markets also need to be broadened and deepened. A more robust legal and regulatory framework for corporate bond issuance, improved transparency, and the establishment of independent credit rating agencies are essential.

A parallel priority lies in improving public financial literacy. An investor base dominated by retail participants with limited knowledge creates fertile ground for volatility and manipulation.

Modernising regulatory oversight through the adoption of advanced technology presents another critical opportunity. The use of AI-driven fraud detection, real-time data systems, and digital compliance platforms can transform the efficiency and responsiveness of regulatory institutions. Partnerships between public authorities and the private sector will be vital in accelerating this transition.

Yet even the best-designed reforms will falter without genuine transformation within banks themselves. Public trust cannot be legislated, but it must be earned through transparency and responsible governance. Banks must embrace radical transparency. Voluntary disclosure of asset quality, provisioning, and capital buffers should be standard practice, not a rarity. Independent audits and honest investor communications will help restore confidence.

At the same time, grey-zone practices must be abandoned. Tactics such as evergreen loans, disguising bad assets through interbank transfers, or masking related-party risks must end. Recognising losses and provisioning honestly, even at the cost of short-term profits, is the only sustainable path forward.

Ownership and governance structures also need reform. Complex conglomerate links must be simplified, and related-party transactions brought into the open. Independent, empowered boards and clear separation between ownership and management are key to restore credibility.