Vietnam’s constant growth is highlighted by numerous macroeconomic data such as a Gross Domestic Product of 5.93%, a Purchasing Managers Index up to 52.9 points in September 2016 and conclusively the increasing number of Foreign Direct Investment.
Furthermore, Vietnam is endowed with a privileged situation of controlled inflation, political stability and stable macro environment and the best prospects to maintain it. The State Bank of Vietnam (SBV) is willing to further stabilize macroeconomic by lowering lending interest rates, by resuming foreign currency lending to exporters who need to pay for local expenses and by increasing risk-weighted assets for loans in real estate sector.
The multiplying number of infrastructure and real estate projects proves the revival of the real estate sector and explains the large amount of credit loans granted in the past few years. Even though ratios of Banks Non-Performing Loans are diminished, it is recommended to pay further attention to banks’ loan books related to property market to avoid situations of insolvency.
In addition, the interbank market must be developed in order to establish a relevant market benchmark. It is necessary to re-evaluate the existing long term yield curve to integrate Scheme of Money Market and create short term yield curve benchmark including derivative products. Moreover, VietNam InterBank Offered Rates (VNIBOR) is transmitted through local banks whereas a contribution by the SBV would reflect the true market fluctuations.
Furthermore, the SBV must develop cash management products to meet with international banking requirements. The lack of regulations establishing cash management products e.g., cash sweeping and pooling system or inter-company lending, creates earnings shortfalls for banks which accordingly cannot provide such services to their clients.
Technical issues requiring the SBV intervention
The restructuration of the banking system during the 2016-2020 period by the SBV should include the amendment of Circular 36/2014/TT-NHNN dated November 20th 2014 on minimum safety limits and ratios for transaction operated by credit institutions and branches of foreign banks. Indeed, Circular 36 obliges credit institutions to verify any information of related persons in keeping credit limits in control but does not provide any provision on how to identify relevant related person in alignment with international standards.
The SBV should then guide banks and customers on the matter, as well as removing restriction on extending credit for credit cards. As long as banks are ensured that the borrower can pay the balance ahead of maturity, credit extensions for credit cards should be allowed.
The SBV should also review the activities included in the banking or financial services sector. For instance banking agent activities open to commercial banks are enumerated in Article 106 of the Law on Credit Institutions, which only provides a general definition of activities that may be acted by commercial banks as agents. A guidance should be provided to explain the exact activities, frequency of exercise.
Circular 15/2015/TT-NHNN dated October 2nd 2015 guiding foreign transactions of foreign currency by credit institutions also requires specific guidance from the SBV. The provisions of Circular 15 are too vague regarding the conversion of foreign currency into Vietnamese currency in case of money transfer. An uncertainty also emerges considering the documents required for foreign currency purchasing transactions denominated in a foreign currency in case of electronic agreements. Moreover, the SBV should include the use of swaps to adjust the signed forward contracts, and include a lead time to release foreign currency for customers traveling overseas five days prior to departure instead of two as stipulated in the Circular.
The exclusion of all guarantees issued on the basis of a counter guarantee granted abroad and out of the credit limit to a single customer should be allowed.
In addition, the SBV should promote the acceptance of a more flexible VND account structure for instance by allowing the simultaneous use of several accounts at a same custodian bank, and encourage the opening of more simple accounts for foreign investors. The facilitation for foreigners to access bank and local stock market is necessary to extend the establishment of banking service providers and would help develop the banking market in Vietnam.
On the other hand, the Law on Credit Institutions and Circular 04/2013/TT-NHNN only recognize discounting and factoring activities with a reserved recourse right. The lack of protection towards Vietnamese exporters induced requires the implementation of a Circular issued by the SBV allowing non-recourse discounting and factoring related claims.
A Draft Circular has been initiated to regulate lending activities which would allow the use of loans to repay debts bought from lending institutions and foreign bank branches if it is proven that the loan is not covering bad debts. It is an international practice that a newly formed company in Vietnam acquires foreign loans from their parent companies abroad and then takes loan in Vietnamese Dong to repay the foreign exchange facilities. The SBV should then allow roll-over loans to ensure transparency and cash management.
Administrative issues to be solved by Ministries
Simplification of paperwork and supporting documents related to the responsibility of credit institutions and organizations engaged in foreign exchange transactions, would encourage lending activities and enhance the efficiency of the Ordinance on Foreign Exchange. Not only credit entities are responsible to review and keep the document, they also bear legal responsibility of the accuracy of all provided information even by the customer.
Establishment of clear guidelines would help resolve some issues such as the difficulty for customers to provide sufficient documentation when held by third parties. Moreover, additional costs incurred by credit institutions and customers to provide payment services and meet the requirements on document are earnings shortfall.
Therefore, state agencies should share their database to support information verification in case of payment services instead of requesting customers to provide it. Customers should also be held responsible for the accuracy of the information they are delivering.
The SBV has issued several documents guiding the implementation of Circular 30/2014/TT-NHNN on entrustment lending, and it is acquired that entrustment activities are business operations when made continuingly for profit making purposes. However, the terms of “continuingly” and “profit making purposes” must be explicit to achieve an homogeneous enforcement of the Circular.
Outlook on the EVFTA
The EVFTA signed on December 2nd 2015 and expected to enter into force by January 2018, is a great leap forward for both the EU and the Vietnamese markets. Indeed, the Free Trade Agreement not only opens new opportunities for goods export, it also enhances services supply and thus establishment of companies to perform their activities.
Pursuant to Chapter 8, Annex 8 of the EVFTA, Vietnamese legislations and regulations related to banking services provided in Vietnam must not circumvent commitment taken under the EVFTA. As the banking system is planned to be reformed, we can expect many amendments influenced by the EVFTA especially concerning foreign currency transactions.
Most important issues
Ø The interbank market and cash management products must be developed to adapt to international standards and requirements.
Ø The SBV should amend and complete unsufficient regulations especially on required documents to reinforce loans efficiency for both credit institutions and customers.
Ø The SBV should promote a more flexible account structure for local and foreign customers and more flexibility in roll-over loans according to international practices.
Ø The relevant Ministries should simplify the paperwork related to foreign exchange transactions, lending activities, and promote database sharing for Government state agencies.
Please do not hesitate to contact Oliver Massmann under email@example.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.