Author: | Published: 30 Sep 2004
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General framework and conduct of business

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 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 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 among others:

  • 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 valuable papers;
  • 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 currencies.

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.

Supervisory requirements

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 million;
  • for non-state-owned banks: from $3 million to $5 million;
  • 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.

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 shareholders 5% of the capital
• Fixed assets limit 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 assistance.

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 authorities?

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 accrues.

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 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.

Author biographies

Truong Nhat Quang

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

YKVN, Hanoi

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

YKVN, Hanoi

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

YKVN, Hanoi

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.

YKVN Lawyers
Metropole Center
Suite 404-2, 56 Ly Thai To Street
Tel: +84 4 936 1139
Fax: +84 4 934 5412