Interest rate and exchange rate
Content
Interest rate and exchange rate: Basically these rates have been liberalized. The State Bank only influences the interest rate and exchange rage through the money market and monetary policy instruments. Therefore, interest rates and exchange rates currently reflect more closely the value of Vietnam dong, and follow the development of the international and domestic money market. Interest rates were gradually liberalized in sequencing and with caution. First of all, the real positive interest rate principle was introduced since 1992. Deposit interest rates were liberalized in 1996, and lending interest rates were determined through negotiation since June 2002. The foreign exchange rate management was shifted from the fixed multiple exchange rate, with administrative measures, to the flexible exchange rates that are regulated on the market basis.
II. Banking Reform
1. Beneficiaries of the reform Focusing on SOCBs and joint-stock commercial banks 2. Objectives of the reform - Enhance financial capacity and competitiveness - Enhance management, governance, and operation efficiency - Making Vietnamese commercial banks strong enough for regional and international integration 3. Reform contents 3.1 For SOCBs - Financial restructuring, includes: + Re-capitalization to increase statutory capitals, ensuring capital adequacy ratios + Solving NPL’s (Non-Performing Loans), cleaning banks’ balance sheets: (i) Formulating special mechanism to solve NPL’s incurred before 31/12/2000; (ii) Classifying and solving NPLs in consistency with international standards and best practices - Re-structuring the organization and operation, including: + Differentiating between policy lending and commercial lending + Completing Business Strategy and Credit Manuals + Establishing specialized departments in charge of risk-management and asset/liability management + Establishing management information systems + Completing the internal control and internal audit mechanism + Practicing auditing in consistency with international accounting standards - Formulating the Proposal on SOCBs equitization, primarily focusing on equitizing the two banks, VIETCOMBANK and MHB 3.2 For joint-stock commercial banks - Increase the capitals to expand business scope: + Merger and acquisition of small joint-stock commercial banks into bigger jointstock commercial banks + Call on shareholders to increase capitals or issue more shares to call for more capitals - NPL solutions: + Provision for risks
12 + Solving security assets (collateral), collecting debts to the end from customer + Debt re-structuring by: selling off the debts, transforming the debt into equity, re-scheduling the debt, and rolling over 3.4.2 Financial re-structuring - Re-capitalization As of now, SOCBs’ statutory capitals have been injected with nearly 13.000 billion dongs by the Ministry of Finance from the source of special Government bonds and other sources; increasing SOCB’s total statutory capitals to 17.000 billion dongs, step-by-step raising equity, significantly improving capital adequacy ratio in consistency with international standards (8%). Joint-stock commercial banks have also continuously issued shares to call for equity from shareholders and the public. Almost all joint-stock commercial banks have reached the capital adequacy ratio in accordance with the State Bank of Vietnam’s regulations. -Solution of NPL 90% of NPLs incurred before 31/12/2000 have been solved by such measures as: collection in cash, solution of security assets (collateral), using provisions for risks… and the Government has also assisted by the State budget. As of now, joint-stock commercial banks’ NPLs are below 5% of the total debt outstanding (by the Vietnamese Accounting Standards).
III. Prospects for the Vietnamese Banking Sector in the coming time
As of 31/12/2004, Vietnamese commercial banks have basically solved all old problems, creating basis to apply stronger measures in the upcoming time, when Vietnam joins the WTO and opens the markets as required under the US-Vietnam Bilateral Trade Agreement. Vietnam needs to push up liberalization of services of the financial and banking sector. In the coming time many foreign banks will be operating in Vietnam with many new banking products and services. This requires the Vietnamese banking system to further reform: + About policy, legal environment: the Government and the State Bank of Vietnam have to revise, supplement, promulgate new regulations on banking activities, first and foremost regulations on accounting, debt classification, allocation of provisions against risks, prudential ratios in banking activities in consistency with international standards and best practices; ensuring every entity operating in Vietnam in the same operation sector has the same rights and responsibilities, without
discrimination. + Completing the mechanism and enhancing capacities for the State Bank of Vietnam’s Supervision force, performing the roles of supervision and monitoring over the banking system against risks; formulating early warning procedures of risks, especially credit risks; 14 + Stepping up the implementation of re-structuring proposals in order to increase financial capacity and competitiveness of commercial banks, especially SOCBs, in: classification and solution of NPLs; raising equity; formulating solution plans of NPLs of the Vietnamese banking system once all NPLs are classified in accordance with international standards; continuing to cooperate with foreign consultants and organizations for technical assistance in banking reforms. + Customers of commercial banks are still mainly state-owned enterprises. However, in the past time, those enterprises were not working efficiently, some enterprises were at prolonged loss, unable to repay bank loans, leading to huge debt outstanding. The fact that the Vietnamese Government is stepping up the equitization and re-arrangement process of State-owned enterprises will dissolve inefficient and loss-making enterprises; creating a healthy business environment. In fact, equitized enterprises are operating more efficiently and able to repay bank loans. In the process of re-arrangement of State-owned enterprises, being big creditors, commercial banks need to actively participate in the financial analysis process of enterprises for better re-arrangement decisions, making enterprises’ repayment more possible. + Stepping up the process of SOCBs equitization to call for big capital from the public both at home and abroad. In which, foreign individuals and organizations can hold shares of equitized SOCBs as well as can participate in governance and management of banks and modern banking technology transfer for banks; thus giving a new impetus for SOCBs operation.
II. Banking Reform
1. Beneficiaries of the reform Focusing on SOCBs and joint-stock commercial banks 2. Objectives of the reform - Enhance financial capacity and competitiveness - Enhance management, governance, and operation efficiency - Making Vietnamese commercial banks strong enough for regional and international integration 3. Reform contents 3.1 For SOCBs - Financial restructuring, includes: + Re-capitalization to increase statutory capitals, ensuring capital adequacy ratios + Solving NPL’s (Non-Performing Loans), cleaning banks’ balance sheets: (i) Formulating special mechanism to solve NPL’s incurred before 31/12/2000; (ii) Classifying and solving NPLs in consistency with international standards and best practices - Re-structuring the organization and operation, including: + Differentiating between policy lending and commercial lending + Completing Business Strategy and Credit Manuals + Establishing specialized departments in charge of risk-management and asset/liability management + Establishing management information systems + Completing the internal control and internal audit mechanism + Practicing auditing in consistency with international accounting standards - Formulating the Proposal on SOCBs equitization, primarily focusing on equitizing the two banks, VIETCOMBANK and MHB 3.2 For joint-stock commercial banks - Increase the capitals to expand business scope: + Merger and acquisition of small joint-stock commercial banks into bigger jointstock commercial banks + Call on shareholders to increase capitals or issue more shares to call for more capitals - NPL solutions: + Provision for risks
12 + Solving security assets (collateral), collecting debts to the end from customer + Debt re-structuring by: selling off the debts, transforming the debt into equity, re-scheduling the debt, and rolling over 3.4.2 Financial re-structuring - Re-capitalization As of now, SOCBs’ statutory capitals have been injected with nearly 13.000 billion dongs by the Ministry of Finance from the source of special Government bonds and other sources; increasing SOCB’s total statutory capitals to 17.000 billion dongs, step-by-step raising equity, significantly improving capital adequacy ratio in consistency with international standards (8%). Joint-stock commercial banks have also continuously issued shares to call for equity from shareholders and the public. Almost all joint-stock commercial banks have reached the capital adequacy ratio in accordance with the State Bank of Vietnam’s regulations. -Solution of NPL 90% of NPLs incurred before 31/12/2000 have been solved by such measures as: collection in cash, solution of security assets (collateral), using provisions for risks… and the Government has also assisted by the State budget. As of now, joint-stock commercial banks’ NPLs are below 5% of the total debt outstanding (by the Vietnamese Accounting Standards).
III. Prospects for the Vietnamese Banking Sector in the coming time
As of 31/12/2004, Vietnamese commercial banks have basically solved all old problems, creating basis to apply stronger measures in the upcoming time, when Vietnam joins the WTO and opens the markets as required under the US-Vietnam Bilateral Trade Agreement. Vietnam needs to push up liberalization of services of the financial and banking sector. In the coming time many foreign banks will be operating in Vietnam with many new banking products and services. This requires the Vietnamese banking system to further reform: + About policy, legal environment: the Government and the State Bank of Vietnam have to revise, supplement, promulgate new regulations on banking activities, first and foremost regulations on accounting, debt classification, allocation of provisions against risks, prudential ratios in banking activities in consistency with international standards and best practices; ensuring every entity operating in Vietnam in the same operation sector has the same rights and responsibilities, without
discrimination. + Completing the mechanism and enhancing capacities for the State Bank of Vietnam’s Supervision force, performing the roles of supervision and monitoring over the banking system against risks; formulating early warning procedures of risks, especially credit risks; 14 + Stepping up the implementation of re-structuring proposals in order to increase financial capacity and competitiveness of commercial banks, especially SOCBs, in: classification and solution of NPLs; raising equity; formulating solution plans of NPLs of the Vietnamese banking system once all NPLs are classified in accordance with international standards; continuing to cooperate with foreign consultants and organizations for technical assistance in banking reforms. + Customers of commercial banks are still mainly state-owned enterprises. However, in the past time, those enterprises were not working efficiently, some enterprises were at prolonged loss, unable to repay bank loans, leading to huge debt outstanding. The fact that the Vietnamese Government is stepping up the equitization and re-arrangement process of State-owned enterprises will dissolve inefficient and loss-making enterprises; creating a healthy business environment. In fact, equitized enterprises are operating more efficiently and able to repay bank loans. In the process of re-arrangement of State-owned enterprises, being big creditors, commercial banks need to actively participate in the financial analysis process of enterprises for better re-arrangement decisions, making enterprises’ repayment more possible. + Stepping up the process of SOCBs equitization to call for big capital from the public both at home and abroad. In which, foreign individuals and organizations can hold shares of equitized SOCBs as well as can participate in governance and management of banks and modern banking technology transfer for banks; thus giving a new impetus for SOCBs operation.
