Operation of Foreign Financial Institutions in Vietnam Revised

By June, 2005, there had been 32 foreign financial institutions from 15 countries and territories operating in Vietnam , including 28 branches of foreign banks, four joint venture banks set up by foreign banks and Vietnamese commercial banks, and three financial leasing companies. Among the 28 branches of foreign banks, there are three branches of American banks.  

Only 11 branches of foreign banks and one joint venture bank have their offices in Hanoi . The remainder is in Ho Chi Minh City , of which only five branches have opened its affiliates in Hanoi .  

The State Bank of Vietnam (SBV) stipulates that each branch of a foreign bank has to have charter capital of US$15 million (equal to VND 225 billion with US$1 equal to VND 15,000) provided by its parent bank.  

Almost all branches of foreign banks, joint venture banks and financial leasing companies are profitable even though their absolute figure is not large. Loans provided by foreign financial institutions account for ten per cent of the total loans of all credit institutions operating in Vietnam .  

Under the Vietnam-US Bilateral Trade Agreement, by 2009, branches of American commercial banks will be treated as local banks by the Socialist Republic of Vietnam.  

At present, branches of foreign banks’ capital mobilisation in Vietnam dong is controlled by SBV. Accordingly, SBV has three ways of controlling capital mobilisation in Vietnam dong of foreign banks. Firstly, branches of American banks are allowed to mobilise a Vietnam dong equivalent amount four times higher than local banks. Secondly, branches of European banks are treated in two various ways according to their relations with Vietnamese customers. Those banks, which have no credit and guarantee relations with Vietnamese customers, are allowed to mobilise a Vietnam dong equivalent amount 3.5 times higher than local banks and those, which have credit and guarantee relations with Vietnamese customers, are allowed to mobilise a Vietnam dong equivalent amount four times higher than local banks. However, the total amount of called capital is not four times higher than that of local banks. This regulation is a real difficulty for European banks. Thirdly, branches of other foreign banks are allowed to mobilise a Vietnam dong equivalent amount equal to 50 per cent of that of local banks.  

As a result, foreign banks and financial leasing companies mainly serve their own clients.          

Furthermore, foreign financial institutions are not used to SBV’s credit regulations. Foreign banks say that Vietnamese banks’ credit provision is risky as credit organisations can use value of materials and goods as guarantees for their loans. On the contrary, foreign banks are used to using commercial paper discounting as credit instruments. Meanwhile, in Vietnam , the commercial paper discount ordinance has been issued but has yet to take effect.  

After Vietnam joins the World Trade Organisation (WTO), the country will open its banking and financial field and these above mentioned barriers will be removed. As a result, competition between Vietnamese and foreign banks will become fiercer.  

Vietnamese commercial banks, in particular State-owned commercial banks, may lose right at home if they do not familiarise themselves with the market mechanism and change their credit provision in line with the international practice. At that time, local State-owned commercial banks will be unable to maintain their present market share of 70 per cent.  

Phan Le