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New banks to face stiff regulations   2008-10-08 - Viet Nam News

A new draft regulation by the State Bank of Viet Nam intends to impose stricter measures on the formation of commercial joint-stock banks in a move to ensure the effectiveness and stability of the local banking system.

New banks must have charter capital of VND3 trillion (US$180.72 million), while existing joint-stock banks must show they have at least VND1 trillion in charter capital by the end of this year.

New banks must have charter capital of VND3 trillion (US$180.72 million), while existing joint-stock banks must show they have at least VND1 trillion in charter capital by the end of this year, according to Le Xuan Nghia, director of banking strategy development for the State Bank of Viet Nam.

"The message is clear. That is, to limit weak banks from joining the local market amid increasing concerns about the spreading global-economic turmoil," Vo Tri Thanh, director of the Department for Trade Policy and International Economic Integration Studies under the Central Institute for Economic Management (CIEM), told Viet Nam News yesterday.

A new bank must have at least 100 shareholders, as at present. However, now each institutional founding shareholder must provide equity of at least VND500 billion ($30.12 million).

Moreover, an institution or enterprise that wants to be part of a new bank must show that it has operated its own business profitably for three consecutive years before applying.

"Such capital regulations are really strict, but good," said Nguyen Thanh Toai, Deputy General Director of Asia Commercial Bank, a leading joint-stock bank. He told the Viet Nam News yesterday that many State-owned economic groups had sufficient equity of VND500 billion, but they had been warned not to invest in the banking sector.

He said that setting up the core of a banking system cost at least $4 million alone. Those with such low potential had little chance of surviving.

State Bank expert Nghia said smaller private enterprises had almost no chance of opening a bank with such large registered capital.

Under current regulations, each bank which wants to become a founding shareholder of a new bank must have total assets of VND10 trillion ($625 million), chartered capital of VND1 trillion ($62.5 million), and bad debts of less than 2 per cent.

No institutional shareholder is allowed to hold more than 20 per cent of registered capital in the bank – and the limit is reduced to 10 per cent for individual shareholders.

A financial institution that buys a stake as a strategic investor can hold up to 40 per cent of shares and can acquire even more if the Prime Minister rules it to be in the national interest.

Moreover, in the first three years after the establishment of a bank, shareholders cannot transfer their stake. Founding shareholders are only permitted to transfer stakes to outsiders after five years.

Most of the new proposed regulations will be the same as under current regulations.

The draft proposal also spells out a system of supervision of commercial banks and determines benefits for shareholders.

The checks include several in-house supervisory commissions and nine compulsory reports that must be ratified by the management board.

"The main mission of the management board now is to decide credit operations, shareholder meetings and the dividend divide. It often seems that there is little for them to do.

"Thus, under the new draft, the board will (be busy checking reports) and have no time to intervene in the job of the general director of the bank any more," Nghia said.

A new bank seeking a licence from the State Bank must not only meet the financial requirements, but also adopt risk-management measures in accordance with international standards.

Seeking consultants, meeting procedural requirements and obtaining State Bank approvals may take a new bank nearly 12 months, a senior State Bank official said frankly, but he added that the strict regulations were intended to screen the potential of banks and eliminate in advance fly-by-night financial institutions set up for quick profit.

Too many?

Viet Nam’s banking system now includes five State-owned commercial banks, six joint-venture banks, 36 joint-stock commercial banks, 44 branches of foreign banks, 10 financial companies, 13 financial leasing companies and 998 people’s credit funds.

Since May, two new joint-stock banks have opened up – the Lien Viet Bank and Tien Phong Bank.

Some wonder if the number of banks is too high for a market with a Gross Domestic Product of about $70 billion annually.

But according to Thanh from the CIEM, the most critical issues lie in supervision and risk management.

"Placing conditions on opening new banks is in accordance with World Trade Organisation commitments," he said.

At one period last year, about 25 applications to establish new banks were already on the State Bank’s desk.

To stop the rush, the State Bank tightened conditions on setting up banks by issuing Decision No 24/2007/QD-NHNN on June 7, 2007. However, two months later, the central bank reported having already received 12 applications from mostly large State-owned corporations and domestic financial institutions.

At that time, many believed that high profits reported by the banking industry and the attraction of banking shares on the securities market were tempting provincial authorities and major enterprises across the nation to set up new banks.

However, so far, only two banks (Tien Phong and Lien Viet) have started operation and another, Bao Viet Bank has been approved for a licence.

In August this year, the State Bank once again announced a temporary pause in licensing new banks while it compiled new criteria for setting up domestic joint-stock commercial banks.

The central bank will receive application to open new banks right after the new draft is finished and ratified by the PM. Given that the draft is still in production, observers believe that few new banks will enter the local market in the next few years, especially during global economic turmoil.

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