An extract from The Lending and Secured Finance Review, 6th Edition
Vietnam's economy has achieved remarkable progress since the start of its transition from a centrally planned economy in the mid-1980s. However, since the 2008 global financial crisis, several segments of the economy had shown signs of poor performance and financial distress, which had affected the overall health of the banking system. From 2009 to 2011, interest rates rose dramatically because of high inflation, despite tightening monetary policies imposed by the State Bank of Vietnam (SBV). Access to credit was limited and the low overall liquidity in the banking system caused a race among banks to further increase deposit interest rates. In 2012, the bursting of the real estate bubble triggered a crisis in the banking sector and resulted in a significant amount of non-performing loans (NPLs) in the system.
The crisis in 2012 led to a series of interventions and bank restructuring reforms by the government, which have shown results in recent years. Bank profits and asset quality are improving in most large banks. A strong economy and higher real estate prices facilitated the disposal of collateral and the restructuring of bad debts, raised profits and boosted capital. Interest rates decreased in general, owing to high liquidity in the market. The government aimed to cut lending interest rates by 0.5 to 1 per cent and increase loans for agriculture, hi-tech and supporting industries by more than 20 per cent. In 2018, the SBV wanted to lower interest rates further to provide incentives for various economic sectors. However, there was not much room for this reduction, given the current cost of financing. In the first quarter of 2019, deposit interest rates ranged from 0.5 to 1 per cent per annum for indefinite terms, and 6.6 to 7.3 per cent per annum for a term of 12 months or more, and lending interest rates ranged from 6 to 9 per cent per annum for short-term loans and 9 to 11 per cent per annum for middle and long-term loans.2 From March 2020, the maximum interest rate for demand deposits and deposits with a term less than 1 month was 0.5 per cent per annum, and the maximum interest rate for deposits with a term from one to six months was 4.75 per cent per annum. In February 2021, deposit interest rates ranged from 0.1 to 0.2 per cent per annum for indefinite terms, and 5.6 to 6.7 per cent per annum for a term of 12 months or more.
Credit growth in Vietnam is the highest in the region, rising to 18.7 per cent in 2016, 18.17 per cent in 2017 and 14 per cent in 2018,3 owing to a more consumer-oriented economy and a low interest rate environment. In 2019, credit growth in Vietnam reached 12.1 per cent, which was the lowest growth rate in the previous five years. In 2020, credit growth is expected to bounce back to around 14 per cent (after adjustment to account for the covid-19 situation). To control credit growth, the SBV has been imposing limits on the credit growth of each bank. Banks that meet the Basel II standards earlier than the 1 January 2020 deadline are allocated a higher credit growth limit. By September 2018, most banks had reached the credit growth limits imposed by the SBV and only a few banks had obtained an adjustment to these limits. In the first quarter of 2021, the SBV adjusted the credit growth limits of only six joint-stock commercial banks, namely Asia Commercial Bank (ACB), Military Commercial Joint Stock Bank (MB), Vietnam Technological and Commercial Joint Stock Bank (Techcombank), Tien Phong Bank (TPBank), Vietnam International Bank (VIB) and Vietnam Prosperity Joint Stock Commercial Bank (VPBank). Also, credit growth in the first quarter of 2021 increased by 2.93 per cent, twice as much as that in the same period of the previous year. The SBV also limited lending in the real estate sector by increasing the risk weight of real estate loans from 200 to 250 per cent, and reducing the proportion of short-term capital used for medium and long-term lending by banks from 50 per cent in 2017 to 45 per cent in 2018, and to 40 per cent in 2019. The SBV expected that both of these measures would reduce lending in the real estate sector because loans in this sector tend to be on a medium or long-term basis.
Partially because of the limits imposed on domestic credit growth, access to domestic bank loans has been difficult and foreign borrowing has increased sharply in recent years, to 44.8 per cent of GDP in 2016, 48.9 per cent in 2017 and 49.7 per cent in 2018.4 In 2019, foreign borrowing accounted for about 45.8 percent of GDP,5 and in 2020, foreign borrowing accounted for about 43.7 per cent of GDP.6
Notably, on 4 March 2020, the Prime Minister issued Directive No. 11/CT-TTg with a credit package of 250,000 billion Vietnamese dong from the commercial banks instead of the state budget, to assist enterprises to overcome difficulties in business and production, and ensure social security, in response to the covid-19 pandemic. Also, on 13 March 2020, the SBV issued Circular No. 01/2020/TT-NHNN on debt rescheduling, the exemption or reduction of interest and fees and the retention of debt category to assist borrowers affected by the covid-19 pandemic, as recently amended by Circular No. 03/2021/TT-NHNN of the SBV dated 2 April 2021 which takes effect on 17 May 2021.
Despite the positive trends in both domestic and foreign borrowing growth, the corporate lending market in Vietnam is premature. Most foreign syndication loans use either the Asia Pacific Loan Market Association (APLMA) form or Loan Market Association (LMA) form. Certain provisions of the APLMA form and ALM form have been adopted and used in Vietnam by banks and law firms; however, there is no standard form for domestic transactions. Lenders in Vietnam are mostly traditional banks and credit institutions licensed by the SBV to conduct banking business. There is also no established market for transferring loan participations.
Legal and regulatory developmentsi Lending regulations
On 30 December 2016, the SBV issued one of its most anticipated lending regulations, Circular No. 39/2016/TT-NHNN (Circular 39), to replace Decision No. 1627/2001/QD-NHNN, which was issued in 2001. Circular 39 provides for the principles, conditions, borrowing dossiers and interest rates of loans by commercial banks, credit institutions and foreign bank branches operating in Vietnam for business and consumption purposes. Below are the most significant changes introduced in Circular 39.Eligible borrowers
Under the current lending regulations, non-legal entities (i.e., households, cooperative groups, and other organisations without a legal entity status) are no longer eligible to borrow from banks. In the case of borrowing for business and other activities, individual borrowers can borrow to meet their own capital needs and those of non-legal entity organisations.Restricted borrowing purposes
Refinancing loans are now restricted under the current lending regulations. Circular 39 provides a list of restricted loan purposes:
- carrying out business investment activities in industries and trades that are prohibited by law;
- paying the costs and meeting the financial needs of transactions and acts prohibited by law;
- purchasing and using goods and services that are prohibited by law;
- purchasing gold bars;
- repaying a loan at the same lending credit institution; or
- repaying debts at other credit institutions and repaying foreign loans.
Under these provisions, refinancing loans are no longer permitted, unless the loan meets the following conditions set out in Circular 39:
- the loan is to repay a loan at the same lending credit institution as payment of the interest arising during the process of construction works where the interest costs were included in the total investment amount for construction approved by the competent authority; or
- the loan is to repay debts at another credit institution or repay foreign loans, in which case three conditions must be met:
- it is a loan to serve business activities;
- the term of the new loan does not exceed the residual term of the previous loan; and
- the term of the previous loan has not been restructured.
Prior to Circular 39, it was unclear whether bank loans were subject to the interest cap of 20 per cent per year imposed on all civil transactions by the Civil Code 2015. This cap had impacted the consumer loan market because the lending rates in this sector tend to be much higher than 20 per cent per year. Lending rates for corporate and non-consumer loans are generally lower than this cap.
Circular 39 confirmed that bank loans are not subject to this 20 per cent cap. Banks and borrowers are free to agree on the lending interest rates, except for short-term Vietnamese dong-denominated loans in certain sectors. These include loans for the purposes of developing agriculture and rural areas, exporting, and supporting small and medium-sized companies, industries and high-tech businesses. This exception aims to encourage the enlisted sectors, and interest rates in these loans are capped at the maximum lending rate announced on occasion by the governor of the SBV.
Though most banks welcomed the much-needed clarification on the maximum interest rate, they also raised concerns with the cap imposed on loans in the targeted sectors. This cap is potentially counterproductive because they could make lending in these sectors less attractive for banks instead of channelling more loans to them, especially if the interest rates are lower than the banks' cost of funds.
In addition, Circular 39 also imposes caps on overdue interests: 150 per cent of the regular interest rate with respect to the overdue principal amount (this is not a new change because it was also provided in the predecessor to Circular 39) and 10 per cent per year with respect to the overdue interest amount. These caps on overdue interest rates are viewed by many banks as too low, especially the fixed 10 per cent per year cap on overdue interest.Lending method
Revolving and rollover loans were not formally permitted in Vietnam under the previous rules. Circular 39 now permits borrowers with financing needs for business cycles not exceeding one month to obtain revolving loans from banks with a term of up to three months. Rollover loans are also be possible, provided that the borrower does not have any NPLs, and the term of the rolled-over loan does not exceed 12 months following the initial disbursement or one business cycle of the borrower.Loan currency
Circular 39 specifies that banks and borrowers may agree on the currency of loans (if the loan is in a foreign currency, regulations on foreign currency lending will apply); however, Circular 39 requires that the loan must be repaid in the same currency it was borrowed in. Loans in foreign currencies by credit institutions are limited to certain circumstances enumerated by the SBV (e.g., short-, mid- and long-term loans for certain qualified import payments, short-term loans for manufacturing, and exports and loans for overseas investments that have been approved by the National Assembly or the Prime Minister of Vietnam). The SBV is expected to further restrict mid- and long-term foreign currency loans in the coming years.Language
Under Circular 39, loan agreements will be prepared in Vietnamese, or in both Vietnamese and a foreign language. Therefore, Vietnamese language is mandatory in all loan agreements.The order of debt recovery
Under Circular 39, banks and borrowers can agree on the order of debt recovery; however, if the loan is overdue, Circular 39 requires that the banks must first recover outstanding principal, and thereafter outstanding interest on the loan.
Further, the SBV, under the Circular No. 01/2020/TT-NHNN dated 13 March 2020, directed credit institutions and foreign bank branches to restructure repayment periods, waive and reduce interest and fees, and maintain debt classifications to support customers affected by the covid-19 pandemic.ii Basel II
For Vietnam's banking system, Basel II standards have become an important requirement in the risk management and safety of the system. However, the application of Basel II in Vietnam remains slow.
In 2014, the SBV announced the trial application of the capital and risk management method in accordance with Basel II standards. According to this programme, 10 banks were selected to apply Basel II by the beginning of 2020. These banks are Vietcombank, VietinBank, the Joint Stock Commercial Bank for Investment and Development of Vietnam, the Military Commercial Joint Stock Bank (MB), Sacombank, Techcombank, Asia Commercial Bank, VPBank, Vietnam International Bank (VIB) and Maritime Bank. Basel II is implemented by Circular No. 41/2016/TT-NHNN (Circular 41) of the SBV.
Circular 41 implements the three pillars of Basel II:
- Capacity Adequacy Ratio (CAR): the required CAR is at least 8 per cent. Under Circular 41, for the purposes of calculating CAR, equity includes Tier 1 and Tier 2 after deductions. Asset classifications are based on credit risk ratios; for example, zero per cent for gold, zero per cent for receivables from international financial institutions, and 90 per cent for receivables from small and medium-sized companies;
- Supervisory Review: banks must implement a comprehensive review of their capital adequacy and have a strategy to maintain their capital adequacy level; and
- Market Discipline: banks are required to disclose important factors of their business operations, risks and risks management. This is intended to allow the market to gauge the capital adequacy of a bank. Under Circular No. 22/2019/TT-NHNN dated 15 November 2019 of the SBV, the new deadline for all banks to meet Basel II is extended until 1 January 2023.
As of January 2020, eighteen banks are recognised by the SBV as having successfully applied the Basel II standards: Vietcombank, MB, VPBank, VIB, Orient Commercial Bank (OCB) and TPBank (OCB and TPBank are not among the initial 10 selected banks), BIDV, Techcombank, ACB, MSB, HDBank, VietBank, Viet Capital Bank, SeABank, Nam A Bank, LienvietpostBank, Shinhan Bank, Standard Chartered Vietnam. Among the 10 banks selected initially, Vietinbank and Sacombank have not yet achieved the Basel II standards.iii Sanctions and anti-corruptionAnti-money laundering and counter-terrorism law
Vietnam became a member of the Asia/Pacific Group on Money Laundering (APG) in May 2007. To strengthen its anti-money laundering (AML) system, Vietnam enacted an AML law and an implementing decree, and the SBV established a Financial Intelligence Unit. Vietnam underwent an APG Mutual Evaluation in November 2008 for the first time and was preparing for its second APG Mutual Evaluation in 2019. According to the plan, the APG's 2019 Mutual Evaluation Report for Vietnam was to have been passed at the APG Annual Meeting in July 2020; however, due to the effects of the covid-19 pandemic, the draft APG Mutual Evaluation in 2019 of Vietnam is still in the process of being finalised and is expected to be approved in 2021.
Under the AML laws and regulations, depending on the type of transactions and other factors relating to the customers or their transactions, a reporting person will have to comply with different types of AML and counter-terrorist financing obligations. These obligations include:
- create and maintain internal regulations on AML;
- perform and collect know-your-customer information;
- report and disclose information to the SBV and other competent authorities; and
- impose temporary measures at the request of the competent authorities.
Notably, the threshold value of transactions that must be reported is relatively low, approximately 300 million Vietnamese dong.New Penal Code
In 2015, the National Assembly adopted a new Penal Code, which took effect on 1 January 2018. The most significant changes among those introduced by the new Penal Code are the expansion of corruption-related offences related to the private sector and the introduction of corporate criminal liability. Under the new Penal Code, individuals of any nationality working in the private sector can now be criminally liable for the offences of embezzlement, and the giving, receiving or brokerage of bribes, which were previously applicable to the public sector only. Together with this change, the definition of bribes was also broadened to include both tangible and intangible interests. The new Penal Code also provides, for the first time, for corporate criminal liabilities applicable to commercial legal entities. Accordingly, commercial legal entities can now be liable for smuggling, tax evasion, securities and insurance-related offences, money laundering and terrorism financing.Sanctions
Banks in Vietnam have been instructed by the SBV not to facilitate or engage in Iran-related transactions. Details of these instructions are unclear because they are 'classified'. The SBV is concerned about potential penalties that may be imposed by the Office of Foreign Assets Control of the US Department of the Treasury if any Vietnamese bank were found to engage in or facilitate prohibited Iranian transactions. These penalties could include prohibitions against US financial institutions maintaining correspondent accounts in Vietnamese banks, which would effectively freeze any Vietnamese bank that is the subject of these penalties out of the global banking market. The main focus and concern of the SBV instructions is probably to protect the Vietnamese banking system, which has become increasingly integrated into the global banking system, rather than any policy aimed at supporting the United States or, for that matter, the EU sanctions regime applicable to Iran.
In addition to the SBV instructions, Vietnamese banks also monitor US, UN and EU sanctions because most Vietnamese banks now have an international presence and their businesses are integrated into the international bank network and settlement systems.
Outlook and conclusions
Faced with the covid-19 pandemic, the SBV adjusted the credit growth target for the whole economy to 14 per cent (equivalent to 900,000 billion Vietnamese dong) in 2020, an ambitious target in the context of the slowdown of economic growth. Despite this target, banks expect a slowdown in credit growth. The expected credit growth for the whole economy in 2021 is 12 per cent. However, because of the impact of the covid-19 pandemic on the global economy as well as the Vietnamese economy, more capital is needed for recovery and growth. Accordingly, it is expected that the SBV will adjust credit growth limits if necessary.
In the long term, economic growth in Vietnam will remain positive (even though economic growth in 2020 is forecast at a much lower level than previous years), and the banks' asset quality will continue to improve, helping to strengthen their profitability. Strong economic growth will also translate into improvements in borrower repayment capabilities and enable banks to accelerate the write-offs of legacy problem assets. Moody's Investors Service, a credit rating agency, has recently changed its outlook for Vietnam's banking system from stable to positive for the next 12 to 18 months,7 reflecting a positive outlook for the Vietnamese economy and its banking sector.