Summary of data analysis in phase 2

In brief, loan loss accounting in phase 2 was intertwined closely with social practices in which the market force grew strongly with the equitisation of SOCBs and the launch of many JSCBs following the implementation of the multisector business sector policy. It resulted in the need for external accounting information to serve investors other than the Government because the state was no longer the only owner of the commercial banks, as in phase 1. The international commitments under the global integration policy were found the major cause of the renovation in regulating loan loss recognition as also claimed by Phuong NC and Richard (2011) and Nguyen Loc, Hooper and Sinclair (2013).

In particular, Decision 493 and Decision 18 classified debts and made provision based on both quantitative and qualitative criteria following international practices. The maintaining both methods of quantitative and qualitative showed the ‘cleverness’ of bank regulators in customisation of international standards for adopting in the specific context of Vietnam. In detail, the quantitative method that was based mainly on the overdue date suited the Vietnamese practicians’ ‘habitus’ of compliance, thus sustaining the dominant–dominated relationship between the Government and the practicians as claimed by Nguyen Loc, Hooper and Sinclair (2013). That habitus helped to enhance the Government control.

The permission for banks to select the qualitative method, which was based on the internal credit rating system, responded well to the need of global integration. By responding in that way, the bank regulators seem to meet both oppositions of Government and market controls simultaneously, consistent with Phuong NC and Richard’s (2011) comment that the accounting transformation was a success at the first glance and the modification was a clever compromise. It also explained why there were few criticisms related to Decision 493 and Decision 18. This is another piece of evidence to prove that the current definition of Government control is similar to the ‘reframe’ response in interpersonal communication in which ‘Dialectical theorists have found reframing to be correlated with higher satisfaction than other ways of managing contradictions’ (Tracy 2004, p. 137).

However, later, there were many claims that the Vietnamese standard in loan loss recognition was quite different from international standards, thus understating bank loan loss disclosed, and then distorting the capital allocation. The analysis of communication in phase 2 revealed that the difference in loan loss disclosure in Vietnam compared with the international standard was caused by the invalidation of regulation on loan loss recognition (Decision 493 and Decision 18). Both the Government and commercial banks took that action.

The Government directly intervened in loan loss recognition in commercial banks or created a separate set of regulations on loan loss recognition for lending to SOEs or state projects. This finding is complementary in another way to Piotroski and Wong’s (2012) discussion about the different ways that reduced the supply of high-quality external reports in Chinese listed firms.

The system error was found to be at the bottom of such behaviour. Specifically, although establishing the multisector economy, the Government would like to develop the state economy sector into the market leader to maintain the Government’s direct control over the market economy. This policy was reflected in different ways. It was reflected in the halfway equitisation of SOEs, including SOCBs, in which the firms or banks were still state controlled after equitisation. It is also reflected in the privileges offered to SOEs in resource allocations, especially, lending in spite of their low efficiency.

In terms of loan loss recognition, the privileges were waiving debts classification requirements for a commercial bank and/or provision making related to lending to SOEs. Other privileges included setting a minimal provision for lending to SOEs via VDB under another regulation instead of under Decision 493 and Decision 18, thus making them inefficient and distorting the external disclosure of loan loss.

Whereas that deficiency misled the market discipline, the Government accepted it because the state has low need of external qualitative information that is consistent with Piotroski and Wong’s (2012) explanation that the state has its private channel of information collection. In the Vietnamese banking industry, SBV collected information via the direct reports from the commercial banks that were not published. Its Credit Information Centre is another private channel of SBV for collecting information related to credit risk management.

In addition, the Government can obtain the necessary information using its private channel under the state control ownership structure in SOCBs as the result of the halfway equitisation. Being state-controlled, SOCBs work for multiple objectives, other than profit seeking, to implement the Government policy. It promoted the state to establish its private channel of information rather than utilising the firm external financial reports. Similarly, Piotroski and Wong (2012) claimed that the only financial information published by the Chinese listed firms was insufficient for the Government to measure and assess the firms’ performance with multiple objectives rather than profit seeking only. Therefore, the external disclosure of loan loss recognition under Decision 493 and Decision 18 would not be necessary to the state. It added to the reduction in the demand of quality information from external sources from the perspective of the government as one of the information users.

The behaviour of the commercial banks in the invalidation of Decision 493 and Decision 18 resulted from three major reasons. These are the low motivation to publish quality information, the high pressure to reach the regulation targets that are simple accounting-based ones and the weak legal environment represented by the prevalence of cross-shareholding and relative transactions. The privileges to SOEs for political purposes led to the situation that depositors cared more about a bank’s political background than its published financial information. It reduced the bank’s motivation to publish high-quality information of loan loss.

The setting of unaffordable regulation targets, which caused a large burden to small commercial banks, reflected the inexperience of the bank regulators in adopting the international practices related to the capital adequacy process. It was found that commercial banks managed their loan loss recognition to meet regulation targets of NPL ratio and equity growth that were simply determined based on accounting figures without the elimination of cross-transactions among relatives. It is similar to Piotroski and Wong’s (2012) assertion that regulation targets based on simple accounting targets, without strong discipline to guard against manipulation, motivated the Chinese listed firms to distort their external accounting reports for reaching regulation targets. This finding is also consistent with Nguyen Loc, Hooper and Sinclair’s (2013) claim that the dominated practitioners (commercial banks) tend to override the regulations imposed by the state as the dominant.

Commercial banks took advantage of cross-shareholding and relative transactions to hide NPLs to reach the regulation targets. The cross-shareholding was caused by the half-equitisation in which SOCBs were required to become a shareholder in JSCBs and SOEs purchased stocks of each other to maintain the Government control.