Banking system & foreign currency regulation

April 21, 2008, 23:21

In the past, the role of the banking system was to fulfill the capital allocation
requirements of the centrally planned state economy. As such there was no
separation between commercial and state banking. The double exchange rate
system has long been abolished and replaced with a single rate reflecting
market forces.
Banking system
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 subbranches 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 states 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 nondiscriminatory (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.
http://www.vietnam-ustrade.org/index.php?
f=news&do=detail&id=31&lang=english

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