* Case highlights lax oversight in Vietnam's banks
* Fraud scandals dent image of domestic banks
* Central bank says bad loans halved, restructuring underway
By Nguyen Phuong Linh
HANOI, Jan 27 (Reuters) - A former banker at a state-owned Vietnamese lender was sentenced to life imprisonment on Monday for masterminding a scam that swindled customers of $190 million in the country's highest-value bank fraud case.
A court in Ho Chi Minh City found Huynh Thi Huyen Nhu, 36, guilty of "swindling to appropriate assets" and of using counterfeit documents and stamps to steal customers' deposits while working at Vietinbank, Vietnam's biggest partly private bank by assets, from 2007-2011.
A former Vietinbank branch manager, Vo Anh Tuan, received 20 years in jail and 20 other accomplices were given punishments ranging from 12 months of house arrest to 14 years behind bars.
The case was the latest conviction of top bankers who stole millions by exploiting loopholes and lax oversight during Vietnam's 2003-2007 economic boom, when banks grew rapidly and collected record deposits, but lent frivolously.
The economy overheated and banks' weaknesses were quickly exposed, revealing a crippling ratio of non-performing loans and a tightening of credit that slowed retail growth, plunged tens of thousands of businesses into bankruptcy and froze the property market.
Two former executives of state-owned Agribank were sentenced to death last year for embezzling $25 million in one of dozens of bank fraud cases being handled by the courts, with losses totalling hundreds of millions of dollars.
Nhu only escaped death because the money she stole was from customers and not the bank itself. The judge ordered her to repay all of the depositors she duped.
Her case was made more prominent because it exposed illegal lending at high rates by Asia Commercial Bank and implicated its founder, tycoon Nguyen Duc Kien and its ex-chairman, former government minister Tran Xuan Gia, with Nhu the recipient of credit funnelled through shell companies. Gia and Kien are awaiting trial.
The court heard how Nhu abused her position at Vietinbank to borrow $9.5 million at high interest to fund failed property and equities investments. She also conspired with accomplices to forge documents and set up a Ponzi scheme, the judge said.
Toxic debt and widespread fraud has dented the image of Vietnam's nascent banking sector, which the government has sought to clean up by ordering the restructuring or dozens of lenders and setting up an asset management firm to buy bad loans and rescue banks.
The government recently announced a decree allowing foreign institutions to buy bigger stakes in lenders from next month, capping them at 20 percent for a single "strategic foreign investor" - an entity with $20 billion of registered capital - within a total 30 percent foreign shareholding.
It would also allow majority foreign stakes in domestic banks considered weak, of which there were 11 last year, according to the central bank, the State Bank of Vietnam (SBV).
The SBV said last week the ratio of non-performing loans (NPLs) in Vietnam had been halved to 3.79 percent at the end of 2013, and $1.9 billion of bad debt had been bought by its asset management firm.
Fitch Ratings revised Vietnam's outlook to positive last week but said the banking sector remained weak, "due largely to a high but unknown level of NPLs".
Independent economists have long suspected official NPL estimates have been understated and say better regulatory oversight is needed to regain public trust.
"The image of the banking system was never as bad as now," said economist Le Xuan Nghia, a government adviser.
Nguyen Thi Bac, a lawyer for Vietinbank, or Vietnam Joint Stock Commercial Bank for Industry and Trade, said his client was not responsible for compensating customers.
Vietinbank is 64.5 percent owned by the state and 20 percent by Japan's Bank of Tokyo-Mitsubishi UFJ. It reported 2013 gross profit of $368 million and is considered one of the country's most reliable lenders.
The case and the way Nhu managed to defraud depositors of $190 million under the nose of Vietinbank has alarmed some of its customers, however.
"I withdrew my money from Vietinbank right after reading about the bank's irresponsibility," said Mai Van Dung, 56, a motorcycle taxi driver who took out his 20 million dong ($950) savings from a Hanoi branch over the weekend.
"My trust has collapsed." (Editing by Martin Petty and Robert Birsel)