General framework and conduct of business
What legislation governs authorization and regulation of
banking activities in Vietnam? What has been the most significant
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
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 services.
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
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 bank.
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 activities:
- 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 bodies?
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 sanctions.
Does the regulatory regime for banking business in
Vietnam include regulatory conduct of business rules governing
obligations of a bank to its customers?
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 foreign
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 law.
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 recommendations?
Vietnamese banking regulations prescribe certain capital
requirements, which are based on core Basel recommendations.
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 Basel recommendations.
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 1.
|• 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
|• Maximum 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 loan limit
||Generally 15% of the capital (for
foreign bank branches, the limit is calculated on
the basis of the capital of the parent bank)
|• Limit of equity investment in
companies that are not credit institutions
||30% of the capital
|• Lending restrictions to bank
auditors, chief accountants, inspectors and major
||5% of the capital
|• Fixed assets limit
||50% of the capital
What effect will Basel II have on banking transactions in
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
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
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
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
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
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 governor.
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 days).
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 reorganization process.
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 such termination.
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 court).
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 unsecured creditors.
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 prohibited thereafter.
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
Does your jurisdiction operate a deposit protection or
guarantee scheme protecting retail depositors from loss in the
event of insolvency of an authorized bank?
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
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
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
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
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
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
Duong Thu Ha
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
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