After a long time looking into those practical issues that the Vietnam banking system has been facing, on 20 November 2014, the State Bank of Vietnam (“the SBV”) issued Circular 36/2014/TT-NHNN (“Circular 36”) regulating prudential ratios for the operations of credit institutions (“CIs”) and foreign bank branches. Circular 36 will become effective on 1 February 2015 and will replace all relevant applicable regulations from the effective date. Circular 36 is seen to meet the market expectations in order to strengthen the quality of banking operation through setting and monitoring important prudential ratios applicable for banking operation. It also helps to direct credit policy in order to ease those difficulties in the real estate and securities sectors and stimulate their development. Furthermore, the new regulations on defining related parties, both for entity and individual, will also contribute to resolving those cross-ownership issues and enhance transparency in corporate governance as well as other banking services provided by commercial banks.
Circular 36 consists of the following important changes that are considered to have major influence on banking operation in particular and the market in general.
Real value of charter capital
Charter capital or contributed capital is considered as one of the five important criteria to assess a bank (CAMEL model).While the legal capital levels applicable for CIs and foreign bank branches remain unchanged, Circular 36 provides detailed guidance on the principle, calculation method, periodic reporting and follow-up actions once the real value of charter capital falls below the legal capital requirement. As a result, the circular has ensured consistency in application as well as requirement of active monitoring and capital management in a safe and effective manner by CIs.
Minimum capital adequacy ratio (“CAR”)
Under this new circular, CIs are required to ensure compliance with both single and consolidated CAR if the CIs have at least one subsidiary. In addition, the decrease in risk weighting factor applicable for credit facilities granted to the real estate and securities sectors from250% to 150% is seen to have positive impact on the CAR of CIs as well as to promote credit activities in these areas.
Apart from those prohibited cases as regulated in Article 126 Laws of CIs, Circular 36 also states that CIs and foreign bank branches are not allowed to provide credit facilities to borrowers who invest and/or trade unlisted corporate bonds. This will help to enhance credit quality through monitoring the aggregate credit exposure of each borrower and mitigating credit facilities granted in indirect ways to those borrowers who are not qualified for such credit facilities under direct lending.