Investing In Vietnam - Banking And Finance

Capital Management

Minimum Legal Capital Requirement

A minimum legal capital requirement applies for credit institutions operating in Vietnam. Accordingly, minimum legal capital levels for commercial banks, foreign banks’ branches, finance companies and financial leasing companies are VND3,000 billion, US$15 million, VND500 billion and VND150 billion, respectively.

Foreign Ownership

Total foreign ownership in a local bank is capped at 30%. Subject to approval by the Prime Minister on a case by case basis, foreign investors can own more than 30% of

the total shares in a local bank.

Capital Adequacy Ratio (CAR)

CAR under the SBV’s guidance is required to be maintained at the minimum regulatory requirement of 9%. The existing CAR calculation methodology is based loosely on Basel I with respect to credit risk and does not take into account other risks, such as operational risk and market risk charges.

In late 2016, the SBV issued a new regulation on CAR which will be effective from 2020. In accordance with this new regulation, CAR is required to be maintained at a minimum requirement of 8% and its calculation methodology was changed to be aligned with Basel II, which not only takes into account credit risk but also operational risk and market risk. This new regulation is considered a step forward to safety and effectiveness in Vietnam’s operation of the banking industry.

Basel II

In 2015, the SBV selected ten domestic commercial banks to pilot the application of Basel II standards from February 2016 to the end of 2018, with an aim to apply Basel II standards for all banks by 2020. Commercial banks are required to maintain a CAR of at least 8% from January 2020.

Internal Controls and Internal Audit

Credit institutions and foreign banks’ branches operating in Vietnam are required to set up an internal control system and internal audit function to comply with the SBV’s applicable regulations.

Every year, credit institutions and foreign banks’ branches must review and assess the adequacy, validity, effectiveness and efficiency of internal controls.

Accordingly, a report on the self-assessment of internal controls containing risk updates, a summary of the main operations, relevant risks and checks and controls at an organization-wide level, unit level and department level of the credit institutions and foreign banks’ branches must be prepared. That report shall be submitted to the key stakeholders of the credit institutions and foreign banks’ branches as required and the State Bank of Vietnam within 30 days from the end of the fiscal year.

Independent Auditor Requirements

The annual statutory financial statements and operating effectiveness of the internal control system of credit institutions and foreign banks’ branches are required to be audited by an independent auditor. Credit institutions are also required to rotate auditing companies every five years.

Before the end of each fiscal year, credit institutions and foreign banks’ branches must select an independent auditing company from the List of Authorized Auditing Companies published by the SBV to audit their financial statements and operation of the internal controls for the subsequent fiscal year.

Foreign Exchange Control

The Vietnamese Dong is not freely convertible and the market is still heavily dependent on foreign currencies, especially the U.S. dollar. The Government has implemented measures to gradually reduce its reliance on the dollar.

All monetary transactions in Vietnam must be made in Vietnamese Dong, except for a Limited number of transactions allowed by law to be made in foreign currencies (e.g. salary payment to foreign employees). Foreign invested enterprises may, subject to certain Conditions, buy foreign currency from banks to carry out a number of obligations in foreign currencies from their transactions.

Generally speaking, the flow of foreign currencies into Vietnam is less constrained by the SBV compared to the outflow, which has been restricted to certain transactions such as payment for imports of goods and services, repayment of loans contracted abroad and payment of interest accrued thereon.

Only banks, non-bank credit institutions and other authorized institutions are eligible to provide foreign exchange services.

Banking System

Vietnam’s banking system was divided into a two-tier structure in 1988 when the State Bank of Vietnam (SBV) assumed the regulatory and supervisory roles for the banking sector, with commercial activities shifting to credit institutions.

The SBV acts as both the Central Bank and as a Government Agency of the Socialist Republic of Vietnam. Operating under the tight direction of the Government, the SBV is subject to the Government’s or the Prime Minister’s approval for key areas of operation.

Since dividing into a two-level system, the Vietnam banking system has expanded rapidly. Vietnam’s credit institutions comprise state-owned commercial banks (SOCBs), joint-stock commercial banks, joint-venture banks, 100% foreign-owned banks, branches of foreign banks, credit cooperatives, finance leasing companies and finance companies.

Four SOCBs dominate the domestic banking sector, the Bank for Foreign Trade of Vietnam (Vietcombank), the Vietnam Joint Stock Commercial Bank for Industry and Trade

(Vietinbank), the Bank for Investment and Development of Vietnam (BIDV), and the Vietnam Bank for Agriculture and Rural Development (Agribank). The SOCBs currently

account for around 70 percent of total banking system assets; however the domination of these banks has been on a significant downward trend.

The second phase of bank restructuring process (2016 – 2020) follows the first phase ending in 2015 (2011 – 2015). The merger of several banks and the buying of under performing banks, banks unable to self – restructure by the State Bank has brought about several achievements including improvement in the performance of banks and reduction of total bad debt ratio of the banking system to 2.7%.

Over the last decades, foreign banks have expanded their presence in Vietnam. There are about 51 foreign bank branches; two joint-venture banks, and six 100 percent foreign-owned banks as of 30 June 2016.

Current legislation states that the total foreign shareholdings, in local Vietnamese banks, is not to exceed 30 percent. Within this limit the maximum shareholding permitted to a foreign bank as a strategic partner is 20 percent, while a non- strategic investor can own 15 percent. Individual investors may hold no more than 5 percent of the shares.

While the banking industry developed rapidly, Vietnam is still a largely cash-based society. This is evidenced through the fact that only about 20 percent of Vietnam’s population of 90+ million held bank accounts at the end of 2015.

Source RSM Vietnam

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