The Vietnamese banking system was reorganized in 1990, separating the State Bank (central bank) from commercial banks and paving the way for the entry of the private sector. The restructuring and strengthening of the State Bank has been continuing with a view to transforming it into a modern and independent central bank charged with executing monetary policy and supervising the banking system. According to the recently approved banking reform roadmap, the State Bank will soon be relieved from the responsibility of exercising the ownership rights of the state in state-owned commercial banks since it conflicts with its role as supervisor of the same banks.
The banking and finance sector now has more participants, is more diversified and offers an expanded menu of financing activities. There are currently four main types of credit institutions in Vietnam: commercial banks, policy lending institutions, credit funds (operating mainly in the countryside), and financial companies. At the time of printing for this book, commercial banks include 4 state-owned banks; 36 domestic private joint stock banks; branches and sub-branches of foreign banks, joint venture banks established with foreign and Vietnamese capital, and 100% foreign owned banks.
Currently, the banking sector in Vietnam is still dominated by the 4 state-owned banks which account for 70% of total assets in the banking system and 70% of total bank loans as well. Thirty six joint stock banks, which serve mainly small and medium enterprises, account for about 15% of total credit and 20% of the total chartered capital in the banking system. Banks with foreign capital, whose clients are mainly foreign invested enterprises and firms, account for about 10% of bank loans.
The equitization (privatization) of commercial state-owned banks are under way and will be completed before 2010, except the Bank for Agriculture and Rural Development whose equitization is expected to be completed later. According to the roadmap, the state’s shareholding in equitized banks will be gradually reduced to 51% by 2010. Total foreign holding of shares will be limited to 30% with a single institutional investor allowed to hold a maximum of 10%. Vietnam has a plan to convert the Development Assistant Fund (one of the two existing policy lending institutions) into a development bank. One of the functions of this bank will be to serve as an “export-import” bank providing financial services to exporters and importers.
The control of interest rates by the State Bank has been abolished. Commercial banks are now free to set their own lending rates for loans in both Vietnamese and foreign currencies.
In general, the banking sector in Vietnam has come a long way in recent years. The number of financial institutions has risen rapidly. Confidence in the banking system has improved and organized financial markets have been attracting more private funds. Yet, the sector remains underdeveloped and has a long way to go to fulfill its function in intermediating and efficiently allocating financial resources. Large troubled loan portfolios are still there as a consequence of a weak legal framework governing the banking sector, the absence of systematic accounting practices, the lack of financial disclosure, a scarcity of skilled staff in the credit arena, as well as pressure from local and central authorities exerted on government banks to lend to state owned companies, and, to some extent, corruption.
Vietnam has pledged in its bid to become a WTO member to allow foreign banks, as of April 1, 2007, to establish 100% foreign-invested subsidiaries in Vietnam. As Vietnamese legal entities, these subsidiaries will receive non-discriminatory (“national”) treatment upon accession.
Foreign Currency Regulation
Foreign exchange control is currently governed by Ordinance on Foreign Exchange adopted on December 13, 2005 by the Standing Committee of the National Assembly and Regulations on Control of Foreign Loan and Loan Repayment issued with Decree No 134/2005/ND-CP dated November 1, 2005.
The double exchange rate system has long been abolished and replaced with a single rate reflecting market forces. However, at present, exchange rates are still subject to certain State control to guard against exchange rate shocks.
Generally, the inflow of foreign currency into Vietnam is welcomed with minimum restrictions and exemptions from taxes, while the transfer of foreign currency out of the country has also been substantially liberalized.
Under the current law, all purchases, sales, loans, settlements, or transfers in foreign currency must take place through credit institutions authorized by the State Bank. All receipts from export of goods and services must be deposited at accounts at banks in the country. Resident economic organizations with branches or representative offices abroad may seek approval from the State Bank to open foreign currency accounts abroad to receive loans from or carry out contracts with foreign parties. The regulation which required Vietnamese and foreign business entities operating in the country to sell a certain percentage of their foreign currency earnings upon their receipt has been abolished. Importers can buy foreign currencies from credit institutions to pay for their imports.
By law, all transactions, settlements, quotations, advertisement, and foreign indirect investment inside Vietnam must be conducted in Vietnamese Dong. Exceptions to this rule include transactions with credit institutions, settlements through intermediaries (such as payments for imports and exports between principals and agents), and other necessary cases as may be allowed by the Prime Minister (such as payment for air tickets, air and sea freight, insurance and international postal bills).
Resident and non-resident individuals are allowed to hold, carry, sell to authorized credit institutions, and use foreign currencies for other legal purposes in Vietnam. Vietnamese residents are allowed to open deposit accounts in foreign currencies at authorized banks in Vietnam with interest paid in foreign currencies. They are also allowed to withdraw both the principal and interest in foreign currencies. Non-resident organizations and individuals with legal revenue in Vietnamese Dong are allowed to open Vietnamese Dong accounts at authorized credit institutions for use in Vietnam or purchase of foreign currencies for remittance abroad.
Resident economic organizations, credit institutions and individuals are allowed to borrow from abroad and must be responsible for loan repayment on their own. Borrowers must register loans with the State Bank after signing loan agreements with foreign credit suppliers and must report on the withdrawal and use of capital, and repayment to the State Bank. For a medium and long term loan, the commercial bank will not allow the withdrawal of capital and repayment until the loan registration has been completed as stipulated. Short term loans borrowed by state owned companies must not be used for medium and long term investment. In certain cases, foreign loans may be guaranteed by the Government, commercial banks, or other credit and financial institutions.