Basel II Standards Underway

The State Bank of Vietnam (the “SBV“) has issued Circular 41/2016/TT-NHNN stipulating the required capital adequacy ratio (“CAR“) for banks and branches of foreign banks (“Circular 41“) in a step to apply Basel II standards in Vietnam. Circular 41 will take effect as of 01 January 2020 (the “Effective Date“), but any bank or branch of a foreign bank may voluntarily apply this Circular prior to the Effective Date by giving notice to the SBV. As such, the Effective Date as finally decided in Circular 41 is one year later than the effective date proposed in an earlier draft of the Circular which was January 2019. Also, Circular 41 as issued removes the effective date of 1 September 2017 which was initially proposed for major local banks which were supposed to apply Basel II standards earlier than other banks.

Circular 41 does not apply to non-bank credit institutions, which will continue to be governed by the current regulations on CAR.

Under Circular 41, CAR is reduced to 8% (“Minimum CAR“) from the current 9%[1] but with increased requirements for computation of capitals:

It seems that the new Minimum CAR, even at 8%, is much stricter than the old Minimum CAR (i.e. 9%), due the changes to the formula, in particular the numerator (i.e. C) may be reduced while the denominator has been increased as can be seen below:

Apparently, commercial banks will be under a pressure to increase capital to meet the new CAR requirements. An interesting question is whether this pressure would pressure the Government to relax the foreign ownership restrictions in the banking sector.

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Refinancing and aggregate borrowing period for rollovers restricted

The SBV has also issued Circular 39/2016/TT-NHNN (“Circular 39“) to regulate lending activities of credit institutions and branches of foreign banks, which supersede all the eight existing decisions and circulars on lending activities. Circular 39 will take effect on 15 March 2017.

Restrictions on borrowing purposes

In addition to the usual restrictions which are carried over from the repealed regulations, Circular 39 notably restricts credit institutions from extending loans to fund the following purposes:

1. a)The purchase of gold taels;
2. b)The repayment of loans previously borrowed from the same credit institution, except for funding the payment of interests incurred during the project’s construction phase which is accounted in the properly approved capital expenditure for the project;
3. c)The repayment of loans previously borrowed from another credit institution or of foreign loans, except for prepayment of a loan satisfying the following conditions:

• Such prepaid loan served business activities;
• The borrowing period of the new loan does not exceed the remaining borrowing period of the prepaid loan; and
• The prepaid loan has not been extended.

Default Interests

Interests on overdue amounts may include the followings:

• Interest at the contract rate on the unpaid principal [if the lender agrees reschedule the principal];
• Default interest on overdue interests at the agreed default rate not exceeding 10% per annum;
• Default interest on overdue principal at the agreed default rate not exceeding 150% of the standard contract rate applicable at the time the principal becomes overdue, if the lender does not agree to extend the repayment schedule.

Conditions for Rollover Loans

Rollover loans are permitted subject to the following conditions:

• When the loan is due, the borrower may repay the loan or extend the maturity date for a specified period with respect to part or all of the principal;
• The aggregate borrowing period may not exceed 12 months from the first disbursement date and may not exceed one business cycle;
• At the time of the lender’s approval of the loan, the borrower does not have bad debts at credit institutions; and
• During the borrowing period, if a bad debt arises at any credit institution, the rollover loan may not be extended.