Banking and Financial Services

Transcription

1 Banking and Financial Services Introduction The purpose of our paper is to contribute our views on how the banking sector in Vietnam can continue to grow, and to support the development goals of the country across all industries, infrastructure and areas of social development. In the past we have structured our suggestions for banking sector reform into three pillars, and this year we have added a fourth pillar : 1. Roadmap: A forward looking roadmap for the banking industry, harnessing market forces rather than administrative restrictions to continue the drive for growth; 2. Market Efficiency: Efficiency and clarity in the way the market and the regulations should work so as to reduce the cost of delivery of banking products and services to businesses and consumers; 3. Consumer Banking: Clear guiding principles and removal of major impediments for the Consumer Banking and Consumer Finance industries. 4. Resolution 11 Measures: How to apply more fairly and effectively some of the measures introduced under Resolution 11 to achieve price and currency stability. For each pillar we set out some recommendations for structural reform, and hope that the Government and the State Bank of Vietnam will continue to address them for the benefit of the banking sector and the country s future development. In Vietnam, 2011 has seen the challenge of significant inflation rise again, and overcoming this has rightly been the focus of Government policy since early March with the introduction of Resolution 11. The Government has shown the required clear leadership in pursuing this course through implementing some difficult measures: high interest rates; limitations on credit growth; caps on deposit rates; encouragement to use VND instead of USD or gold these are just a few. We are supportive of the strategy being pursued, and of maintaining this strategy for long enough to ensure that stability is reestablished for both prices and the VND. With stable prices and currency, Vietnam will have a solid platform off which to achieve strong and productive growth in the future. While we support the government s strategy there are some aspects of its implementation that we would like to see reconsidered. These are of an importance that have led us to create Pillar Four dealing with issues arising from Resolution 11 and its related measures. The recommendations set out below in relation to Resolution 11 are 1

2 new to this paper, and we believe their adoption could materially enhance the longer term competitiveness and development of the Vietnamese economy and banking sector. Overall, some progress has been made on the issues raised last year. However, in several cases, encouraging dialogue was held, but tangible action is still awaited. We hope that this paper is taken in the constructive way it is intended. We look forward to further improvements in the banking sector so that the real economy can be better supported, investment can be more efficient, and customers can be better served. I. Roadmap (Pillar 1) 1. Law on Credit Institutions / Scope of activities of foreign bank branches (FBB) and 100% foreign owned banks (FOB) The Law on Credit Institutions has been in force since 1 January It represents a major step forward in setting out the purpose, role and responsibilities of the banking sector. Last year we highlighted the need for several implementing guidelines to ensure the Law became as effective as intended. These implementing guidelines need to be robust, transparent, in line with international best practice, and with an open and flexible approach to innovation. The clarity of the guidelines should allow reduction in bureaucracy and administrative constraints, and give banks confidence in the boundaries of permitted activities. Recommendation: While some draft implementing guidelines have been published this year, they have mainly focused on governance issues (such as internal controls, internal audit and risk management frameworks) rather than on business issues (such as foreign exchange, credit, derivatives). We recommend the SBV should continue to issue clear, business-focused guidelines that allow progress and innovation in the market, and which will strengthen the banking system. 2. Lending limit for a single borrower Article 128 of the Law on Credit Institutions sets out single borrower limits for banks. Most foreign banks have relatively small balance sheets in their Vietnam branches and subsidiaries, even though their parent banks have the capability to finance significantly larger transactions than Article 128 will allow onshore. Vietnam has a significant need for foreign investment over the coming years, and in order to facilitate this, we make the following recommendations to the SBV on single borrower limits: Recommendations: - Offshore Guarantees/SBLCs: We continue to recommend that offshore guarantees or Standby Letters of Credit (SBLC) from the head office or other 2

3 offshore financial institutions be allowed to offset the credit exposure to a single borrower should a single borrower (or related group company borrowers) reach and need to exceed the single lending limits in Vietnam. A parent guarantee and/or SBLC has been extensively used to transfer risk between banks in many countries, allowing prudent lending above the single lending limit set by central banks. The guarantee and/or SBLC would be issued in respect of an exposure of the group entity to a third party, e.g. the off-shore parent bank guarantees its Vietnam branch or subsidiary against a specific exposure of the Vietnam branch or subsidiary to a third party borrower for amounts exceeding the single lending limit. This solution should enable corporate customers and large infrastructure projects in Vietnam to access their required large funding for business expansion. This solution will greatly help the efficient financing of large businesses and projects whilst simultaneously ensuring prudential credit exposure by banks. Last year there was some indication that the SBV may adopt this recommendation, and we await a final response. We also recommend that the above should apply in regard to limits on the notional value of derivative products, where the restriction of no more than 30% of capital limits market liquidity for counterparties and banks. A bank guarantee or a standby letter of credit in relation to the excess over the maximum notional amount would allow better counterparty risk management and greater market liquidity. - Government Guarantees and ECA Guarantees: EuroCham continues to recommend that where a financing is supported by a Government guarantee (by the Government of Vietnam or a foreign Government) or an Export Credit Agency, the loan shall be taken out of the total single lending limit the bank can extend to that particular borrower. This solution will help all banks in Vietnam, including foreign bank branches, to be able to finance large-scale critical and important infrastructure and other major projects in Vietnam to support the Government development plan. - Guideline for Prime Minister s exceptional approval: We recommend that the State Bank of Vietnam provide a guideline for all banks on how to apply for the Prime Minister s exceptional approval under Article where the single lending limit is exceeded, eg. on required documentation, criteria and procedures, etc. We believe that a standard process would create a level playing field for all market participants in Vietnam. This was accepted by the SBV last year, but we have not yet seen any guidelines. We recommend that the SBV also introduces instruments (such as those already extensively used in other countries) that allow banks to transfer risks between 3

4 themselves thereby creating an efficient mechanism for risk management and financing growth e.g. Risk Participation Certificates. This will facilitate the efficient syndication of larger lending transactions between banks in order to spread risk and optimize loan portfolios. 3. Foreign shareholdings in local banks The issuance of a draft Degree to amend Decree 69 would remove the requirement for the Prime Minister s approval to increase a strategic partner s foreign shareholding in a Vietnamese bank from 15% to 20%, and this is to be welcomed. However, there is no proposed change to the limitation of 30% on the total foreign shareholding in a local Vietnamese bank. Particularly in light of the SBV s desire to see consolidation of the banking sector in Vietnam (which we fully support), a roadmap for further deregulation of foreign shareholdings should be developed. Recommendation: To enable better banking sector consolidation in line with the SBV s expressed intention, there remains a need for clarity on scope and timing of further increases in shareholding. This is necessary to allow strategic partners and local banks to devise more definitive future plans, leading to a much more constructive and planned approach for the banking sector in Vietnam. 4. Clearing System Establishing a highly reliable and efficient settlement and clearing system is a key component of the financial infrastructure required to ensure further development in the banking sector. We welcome the SBV s recently-stated prioritization of this area. While clearing systems have been improved over the past several years, significant capacity and efficiency improvements are required in order to support economic growth adequately. These include: earlier opening times and later cut-off times; improving the stability and scalability of the CITAD system; and a more definitive business continuity plan (BCP) in the event of a system outage. Recommendation: The SBV should work with industry participants to create an efficient and reliable clearing system that: - Satisfies business continuity requirements; - Is open for longer during normal business hours; - Facilitates automated/electronic transfers across the entire country; 4

5 - Clears major transactional currencies (VND and USD); - Guarantees liquidity requirements (appointing a lender of last resort); and - Ensures security requirements. 5. Enforcement of rules Instruction 01/CT-NHNN and its associated provisions set out many limits and requirements for banks to comply with. Recently, it has been well publicized that some of these requirements have been less complied with than others. If advantage can be gained by non-compliance, and non-compliance is not addressed, then banks will be less compliant with the rules. We are encouraged by the SBV s recent strong enforcement of the deposit rate caps. All banks have a duty to comply with the SBV s rules, but the SBV should ensure there is a positive motivation for banks to fulfil that duty, not only the possibility of sanctions for a failure to do so. Unless all banks adopt the same strong compliance culture, it creates an uneven market. Recommendation: The SBV has the ability to ensure a level market made up of banks with a strong compliance culture. To achieve this we recommend that the SBV not only issues sanctions for non-compliance, but also creates positive incentive for those who are compliant. Compliance should be demonstrably more advantageous than noncompliance. II. Market Efficiency (Pillar 2) 1. FX regulations and FX Policy Decree 160, issued in December 2006, lays out the framework for dealings between participants and FX products in Vietnam. However, the key implementing circulars have still not been issued, and guidance is needed for participants in conducting their FX activities in line with this law. In particular, better guidance is needed for participants about FX control on FDI and FII, as well as on current transactions and capital transactions. The lack of such guidance has slowed down the development and the depth of the FX market factors especially relevant in periods of high FX demand and volatility, where exporters/importers need to use more sophisticated hedging techniques so as not to be disadvantaged vis-à-vis their competitors operating in other countries. We welcome the greater flexibility shown by the SBV in setting the FX rate since March with the introduction of the new regularly adjusted trading band. FX stability, which has been fostered by this new FX management regime, is critical for the future development 5

6 of the economy. However, there remains very limited ability to hedge currency exposures without a functioning FX forward market, periods of strong demand for FX will demonstrate the structurally instability of the VND FX market. This year, Circular 07 was introduced which required a borrower of foreign currency in certain circumstances to have a commitment from a bank to sell them the required foreign currency to repay the loan at maturity. It has been unclear what was meant by commitment whether it was a legal obligation by a bank to sell FX on a future date at an agreed price, or an undertaking on a best efforts basis to sell FX at the maturity of the loan at the prevailing price. Clarity would be welcome. Recommendations: - We recommend urgency in issuing clear implementing circulars for Decree 160. Doing so will allow participants to operate their FX activities uniformly and responsibly, reinforcing an orderly and transparent market. This would also have the effect of improving confidence in the Vietnamese Dong and increasing liquidity in the FX Market. - We also recommend creating a liquid and market-driven forward FX market. Such a move would not only enhance trade flows, but it would also help inward investment to Vietnam. Currently, foreign investment in Vietnam is more uncertain than it needs to be because currency risk cannot be adequately hedged FX hedging could transform foreign investors view of Vietnam. It would also improve the business performance of Vietnamese exporters and importers. 2. Government Debt Markets The development of a highly liquid and systematically managed government bond (and bill) yield curve is important for supporting efficient market liquidity and bank balance sheet management. Further, having a robust government debt issuance process is important for the healthy development of new capital market instruments, greater corporate bond issuance and broader investment options for both corporations and consumers. Restrictions such as the inclusion of corporate bonds in the credit growth cap and limitations on interest rates to be offered on bonds have meant that the corporate bond market has been inactive this year. For investors and issuers, and ultimately the overall economy, it is important to develop the capital markets for a range of issuers in addition to the government s own bond programme. Recommendation: The government debt market needs to have, as much as possible, transparency as to the issuance calendar, amounts and maturities to be issued. The 6

7 market should be allowed to set efficient pricing for debt issuances that systematically adhere to a well-developed calendar. Additionally, it should be a priority to encourage development of a broader capital market for non-government issuers. 3. Rating agencies Rating agencies play a critical role in market efficiency, especially in the disintermediation process. To achieve this effectively, experience in other markets has shown that rating agencies need to be formed within the country to enable a wide crosssection of companies to access their services and to enable them to gradually enter the bond and commercial paper markets with rated paper. The introduction of rating agencies also plays a transformational role in areas like accounting practices, corporate governance, etc., thereby leading to a more efficient market with greater transparency. Recommendation: We continue to recommend that the government should encourage at least 1 or 2 independent rating agencies within Vietnam. 4. Close Out Netting and Set-Off Currently, there is no regulation that addresses netting of market transactions. While trading partners within Vietnam may agree to offset their positions or obligations, it is unclear whether these agreements are permissible or enforceable under current local laws. Besides reducing transaction costs, netting is a critical tool for efficient markets as it reduces credit and liquidity risks, and ultimately systemic risk. Additionally, given that netting results in more favorable capital treatment for credit risks, netting arrangements are crucial for Vietnamese-domiciled banks as it may help to improve their credit ratings when they participate in the international markets in order to hedge their positions. Recommendation: We continue to recommend that the government should work with industry and external experts to develop regulation on close out netting and set-off in line with international best practice. 5. Regulatory reporting While we have seen a reduction in the number of reporting criteria from around 200,000 to around 132,000 in the new Circular 21, it remains a challenge for banks to meet the requirements. Whilst timely and accurate reporting of critical data are a prerequisite of effective regulation, the current system has many duplications. The same information has to be included in several different reports, and the same reports have to go to several different recipients (SBV, MoF, Deposit Insurance Company, etc). Recommendation: Although some progress has been made, we continue to recommend that a working group comprised of the SBV, MoF, DIV, banks and the World 7

8 Bank be created to review and overhaul the reporting requirements to ensure that reporting is appropriate and robust and unnecessary duplication of reports is eliminated. 6. Withholding tax on offshore borrowings Vietnam s long term economic growth and infrastructure development will require substantial long-term debt capital to be raised from offshore capital markets. There is currently a withholding tax of 10% on interest paid to offshore lenders. This has led to companies shying away from accessing the capital markets and instead relying on mismatched short-term loans from the onshore Vietnamese market. It is also the case that the withholding tax is not present for interest payable to foreign banks from a few jurisdictions where bilateral tax treaties exclude it. Banks from these jurisdictions can be more competitive than those from jurisdictions subject to the withholding tax. Recommendation: The government is encouraged to abolish the withholding tax on interest paid to foreign lenders, or at least to continue to negotiate taxation agreements with additional jurisdictions. This will allow more cost-effective financing of large, strategic projects using foreign capital, yet it should not open up foreign borrowing inappropriately for purposes that could adequately be met by domestic borrowing. It should also reduce the cost to strategic projects of accessing international capital, and ensure equality of treatment for all international lenders. III. Consumer Banking (Pillar 3) 1. Wealth Management Products Globally, wealth management products are a core offering for banks to their retail clients. This has proved advantageous for consumers, given that regulators and banks provide significant oversight and expertise to ensure that products are appropriately provided to customers by proper assessment of their risk appetite and investment purpose. Currently, no regulation exists in Vietnam on investment products, and each bank must seek individual product approval from the SBV. This is a poor use of time for banks, the SBV and for customers, and lacks transparency and consistency. A uniform set of rules that ensure the appropriateness of investment products for retail investors will allow banks to mobilize funds more effectively, and to channel those funds into important investment projects, as well as to encourage saving by individuals. Recommendation: Given that current regulation is silent on investment products, the government is encouraged to bring into place a law that allows commercial banks to offer investment products to their customers, provides protection to investors in the sales process, and requires transparency in the pricing, returns and risks of such products. 2. Credit Bureau 8

9 The Credit Information Centre (CIC), issued a draft regulation on credit bureaux, requiring at least 20 commercial banks to provide credit information exclusively to each credit bureau in order for the bureau to be recognised. In return, those 20 commercial banks may obtain data only from that credit bureau. The current provision on membership exclusivity does not promote healthy competition in this field. Furthermore, industry data will be split amongst the bureaux and banks will not get a holistic view of the market as they are not able to access all the data. Although bureaux are allowed to share amongst themselves, the likelihood of sharing information amongst competitors is low. Recommendation: We recommend that credit institutions are allowed to use the services of more than one credit bureau and that the SBV works closely with commercial banks, consumer finance companies and other market participants to encourage the rapid development of full and complete credit bureau reporting and infrastructure. IV. Resolution 11 Measures (Pillar 4) 1. Credit growth cap of 20% Resolution 11 limits the growth of credit in each bank to no more than 20% in 2011, and it seems likely there will be a growth cap in We understand and agree with the policy of limiting credit growth in the current environment, and in an economy that has seen bank credit increase from 65% of GDP to around 125% of GDP in five years. Such continued growth is unsustainable, and needs to be managed. However, the application of a single growth rate to all banks, regardless of their capital strength, their risk management capabilities, the nature of their lending to productive parts of the economy, or any other objective criteria, will not yield the best results for the Vietnamese economy. It rewards the size of a bank rather than the quality of a bank. Large banks are favoured and small banks are penalized. The SBV has wisely stated that it is concerned with the quality of the banks it regulates rather than the size of them, and credit growth limits should reflect that. Recommendation: We recommend that if further restrictions on bank credit growth are employed, they should allocate the limited credit growth to banks best able to use it productively for the economy, based on objective measures. 2. Productive and non-productive sectors Resolution 11 sets out credit growth limits for loans to productive and non-productive sectors of the economy. Real estate was included within the non-productive sectors. We agree with the intention to remove availability of credit to speculators in real estate, where demand from such buyers could inflate property prices beyond their sustainable 9

10 value. However, the way the measures apply has squeezed out many legitimate buyers and developers of real estate whose involvement in the market is due to a genuine need for premises and/or land. Home buyers wishing to live in the property they are acquiring, developers of industrial parks, and owners of schools are some of those who have seen the availability of financing for their projects reduced or removed. Recommendation: We recommend that the current definition of non-productive sectors be reviewed to ensure that productive activity is not inadvertently squeezed out. Conclusion The issues and recommendations above represent a significant reform agenda for the Vietnamese banking sector. However, we should not forget the huge progress that has been made in recent years in opening up the sector to new products and participants, offering better service to clients from all parts of the economy. The full agenda set out above supports an ambition for continued progress in making Vietnam s banking sector capable of meeting the growing needs of its growing economy in the future. 10