Credit Misallocation and Economic Growth in Vietnam

The legacy of non-performing loans and high opportunity cost of government financing of bank recapitalization impeded the efficiency of financial intermediation and are an important policy issue in Vietnam. This paper presents a theoretical and empirical analysis of the issue. An empirical analysis using corporate data indicates credit misallocation between state owned enterprises and private firms in Vietnam. On the theoretical side, a micro-founded banking model is embedded in a political economy setting to assess the factors determining the size of bank recapitalization and its effects on the efficiency of financial intermediation, economic growth and welfare. The analysis suggests that recapitalization depends on an array of factors, including the tightness of the government budget and the decision maker’s concern for the favored sector.

Bank Recapitalization in India: A Critique of Public Policy Concerns

Public sector banks in India have always been viewed as vehicles of economic and social development. These institutions reach out to people of all sections across the country and offer banking services even if they have to compromise on profitability. Most of the social schemes for poverty alleviations, livelihood, skill development, financial inclusion, etc., are channelized through public sector banks. However, their capability is severely limited due to burgeoning non-performing assets. Considering the importance of public sector banks for the economy of the country, the government often recapitalizes them so that banks may survive the threat of closure. However, bank recapitalization serves as Band-Aid while the underlying sickness continues to spread. This article examines the policy concerns vis-à-vis bank recapitalization and suggests corrective pathways. Factors leading to unremitting capital erosion in banks have been diagnosed and efforts have been made to figure out why previous attempts at recapitalization have failed to strengthen and transform the banking system.