Banking Position Paper 2010
Banking Position Paper 2010 Banking Position Paper 2010
II. Roadmap (Pillar 1)1. Law on Credit Institutions / Scope of activities of foreign bank branches (FBB)and 100% foreign owned banks (WFOB)A specific, unambiguous and comprehensive law governing credit institutions is crucialto successfully attract investment and promote growth in financial services. A major stepforward in this area has been made with the Law on Credit Institutions having beenpassed by the National Assembly on 16 June 2010. This new Law will take effects from01 January 2011 and we understand that the SBV has been making continuous effortsto prepare and finalise implementing guidelines through consultation with industryparticipants and impartial external experts.Recommendation: we recommend the final implementing guidelines on numerousbanking areas should be robust, transparent, in line with international best practices andopen to innovation. The guidelines should aim to reduce bureaucracy and removeadministrative constraints, particularly for the areas of licensing, corporate governanceand regulatory returns.2. Lending limit for a single borrowerAs per Article 128 of the Law on Credit Institutions, a lending limit to a single client willbe calculated based on the branch’s capital instead of the head office’s capital of aforeign bank, which shall have significant impacts on the current operations of foreignbank branches in Vietnam. To mitigate the impacts and ensure the smooth transition ofthe current credit exposures of foreign bank branches to meet with the new requirement,we would propose for the SBV’s consideration the following recommendations: Grandfathering arrangementsThe SBV should consider allowing foreign bank branches to maintain the short termcredit limits as granted to corporate customers by 31 December 2010 regardless ofwhether drawn or undrawn for the next 2 years, ie. ending on 31 December 2012.These grandfathering arrangements will help corporations to maintain their business asusual and have sufficient time to sort out their financial arrangements to avoid anypotential market disruption.The grandfathering for medium to long term loans will be carrying on until its maturity orover the life of the loans as provided in Article 161.4 of the Law on Credit Institutions.We believe that this recommendation is in line with Article 161 of the Law on CreditInstitutions on the transitional period which allows the banks a maximum of 2 years inadjusting the position. Offshore Guarantees/SBLCsIt is recommended that offshore guarantees or Standby Letter of Credits (SBLC) fromthe head office or other offshore financial institutions be allowed to offset the creditexposure to a single borrower should a single borrower (or related group companyborrowers) reach and need to exceed the single lending limits in Vietnam.2
A parent guarantee and/or SBLC has been commonly used as a capital substitute inmany countries to allow prudent lending above the single lending limit set by centralbanks. The guarantee and/or SBLC will be issued in respect of an exposure of thegroup entity to a third party, e.g. the off-shore parent bank guarantees its Vietnambranch or subsidiary against a specific exposure of the Vietnam branch or subsidiary toa third party borrower for amounts exceeding the single lending limit.This solution shall enable corporate customers in Vietnam to access their required largefunding for their business expansion. This solution will greatly help in the event domesticfunding is not available for large business projects. Government Guarantees and ECA GuaranteesEuroCham would like to recommend that where a financing is supported by aGovernment guarantee (by the Government of Vietnam or a foreign Government) or anExport Credit Agency, the loan shall be taken out of the total single lending limit the bankcan extend to that particular borrower.This solution will help all banks in Vietnam, including foreign bank branches, to be ableto finance large-scale critical and important infrastructure and other major projects inVietnam to support the Government development plan. Consolidated Capital of BranchesWe would recommend the State Bank of Vietnam to allow foreign banks with more thanone branch in Vietnam to calculate the single lending limit on a consolidated basis of allthe branches' capital. Even in case the branches have been operating, accounting andreporting independently, they are actually under one entity as one foreign bank, followingthe consolidated credit concentration risk control as a whole, and acting under the samepolicy and strategy as branches in Vietnam of one foreign bank. Therefore, we believethat the calculation on the consolidated basis of all the branches' capital is in line withthe risk control purpose of Article 128. Guideline for Prime Minister’s exceptional approvalIt would be recommended that the State Bank of Vietnam provide a guideline for allbanks on how to apply for the Prime Minister’s exceptional approval under Article 128.7where the single lending limit is exceeded, eg. on required documentation, criteria andprocedures, etc. We believe that a standard process would create a level playing field toall market participants in Vietnam.3. Consolidation of banking sectorThere remain over 80 banks in Vietnam, where the top 20 banks are estimated to do thebulk of the banking business. There is concern that weaker banks could pose a threat toconfidence in the banking system through their instability and lack of critical mass.Decree 59 aimed to address this issue by increasing the minimum legal capital for jointstock banks from VND1 trillion to VND3 trillion. Over time, this may lead toconsolidations, mergers and acquisitions in the banking sector. In preparation for this, itis critical that any banking consolidation is supported by a legal and proceduralframework that ensures clarity in process and speed in action.3
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II. Roadmap (Pillar 1)1. Law on Credit Institutions / Scope of activities of foreign bank branches (FBB)and 100% foreign owned banks (WFOB)A specific, unambiguous and comprehensive law governing credit institutions is crucialto successfully attract investment and promote growth in financial services. A major stepforward in this area has been made with the Law on Credit Institutions having beenpassed by the National Assembly on 16 June <strong>2010</strong>. This new Law will take effects from01 January 2011 and we understand that the SBV has been making continuous effortsto prepare and finalise implementing guidelines through consultation with industryparticipants and impartial external experts.Recommendation: we recommend the final implementing guidelines on numerousbanking areas should be robust, transparent, in line with international best practices andopen to innovation. The guidelines should aim to reduce bureaucracy and removeadministrative constraints, particularly for the areas of licensing, corporate governanceand regulatory returns.2. Lending limit for a single borrowerAs per Article 128 of the Law on Credit Institutions, a lending limit to a single client willbe calculated based on the branch’s capital instead of the head office’s capital of aforeign bank, which shall have significant impacts on the current operations of foreignbank branches in Vietnam. To mitigate the impacts and ensure the smooth transition ofthe current credit exposures of foreign bank branches to meet with the new requirement,we would propose for the SBV’s consideration the following recommendations: Grandfathering arrangementsThe SBV should consider allowing foreign bank branches to maintain the short termcredit limits as granted to corporate customers by 31 December <strong>2010</strong> regardless ofwhether drawn or undrawn for the next 2 years, ie. ending on 31 December 2012.These grandfathering arrangements will help corporations to maintain their business asusual and have sufficient time to sort out their financial arrangements to avoid anypotential market disruption.The grandfathering for medium to long term loans will be carrying on until its maturity orover the life of the loans as provided in Article 161.4 of the Law on Credit Institutions.We believe that this recommendation is in line with Article 161 of the Law on CreditInstitutions on the transitional period which allows the banks a maximum of 2 years inadjusting the position. Offshore Guarantees/SBLCsIt is recommended that offshore guarantees or Standby Letter of Credits (SBLC) fromthe head office or other offshore financial institutions be allowed to offset the creditexposure to a single borrower should a single borrower (or related group companyborrowers) reach and need to exceed the single lending limits in Vietnam.2
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