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Official Gazette

Friday, October 7, 2022

Vietnam continues to open the financial market for foreign financial institutions

Updated: 14:32’ - 09/08/2005

Dr. Le Xuan Nghia
Director, Vietnam State Bank Department of Banking Development Strategies

In the process of reforming to develop a market economy and integrate into the global economy, Vietnam has spared no efforts to create a favorable environment for foreign credit institutions to come and do business permanently in Vietnam. Foreign credit institutions have been regarded as an inseparable part of Vietnam’s banking system. Promulgated in 1987, the Law on Foreign Investment has been a legal foundation for attracting foreign investment in various economic sectors in Vietnam. Accordingly, the 1990 Ordinance on Banks, Credit Cooperatives and Financial Companies permitted foreign banks to open branches and establish joint-venture banks in Vietnam. The Law on the State Bank of Vietnam and the Law on Credit Institutions, both enacted in 1997, together with other relevant policies and regulations, have been constantly revised towards opening up the financial market and stepping up international integration in the banking sector. As the country strives to realize its international commitments and facilitate the participation of foreign credit institutions in the domestic banking market and activities, substantial changes have been seen in Vietnam’s banking policies and environment in order to attract investment from foreign financial institutions.

Reforming interest rate management and credit policies in accordance with the market

The State Bank of Vietnam (SBV) has liberalized interest rates on domestic currency in a gradual and prudent manner. First, the principle of a positive real interest rate was introduced in 1992, and then the deposit interest rate was liberalized in 1996. Since 2002, interest rates on domestic currency have been freed up and a mechanism of interest rates according to market principles has been implemented. At present, the SBV mainly regulates interest rates through market operations so as to influence supply and demand relations in the monetary market. It announces the basic interest rate for reference by credit institutions and adjusts in a flexible manner refinancing and discount interest rates to suit the market situation. The SBV is now actively studying the formation of a system of guiding interest rates and renewing the interest rate management mechanism to make it more responsive to the market. Under this mechanism, management of interest rates on domestic currency will be closely combined with that on foreign currencies, and the management of interest rates with that of exchange rates in a way that interest rates and exchange rates reflect more accurately the value of domestic currency and developments in domestic and foreign financial markets.

The credit mechanism has been renewed towards raising the autonomy and responsibility of credit institutions in granting credit (allowing them to make decisions on borrowing conditions, interest rates, loan amounts, lending periods and modes, loan guarantees, customer selection, etc.). New credit policies have created favorable conditions for all economic sectors to have equal access to credit capital of banks on the basis of commercial principles.

Reforming foreign exchange control policies to liberalize current transactions, prudently relaxing capital transactions to better meet the requirements of a market economy and increase the convertibility of the Vietnam dong

The foreign exchange control policies have been gradually renewed to be more open and liberal. Unreasonable limitations on international payment and money transmission, purchase, sale, investment and savings in foreign currencies and inward remittances have been gradually abolished in order to liberate current accounts and facilitate international commercial and investment transactions. In 2003, the surrender requirement ratio was reduced to 0%, from 80-100% in 1998. Vietnam has liberalized current transactions and recently proposed the IMF recognize its compliance with Article VIII of the IMF charter. Such relaxed foreign exchange control policies have not only enabled foreign financial institutions to increase their capability to provide financial and banking services in the form of commercial presence but also offered them greater access to the market in other forms of service provision, especially cross-border provision. The SBV is actively drafting a foreign exchange ordinance for submission to the National Assembly Standing Committee. Once enacted in 2005, it will be a firm legal foundation to ensure liberalization of current transactions, loosen capital transactions in a prudent and safe manner, and raise the SBV’s foreign exchange control capacity, contributing to promoting trade, financial and investment relations between Vietnam and the rest of the world.

Implementing a controlled, flexible market exchange rate mechanism

The multi-currency practice controlled mainly by administrative measures has been replaced with a market exchange rate mechanism regulated by market operations. The spot exchange rate set by credit institutions dealing in foreign currencies is permitted to fluctuate within a range of ± 0.25% of the average transaction exchange rate on the inter-bank market. The maturity point in time transactions is determined on the basis of the difference between the basic interest rate of Vietnam dong and that of the US Federal Reserve. Thanks to a flexible market exchange rate mechanism and a relatively open foreign exchange transaction mechanism, many new foreign exchange business operations such as options and swaps (between foreign currencies and between foreign currencies and Vietnam dong) have been conducted by commercial banks, offering new investment tools and controlling risks for both commercial banks and enterprises.

Opening the banking service market and loosening limitations on the operations of foreign credit institutions in Vietnam

Vietnam has made great strides in opening the banking service market, creating favorable opportunities for foreign credit institutions to enter the market and expand their operations in Vietnam. In terms of operation, licensing and distribution network, joint-venture banks, wholly foreign-invested and joint-venture financial companies and financial leasing companies now enjoy fundamentally equal treatment with domestic credit institutions. Limitations on the acceptance of deposits by foreign banks’ branches have been abolished step-by-step. Foreign bank branches operating in Vietnam are now allowed to accept demand and time deposits and savings in Vietnam dong from Vietnamese legal entities and natural persons with which they do not have a credit relationship in a ratio of no more than 50% of paid-in capital (compared to 25% previously). In particular, US and EU bank branches are allowed to accept more deposits according to the committed schedule, now reaching up to 750% of paid-in capital. The regulations that outward remittances must not exceed 30% of paid-in capital for foreign bank branches or 10% of charter capital for foreign credit institutions have been cancelled.

The 1997 Law on Credit Institutions has allowed foreign credit institutions to be commercially present in Vietnam in four forms: (i) joint-venture credit institutions; (ii) branches; (iii) non-bank credit institutions with 100% foreign capital; and (iv) representative offices. The 2004 amendments to the Law have further permitted them to provide banking services in the form of banks with 100% foreign capital. According to the market access commitments under the Vietnam-US Bilateral Trade Agreement (BTA), all limitations on the acceptance of deposits by US bank branches will be abolished by 2010 (full national treatment). After three years’ implementation of the BTA, Vietnam has granted full national treatment to US bank branches in accessing central bank rediscounting, swap, and forward facilities. To ease the establishment and operation of foreign credit institutions in Vietnam, the SBV is now revising relevant regulations to ensure transparency and fairness and simplify procedures in line with the roadmap for realizing Vietnam’s multilateral and bilateral international commitments to open the financial market on WTO/GATS principles. Restrictions on the number of branches, the placement of automated teller machines, acceptance of deposits, types of customers and banking services will be gradually removed.

Bringing bank inspection and supervision up to international standards to ensure observance of law, stability, security and fair competition in the banking sector

A system of regulations on assuring banking operation safety (debt classification, making and use of risk provisions; minimum capital safety ratios; banking operation risk limits; audit, etc.) has been put in place. With renewed banking inspection and supervision methods and procedures that conform to international bank inspection and supervision principles and standards (Basel 1), off-site supervision and audit have been intensified to effectively support on-site supervision. The establishment of an early risk warning system in the banking sector is also under consideration.  Vietnam Deposit Insurance, established in 2000, and the Credit Information Center have made important contributions to preserving the stability and safety of Vietnam’s banking system.

Equitizing State-owned commercial banks

Under a recent decision of the Prime Minister, the top two state-owned commercial banks, the Vietnam Bank for Foreign Trade and the Bank for Mekong River Delta Housing Development, will be equitized in the coming year. The equitization of state-owned commercial banks will comply with international principles and practices (regarding audit, valuation, financial handling, issuance of shares, etc.), with technical support from selected international consultancy organizations. The equitization of State-owned commercial banks aims to increase their equity as well as bring minimum capital safety ratios up to international standards; make their operations more healthy, effective and competitive; reduce the State’s financial burdens and restrict administrative interference in business activities. Strategic foreign investors will possibly be allowed to buy shares and participate in managing and running equitized state-owned commercial banks. The concerned ministries and branches have been urged to modify the current mechanisms and policies, making public lists of business lines and fields in which foreign investors may only contribute 30% of investment capital at most. For those not on these lists, foreign investors will be allowed to make investment without limitation. In the long run, the State will not hold 100% of the capital in State-owned commercial banks.

Enhancing the institutional capacity of commercial banks through restructuring programs

The programs on restructuring equitized commercial banks and State-owned commercial banks have been implemented since 1998 and 2001, respectively. They so far have achieved the following notable results:

4The operation safety level and financial capability have been increased (higher charter capital and fewer non-performing loans). In the 2001-2004 period, commercial banks increased their equity and fundamentally handled non-performing loans, cleaning their balance sheets and meeting the requirements of banking operation safety. Hence, throughout the banking system, the capital safety assurance ratio (CAR) has been improved, and the percentage of non-performing loans in 2004 was reduced to below 3%. Most banks have been doing business at a profit and made relatively sufficient risk provisions. By the end of 2004, the equity of State-owned commercial banks was three times that at the end of 2000. All joint-stock commercial banks had ensured the CAR of over 8%, with a number of them having their own capital of up to VND 500-800 billion and CAR of over 10%. The equity of domestic commercial banks will continue to be on the increase for the near future.

4A new momentum has been created for commercial banks to operate in conformity with market principles and discipline. Credit operations according to social policies and the provision of loans under Government mandate have been separated from commercial credit operations. Credit institutions now enjoy autonomy and take responsibility for their financial results and business risks. As a result, banks, including State-owned commercial banks, have become more competitive and focused on efficient business activities to maximize profits.

4Good principles and practices aided by advanced techniques and technologies have been applied step-by-step in managing and running commercial banks. To suit the competitive environment and technological level and comply with international practices, a number of professional managerial institutions have been being formed such as debit/credit asset management councils, credit councils, internal control and audit boards, and risk management councils. Credit institutions have stepped up the application of advanced information and telecommunication technologies while deploying automatic and on-line transaction systems. The information technology systems and electronic payment systems have been modernized and comprehensively developed, serving as a foundation for developing banking services and practicing advanced banking management skills. Commercial banks have been interdependently audited on an annual basis and are required to make public their financial status and operations so as to increase transparency in their banking operations and public supervision. Particularly, in recent years, state-owned commercial banks have been internationally audited on a regular basis. The accounting system applied by Vietnamese banks has been gradually renewed to comply with international accounting standards.

4Most commercial banks have diversified their business activities and strongly developed banking services in the direction of raising the quality of conventional banking services and expanding new ones with high technological content. Banking products and services have become rich in types and better in quality, including derivative instruments (futures, options, forwards and swaps). Some commercial banks have developed a system of electronic banking services (internet banking, telephone banking, mobile banking, ATMs, etc.) and issued payment and credit cards which are accepted at home and abroad. Other commercial banks have expanded their business to the fields of insurance and securities so as to diversify their activities, forming value-chain activities, optimizing their business capabilities and controlling risks.

These achievements have shown Vietnam’s determination to thoroughly reform its economy and pursue the objective of developing a socialist-oriented market economy. Thanks to the recent improvements in the banking institutions and banking operation environment and commitments to accelerating the process of liberalizing and opening the financial market, Vietnam has truly become a safe, reliable and attractive destination for foreign financial institutions.-


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