General framework and conduct of
What legislation governs authorization and
regulation of banking activities in Vietnam? What has been the
most significant regulatory issue?
The licencing and regulation of banks and other credit
institutions fall within the ambit of the Law on the State Bank
of Vietnam (the LSBV) and the Law on Credit Institutions (the
LCI), both of which were enacted in December 1997 and amended
in July 2004. The LSBV provides for the setting up and
operation of the State Bank of Vietnam (the SBV) as the central
bank of Vietnam and the unitary regulator of banks and other
credit institutions. In these capacities, the SBV has two main
objectives: to stabilize the value of money and to ensure the
safety of credit organizations.
Under the LCI, Vietnamese credit institutions include banks
(such as commercial banks, development banks, investment banks
and policy banks) and non-bank credit institutions (such as
finance companies, financial lease companies and so on). Unlike
banks, non-bank credit institutions are generally not
authorized to take demand deposits and provide payment
Foreign banks are allowed to have a presence and/or operate
in Vietnam in the form of a representative office, a foreign
bank branch or a joint venture with a Vietnamese bank. A
representative office can engage in activities to facilitate
the operations of its parent bank in Vietnam, but is prohibited
from entering into contracts or engaging in profit-making
activities on its own behalf.
The LSBV and the LCI require big changes. Such changes are
necessary to address issues arising from the lack of
implementing regulations and guidelines on bank supervision,
weak corporate governance and internal controls, lack of
internal risk management tools and systems, low level of
capitalization, and continued directed policy lending and
backlog in non-performing loans to state-owned enterprises.
Changes are also driven by Vietnam's commitment to gradually
liberalize the banking and financial sectors under the
US-Vietnam bilateral trade agreement, and its efforts to enter
the WTO, which requires the creation of a level playing field
between Vietnamese banks and foreign banks.
As an initial response to these pressures for change,
Vietnam amended the LSBV and the LCI in July 2004. Although the
legislative changes are not as large as was expected, they
nevertheless allow, for the first time, the setting up of 100%
foreign-owned credit institutions in Vietnam. Banks have also
been given more autonomy, particularly when it comes to
extending unsecured loans. Certain prudent ratios are also
clarified. Other changes in the banking regulatory scheme are
under consideration, including a new decree on anti-money
laundering, new amendments to deposit insurance regulations and
new amendments to the regulations governing joint venture banks
and foreign bank branches.
What are the key activities for which
authorization is required in Vietnam?
Banks are strictly regulated in Vietnam and all banking or
bank-related activities must be licensed by the SBV, including
- the organization of a new bank;
- the opening of a new office by an existing bank;
- the scope of permitted activities of a bank; and
- the acquisition or restructuring of an existing
An operating licence granted by the SBV to a bank will
typically specify the types of banking activities in which the
bank is authorized to engage. Subject to the SBV licence, banks
are generally authorized to engage in the following
- taking deposits and issuing certificates of deposit and
- borrowing loans from credit institutions in and outside
Vietnam, and borrowing short-term loans from the SBV;
- providing loans, discounting and re-discounting valuable
papers, and providing bank guarantees;
- dealing in foreign currency; and
- providing payment services.
What sanctions are available for regulators in
Vietnam when taking action against regulated
A violator of banking law may be subject to a wide range of
sanctions, including warning, monetary fine and withdrawal of
operating licence. Regulators may also require violators to
compensate for damages and/or restore the original conditions
before the violation. In cases of serious fraud, illegal use of
the bank's reserve funds, or extension of illegal loans,
individuals may be criminally liable.
Except for criminal liability (which is determined by the
courts), the SBV inspectors are empowered to apply any of the
above sanctions, depending on the seriousness of the violation.
Except for the recent Minh Phung and Tamexco
cases, in which several high-ranking bank officers were
imprisoned for violation of lending regulations, no meaningful
record exists as to the effective use of the above
Does the regulatory regime for banking business
in Vietnam include regulatory conduct of business rules
governing obligations of a bank to its
A bank is generally prohibited from conducting unlawful
competitive acts that may damage the legitimate interests of
other banks and customers and the safety of the banking system.
Unlawful competitive acts include unlawful promotion, the
publication of misleading information, and speculation for the
purpose of control of the market of domestic currency, gold and
A bank also has confidentiality obligation to its customers.
It must not disclose any customer information without the
consent of the customers, except as otherwise required by
In relation to deposit-taking activities, a bank is
obligated to protect the interests of the individual depositors
by: participating in the compulsory deposit insurance system;
creating favourable conditions for clients to deposit or
withdraw money in accordance with their requirements, and to
ensure full and timely payment of the principal of and interest
on any deposit; and publishing the deposit interest rates.
Banks are also subject to certain fee and other disclosure
requirements in relation to loans, foreign exchange, payment
and other banking transactions.
Does the regulatory regime for banking business
in Vietnam include regulatory capital requirements? If so, are
these based on the Basel Accord and are there significant
variations from the core Basel
Vietnamese banking regulations prescribe certain capital
requirements, which are based on core Basel
A minimum initial capital amount for setting up a bank is
stipulated for all banks licensed to operate in Vietnam (all
figures are approximate):
- for state-owned banks: from $80 million to $140
- for non-state-owned banks: from $3 million to $5
- for joint-venture banks: $10 million; and
- for foreign bank branches: $15 million.
All banks (except foreign bank branches) are required to
have a minimum capital standard of 8% of the banks' assets.
Capital is defined to include shareholders' equity, reserve
funds and "a number of other liabilities as stipulated by the
State Bank." Assets (including off-balance-sheet items) are
risk-weighted and classified into four brackets (0%, 20%, 50%
and 100%). Vietnamese banking law also requires banks to
provide for past due loans. Depending on the number of past due
dates, past due loans are classified into four brackets, with
loan-loss reserves of 0%, 20%, 50% and 100%.
Unlike the core Basel recommendations, capital is not
divided into two tiers (tier one being shareholders' equity and
retained earnings, and tier two being additional internal and
external resources available to the bank). The SBV is
considering a two-tier capital regime for the minimum capital
adequacy requirement in upcoming legislation, to comply with
Observers (including the World Bank) believe the
unavailability of international accounting standards remain the
main hindrance to the efforts to assess the banks' true
financial condition. In relation to the Basel core principles
assessment, the World Bank noted in its report Vietnam:
Delivering on its Promise published in November 2002
that:"A minimum capital adequacy ratio (8%) is in place, but
compliance is hindered by the use of local accounting
standards. This is particularly evident regarding loan
classification and provisioning, which have a decisive impact
on the computation of the ratio."
Some other prudent requirements are summarized in Table
|• Minimum daily
liquidity ratio (being the ratio between cash and other
assets realizable within the day and liabilities payable
on demand or within the day)
||At least one
percentage of medium- and long-term loans funded by
short-term deposits received and valuable papers issued
by a bank
||Ranging from 10% to 30%,
depending on the type of bank
|• Single borrower's
||Generally 15% of the
capital (for foreign bank branches, the limit is
calculated on the basis of the capital of the parent
|• Limit of equity
investment in companies that are not credit
||30% of the capital
restrictions to bank auditors, chief accountants,
inspectors and major shareholders
||5% of the capital
|• Fixed assets
||50% of the capital
What effect will Basel II have on banking
transactions in Vietnam?
Nine out of the 25 Basel core principles have been assessed
in Vietnam. The SBV, with World Bank funding, has invited
foreign consultants to help assess the application of the
remaining core principles. Nevertheless, the SBV has not
indicated its official intent to adopt the Basel II principles,
and it is not clear when these principles will be adopted in
Vietnam. The effect of Basel II on banking transactions in
Vietnam can hardly be foreseen, though it is clear that it will
have an impact on all market participants, particularly in the
way banks will deal with market risk and operational risk.
If Basel II principles are adopted, the SBV will be required
to develop its organizational structure and personnel. In
particular, supervision based on an evaluation of asset
quality, and other risks in the banks' operations, should be a
routine task of SBV inspectors (these inspectors are for the
time being only really concerned with monitoring compliance
with local banking law). The SBV will have to build up a system
of guidelines for implementation of Basel II recommendations,
and a regime of supervision and control on their
implementation. The banking law accordingly will have to be
reshuffled. This all will take time and require international
The implementation of Basel II will lead to changes in
banks, at least in terms of capitalization, organizational
structure, personnel and data and information system. Internal
control units should be focused on risk management rather than
simply compliance. These changes will be difficult,
time-consuming and expensive, and most banks may face extreme
difficulties because the Vietnamese banks have not developed
enough risk management tools and systems. Unhealthy banks may
go bankrupt if not recapitalized.
Higher disclosure requirements will favour banks' clients,
as they will have more information on their banks. On the other
hand, costs incurred as a result of the changes as mentioned
above will probably be passed onto such clients. Bank costs and
charges will probably be increased.
Does the regime in Vietnam include rules and
operational and organizational requirements relating to
internal controls and operational risk?
Under Vietnamese banking law, the overall minimum capital
requirement of 8% is intended to cover credit risk and other
risks (including market risk and operational risk). The law
does not, however, introduce a separate capital charge regime
for operational risk, as recommended by Basel II principles.
Nevertheless, certain primitive rules, and operational and
organizational requirements relating to internal controls and
operational risk, are in place.
Only capable people are allowed to hold management positions
(such as members of the management board, members of the
supervisory board, general directors and deputy general
directors). For example, a general director of a bank must live
in Vietnam during their term of office, be healthy,
professionally ethical, diligent and good at law, and have
professional qualifications and management capability. People
who held a management position in a bankrupt bank, or who have
criminal record, are not allowed to hold a management position
at a bank.
Every bank must set up and maintain an internal control
system to help the management of business operations properly,
safely and in compliance with law. Internal control results
must be reported to the bank's general director, members of the
board of management and members of the supervisory board.
However, the powers of internal control units are focused on
compliance rather than risk management.
Does the regime in Vietnam include a requirement
for controllers and major shareholders of regulated banking
institutions to be approved by the supervisory
The LCI introduces a statutory regime for the approval of
controllers and major shareholders of regulated credit
organizations, including banks. It requires that the
appointment of board members, controllers, general directors,
directors of banks be approved by the governor of the SBV or
their authorized person, except when such appointment is made
by the prime minister. Board members, general directors, deputy
general directors and chief accountants of state-owned
commercial banks are directly appointed by the SBV
Investor protection scheme
Have there been any recent significant changes
to insolvency legislation in your jurisdiction, or are there
any such changes proposed? Have they made/will they make the
regime more or less borrower friendly?
In June this year, the National Assembly of Vietnam enacted
the new Law on Bankruptcy, which replaced the Law on Enterprise
Bankruptcy dated December 30 1993. More than 10 years since the
introduction of the old bankruptcy legislation into the legal
system of Vietnam, only about 40 companies have been declared
bankrupt, none of which are banks. This small number indicates
the weaknesses of the old law, and the new bankruptcy law is
expected to alter the current situation.
Since the new bankruptcy law has not been tested, it is
difficult to predict whether the law will in fact be more or
less friendly to a borrower. The new bankruptcy law has mixed
prospects for a borrower. Below is a summary of several major
changes made in the new bankruptcy law.
The scope of application of the new bankruptcy law is
broadened to include partnerships, a new type of enterprise
allowed to be incorporated and to operate in Vietnam. The
bankruptcy law however does not apply to individuals.
It is easier for an enterprise to be considered insolvent
under the new law. It provides that an enterprise is considered
to fall in insolvency status when it fails to pay due debts to
creditors, or to pay salaries to employees, when such
liabilities are due (under the old law, the enterprise was
considered insolvent if it has been suffering from loss for the
past two years and it could not pay salaries for three
consecutive months or pay creditors for 30 consecutive
Reorganization is provided in a separate chapter in the new
law (Chapter VI). If agreed by the creditors, the
reorganization process could take up to three years, and the
law spells out specific steps and the timeline in the
The new law shortens the preference period from six months
to three months. The three-month period starts on the date the
court accepts the bankruptcy petition.
The new legislation empowers bankruptcy judges to terminate
the performance of any contract, if the judge considers the
termination to be more advantageous to the insolvent company.
Any creditor or the insolvent company is entitled to request
The new law makes it clear that the following actions
against an insolvent company must be stayed automatically as of
the court's acceptance of the bankruptcy petition: enforcement
of judgment, settlement of a legal action, and enforcement of
security (except as otherwise authorized by the bankruptcy
The new law amends slightly the order of priorities. The
order is now as follows: bankruptcy costs and expenses;
salaries and salary-like liabilities to the employees; payments
to unsecured creditors on a pro rata basis; and
payments to shareholders. Tax liabilities are treated equally
with other claims of unsecured creditors, unlike under the old
bankruptcy law, which preferred tax liabilities over claims of
The new law also for the first time addresses set-off
issues. In lending transactions, a bank's right to set-off is
permitted before a liquidation decision is issued, but is
The new law allows loan interest to continue to accrue until
the date the judge decides to liquidate the assets of the
insolvent enterprise. Under the old law, the court, in its
decision to open bankruptcy proceedings, would fix a date,
after which time the insolvent enterprise stops paying debt and
interest no longer accrues.
Does your jurisdiction operate a deposit
protection or guarantee scheme protecting retail depositors
from loss in the event of insolvency of an authorized
Individual retail depositors in Vietnam are protected by the
Deposit Insurance of Vietnam (the DIV), a not-for-profit
state-owned institution set up by the prime minister. An
authorized bank must purchase from the DIV deposit insurance
for all Vietnamese dong deposits placed by its individual
customers. The bank must pay an annual premium equivalent to
0.15% of average balances of all Vietnamese dong deposits of
individual account holders. If the bank becomes insolvent, any
individual depositor is entitled to receive from the DIV up to
D30 million ($1,900). Presumably, individual account holders
must recover any deficiency through the liquidation proceedings
as other creditors of the bank. Deposit insurance is not
applicable to foreign currency deposits.
With respect to corporate clients, there is, however, no
such deposit insurance scheme. Therefore, when a bank becomes
insolvent, corporate clients must recover their deposits
through the liquidation process of the bank's assets.
Does your jurisdiction have an ombudsman scheme,
arbitration scheme or similar scheme for the resolution of
disputes between a bank and its retail customers other than
through formal legal proceedings?
Vietnamese law does not have an ombudsman scheme. So in
addition to formal legal proceeding through the courts,
arbitration is the only option for resolving disputes,
including those between a bank and its retail customers.
YKVN, Hanoi and Ho
Chi Minh City
Truong Nhat Quang is the managing partner of YKVN and has
overall responsibility for the management of the firm. His
practice focuses on banking and finance transactions.
Quang advises both lenders and borrowers on landmark lending
transactions in Vietnam. Among others, he is advising Vietnam
Airlines Corporation in connection with the $480 million US
Eximbank-guaranteed financing of four Boeing 777-200 aircraft,
which is the first US Eximbank-guaranteed financing in Vietnam,
and in connection with the $150 million
ECGD-COFACE-HERMES-guaranteed financing for the purchase of
three Airbus 231-321 aircraft, which is the first combined
European ECA guaranteed-financing in Vietnam.
Quang has represented all the four state-owned Vietnamese
banks on significant lending transactions. He is advising a
syndicate of the four state-owned banks led by the Bank for
Investment and Development of Vietnam on the $110 million
financing of 108MW Se San 3A Hydropower Plant and a syndicate
of the four state-owned banks led by the Bank for Investment
and Development of Vietnam on the $140 million financing of
Binh Phuoc Cement Plant.
Quang received his LLB at the Hanoi National University,
School of Law in 1994.
Nguyen Thi Dang is an of-counsel of YKVN and is based in the
Hanoi office. She was associated with White & Case LLP from
1996 to 1999 and was of-counsel to YKVN from 1999 to 2000. From
2001 to April 2004, Dang was the country legal counsel and
compliance head of Citibank NA, Vietnam.
Dang advises both lenders and borrowers on significant
landmark lending transactions in Vietnam. Among others, Dang
advised Citibank on its $120 million financing of one Boeing
777-200 aircraft for Vietnam Airlines Corporation guaranteed by
the US Eximbank and advised a syndicate of the four state-owned
banks led by the Bank for Investment and Development of Vietnam
on the $140 million financing of Binh Phuoc Cement Plant.
Dang received her LLB at Kishinev University, Moldova, in
1990 and a Master of Comparative Jurisprudence at New York
University School of Law in 1995.
Duong Thu Ha is an associate of YKVN and is based in the
Hanoi office. Her practice focuses on banking and finance
transactions. Ha received her LLB at Hanoi Law School in 1996
and her LLM at Melbourne University School of Law in 2002.
Vu Dzung is an associate of YKVN and is based in the Hanoi
office. His practice focuses on banking and finance
transactions. Dzung received his LLB at Hanoi University School
of Law in 2000 and a BA (English) at Hanoi Foreign Language
University in 1999.
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