Vietnam: Changes to prudential ratios

Author: | Published: 8 Jul 2015
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Vu Le Bang
The State of Bank of Vietnam (SBV) issued Circular 36/2014/TT-NHNN (Circular 36) regulating prudential ratios and limits in banking operations, effective from February 1 2015. Compared to the previous legislation, Circular 36 is, on the one hand, believed to provide more stringent standards on prudential ratios and limits such as limiting interest groups' influence, avoiding cross ownership, and limiting excessive exposure to securities related risks. On the other hand, Circular 36 relaxes the weight of medium and long-term credit using short-term funding and lowers the risk ratio for securities and real estate related loans. Notably, prudential ratios and limits regulated under Circular 36 closely follow the international business standard Basel II. Below are some significant aspects of Circular 36.

A notable feature of Circular 36 is to provide a mechanism to evaluate the actual value of charter capital and funded capital that prevents untruthful declarations by credit institutions, as occurred in the past. Specifically, the actual value of the charter capital or funded capital is determined as the contributed charter capital or funded capital plus (minus) undistributed accumulative profit (accumulative losses which have not been dealt with), and funds appropriated from after-tax profit (not including the commendation and reward fund, welfare fund and bonus fund for the executive board). In principle, Circular 36 requires that the actual value of the charter capital or funded capital should not be lower than the legal capital. If it is lower, the SBV will impose certain measures, which may include statutory restructuring or withdrawal of the licence.

While the minimum required Capital Adequacy Ratio (CAR) remains at nine percent for both individual and consolidated CARs, as was the case previously, the risk factor to calculate risk weighted assets (RWA) for securities and real estate related loans is reduced from 250% to 150%. It is reported that the lower rate will significantly solve difficulties in the real estate and securities markets here in Vietnam; it will boost the markets and allow them to recover quickly for further development.

Circular 36 restricts capital contributions and share purchases by commercial banks and finance companies. Accordingly, the total amount of capital contributions and share purchases made by one commercial bank to enterprises, including capital to fund or to contribute to its subsidiaries and affiliates, must not exceed 40% of the charter capital and reserve funds of the commercial bank. Particularly, subject to meeting the statutory conditions, a commercial bank is only permitted to own shares of a maximum of two other credit institutions and the holding in each credit institution must not exceed five percent. Obviously, this regulation will prevent the cross ownership which has been a pending issue in the Vietnamese banking system over the years.

Vu Le Bang