Development and Implementation of Basel II in Vietnam

At present, Vietnamese credit institutions have just started to conform (since

January
2006) to the CAR (under Basel I) which still does not include market risk
(Decision No.
457/QD-NHNN issued in April 2005 in which banks are required to report
capital adequacy ratio on quarterly basis since January 2006). Besides, the
calculation of credit risk is mainly based on the quantitative criteria
(classifying loans into 5 groups).
The objective of banking supervision is to ensure the stability of the banking
system as stated in Decree 91/1999/ND-CP which states that banking
supervision activities are to include the inspection of the adherence of
legislation of monetary and banking activities as well as the observance of
the provisions of banking operation licenses. The current legal framework is
yet to be sufficiently comprehensive and compatible for banking supervision
activities using the risk-based supervision methodology. The Banking
Supervision Department is drafting the new Decree which will replace Decree
91/1999/ND-CP, planned to be issued by the end of this year.
Procedures on Supervision of Risk Management Processes of Banks
including Liquidity Risk, Interest Rate Risk, and Operational Risk as
well as All Other Risks
Since the Banking Supervision Department of the SBV mainly performs
compliance supervision of banks, procedures on the assessment of the risk
management processes and qualitative factors of risk management practices
of banks are not adequately performed by the supervisors. The lack of skills
and knowledge of supervisors in risk management procedures is also a
weakness at this time.
The Banking Supervision Department is developing regulations on minimum
requirements of risk management for credit institutions to provide guidance
to banks for the establishment of a comprehensive risk management
framework and encourage banks to develop their own proposals.
Minimal Capital Requirement for Different Type of Banks
Minimum legal capital requirements are specified for all banks based on the
category.

However, in practice, such requirements have remained unchanged for a long

time. The regulation on minimal capital requirement for each type of banks
was issued in 1998 and has just been changed last year. According to this
new regulation, banks must maintain minimum regulatory capital of 3,000
billion VND by 2010 (equal to nearly 200 million USD).

Regulation on Loan Classification and Loan Loss Provision

On 19 April 2005, the State Bank of Vietnam issued Decision No 493/QDNHNN on Asset Classification and Loan Loss Provision, in accordance with
international best practices. Banks are preparing for this loan loss provision in
accordance with the Article 6
- Decision 493/2005/QD-NHNN which requires the provisioning to be mainly
based on the overdue status of loans and not on the realistic expectation of
repayments. Bank inspectors are currently only checking the compliance with
regulations rather than assessing realistic repayments.
However, Article 6 will only be valid until 2008 and will be replaced by Article
7 of the Decision 493 which requires credit institutions to apply the
qualitative method to classify debts and make provisions.
Independent Evaluation of a Banks Policies Related to the Granting
of Loans and Making of Investments
It is required by BASEL that supervision should include evaluation of a banks
policies relating to the granting of loans and investments. While supervisors
perform adequate assessment of the lending policies, the evaluation of a
banks policies for investments is not thoroughly performed by supervisors.
Procedures on Supervision of Market Risks
Apart from regulation on foreign exchange exposures, there are no laws and
regulations relevant to market risks for securities, futures, options, or
derivatives. In particular, Vietnam has not implemented the market risks
amendments to the Basel Accord because banks and authorities in Vietnam
have yet to pay adequate attention to these risks. It is also noted that
inspectors current knowledge and skills about market risks and derivatives is
limited.
SBV currently looks into whether banks set limits for market risks, including
their FX business and whether they have in place, information and internal

control systems to ensure the compliance of limits. However, the level of

verification by the SBV varies considerably and is dependent on the class of
bank being inspected and on the skills and knowledge of supervisors
Anti-Money Laundering
Anti-money laundering stipulation has recently been introduced in Vietnam.
The legal framework on anti-money laundering in Vietnam is Decree
74/2005/ND-CP dated 7 June 2005, issued by the Government on the
prevention of money laundering. However, up to date there are no specific
laws on anti-money laundering.
Generally, the framework is broadly compliant with Basel and other
international standards relating to the prevention of financial crime but
considerable work has to be undertaken within the SBV and banks to
implement the new legal framework.
From July 2007, the Anti-Money Laundering Information Center has been
separated from Banking Supervision and is acting as an independent
Department of the State Bank of Vietnam.
Monitoring Trends and Developments of a Bank
Currently, there is limited statistics for the monitoring of trends and
development of supervised banks and as such SBV officials have considerable
difficulty in monitoring trends.
Prudent Limits on Large Exposures to a Single Borrower or Closely
Related Group of Borrowers
In general, regulations of the SBV are in line with Basel on large exposures
except for the maximum limit of total exposures to a closely related group of
borrowers. In accordance with Basel, 25 percent of a banks capital is the
maximum limit for total exposures for a closely related group of borrowers
while Decision 457 allows the limit to 60%.
Procedure for Controlling Country Risk and Transfer Risk in
International Lending and Investment Activities of Banks and for
Maintaining Appropriate Reserves Against Such Risks
Since overseas lending and investments of Vietnamese banks are very
limited, the

SBV and commercial banks have not issued or developed procedures on the
assessment of country risk.
Recently, on 24 May 2006, the government, approved Decision 112-2006QD-TTg of the government related Scheme on Development of Vietnams
Banking Sector up to 2010 and Orientations toward 2020. Of note, the
planned reforms include:
-In 2008, the National Assembly will consider and pass a new Law on
the SBV, Law on Credit Institutions and Law on Deposit Insurance (currently
deposit insurance is regulated at decree level only). A Law on Supervision of
Safety of Banking Activities is also planned.
-Forex regulations will be relaxed to further liberalize current transactions and
capital transactions.
-Regulations on market access for foreign investors will be reformed to fulfill
Vietnams commitments to the US, the EU, the WTO and others to open the
banking and finance market.

Vietnam will not meet 2015 deadline for Basel II

Banking sectors huge non-performing loans and inadequate credit risk
framework are major stumbling blocks.
These problems remain the governments most challenging, said banking
sector sources. One source said there is no overt evidence that progress
towards Basel II is being made, either systemically or in individual
institutions.
There is, however, a more urgent need for more pressing structural reforms
other than Basel II.
Vietnam is not a member of the Basel Committee on Banking Supervision and
is hence not bound by the implementation timeline for Basel II. The State
Bank of Vietnam in March 2012, however, included Basel II in its restructuring
plan for the banking sector. Unfortunately, it did not establish a specific
framework or process for its implementation.
Weak credit assessment processes led to a sharp rise in non-performing
assets in the banking sector. Credit loss provisions for these loans remain
largely unrecognized in the financial statements of domestic banks.

Reported NPL figures range from 1% to 3%, said SBV governor Nguyen Van
Binh, but noted that the real figure is actually closer to 9%. He added that
drastic measures would be taken to resolve this issue.
SBV is considering establishing an asset management company to acquire
and manage bad loans.
Basel II implementation in Vietnam by 2015 remains challenging
While the Vietnam regulator is consulting on setting up an asset
management company to take on NPLs to help clean up domestic banks'
balance sheets, slow progress is being made towards Basel II
Vietnam's bid to implement Basel II by 2015 will be difficult, given the
banking sector's inadequate credit risk framework and large amounts nonperforming loans (NPLs), which remains the regulator's largest and most
challenging priority, according to the chief executive of a bank in the country.
Vietnam is not a member of the Basel Committee on Banking Supervision and
is hence not bound by the implementation timeline for Basel II. Although the
State Bank of Vietnam (SBV) set a 2015 deadline for Basel II implementation
for some banks, Louis Taylor, chief executive of Standard Chartered's
Vietnam, Laos and Cambodia arm, believes this remains challenging.
"There is no overt evidence that progress towards Basel II is being made,
either systemically or in individual institutions. In fact, there's a need for
more pressing structural reforms than introducing Basel II, even if Basel II will
eventually improve risk management in banks from current levels, so this
should be no surprise," he says.
In Decision 254, released in March last year, Vietnam's banking regulator
included Basel II in its restructuring plan for the banking sector. However, it
did not establish a specific framework or process for its implementation.
Weak credit assessment processes in the past few years fed loan growth of
over 60% in the country (in 2009), but also led to a sharp rise in nonperforming assets in the banking sector. Credit loss provisions for these loans
remain largely unrecognised in the financial statements of domestic banks.
The SBV is considering an asset management company (AMC) to acquire and
manage bad loans in the industry. According to Taylor, the AMC should
require banks to take losses on the bad loans before it purchases them.

"The banks made the lending mistakes, so they should take the losses. This is
also necessary to minimise the permanent cost of the restructuring to state.
In a recent speech to the banks, the prime minister asked banks to help deal
with the NPL issue through their own provisioning policy, implying that the
banks themselves, through their equity holders, must suffer some of the
losses," Taylor says.
KPMG Vietnam's director for risk consulting, Stephen Punch, says the asset
management company is currently at a conceptual stage with the regulator
receiving inputs from teams from global organisations with an interest in
Vietnam's economic development.
According to Taylor, a large number of variables remain to be discussed.
"Decisions will need to be made in terms of how the AMC will be funded, and
the mechanism it will use to foreclose on collateral and settle the debt with
the proceeds. While a lot of detail needs to be fleshed out, the authorities
seem conceptually to be heading in the right direction," he says.
In another move to resolve the sector's bad loan problem, the SBV released
new accounting rules in January 2013 that require banks to downgrade NPLs
in risk weighting. Market participants believe this will increase transparency
in the banking sector and help prevent a similar accumulation of impaired
assets in the industry going forward.
Although reported NPL figures range from 1%3%, SBV governor, Nguyen Van
Binh, said in a speech in December last year that the figure is actually closer
to 9%. He added that drastic measures would be taken to resolve the issue.
The new rules known as Circular 02 replace the problematic Vietnamese
accounting decision 493 which required banks to provision for credit losses
on loans on a days-overdue basis. Banks would therefore renegotiate loan
terms with borrowers, delaying the payment date, rolling over the loans, and
therefore not recognising impairment in the asset.
This, along with a renewed focus by the Vietnamese regulator, says Punch, is
a positive step towards ensuring that impaired loans get recognised as such.
"Among other things, the new rules require banks to categorise loan
contracts renegotiated once as category 3 or substandard and those

renegotiated twice as category 4 or doubtful. When the rules go into effect

from June this year, it will have significant implications on the level of NPL
reporting and transparency in the banks' books," he says.
Tony Foster, managing partner at Freshfields in Vietnam, says the pace of
reform from the regulator could be faster. "The new rules would make it
easier to quantify bad debt, which is a good step, but it is not yet clear how
much substantive difference this will make in practice." he says.
According to Punch, however, the SBV has made a number of steps in the
right direction. "The rules for the first time mention what banks should do
about collateral valuation, which is positive. The NPL level is very important,
especially in relation to collateral valuations," he says.
Vietnam Banks Already Meet Basel III Rules : Senior Official
Vietnam banks already met a minimum of 8% Capital Adequacy Ratio (CAR)
under the new internaltional banking rules, or Base III, said Le Xuan Nghia,
Vice Chairman of Vietnams National Financial Supervion Committee.
Earlier on September 12, global meeting in Switzerland led by Basel
Committee on Banking Supervision announced new guidelines to strengthen
the financial system by forcing banks to set aside more capital.
Under the new rules, known as Basel III, the mandatory reserve known as
Tier 1 capital would rise from 4 % to 4.5 % by 2013 and reach 6 % in
2019.In addition, banks would be required to keep an emergency reserve
known as a conservation buffer of 2.5 %.
In total, the amount of rock-solid reserves each bank is expected to have will
be 8.5 % of its balance sheet but not until the end of the decade.
In Vietnam, CAR is calculated mostly based on Tier 1 capital and most local
banks CARs already satisfied a minimum of 8% by end of 2009 and are
expected to hit 9% in line with Circular 13 issued by the State Bank of
Vietnam, Nghia said, adding that most of the 8% CAR attributes to Tier 1.
To an extreme, CAR of Eximbank is above 30% and CAR of SHB is within 15%20, said SME securities in a recent banking sector coverage, adding that the
lowest CARs were already 8.06% and 8.11% at Vietinbank (CTG) and
Vietcombank(VCB), respectively.

CAR is the commitment of bank owners to their banks, Vietnamese bank

owners commitments are higher than that of Western ones.
Bank

CAR

ACB

9.97%

CTG

8.06%

EIB

30.56%

SHB

15-20%

STB

11.41%

VCB

8.11%

CAR 2009 of some Vietnam banks (Source: SME Securities)

The application of international standards in Vietnam
Currently, when banks around the world have addressed the application of
Basel 3 standards , the banks in Vietnam has not officially addressed the
application of the Basel norm . Although regulations in recent years the State
Bank of Vietnam (SBV ) as 493/2005/QD-NHNN Decision and Decision
457/2005/QD-NHNN , Circular No. 13 , 19 in 2010 access to a number of
issues related to the terms in Basel but still very limited. The commercial
banks in Vietnam have not applied the standards of Basel in a formal way to
improve the quality of risk management in the banks around the world have
taken steps to develop higher will reduce competitiveness of commercial
banks.
Access to the standards of Basel , Basel 2 is particularly complex technical
demands and high costs . For a country 's banking system is still in the initial
stages of development as Vietnam , the application of Basel 2 difficult ,
challenging and time consuming . However, before the integration trend and
open the market of financial services - banking services for various types of
new banks , the gradual application of the Basel standards in Vietnam is a
critical requirement to enhance operational capability , reduce risk for
commercial banks and enhance Competitiveness in international financial
markets , facilitates the Vietnam banking market could expand in the future .

Many financial experts said banks, even the big banks like Vietcombank
Vietnam, Vietinbank, BIDV, although 8% CAR are guaranteed under Decision
457 and the allocation decision supplements, but are calculated according to
Vietnam accounting standards, should be pretty far when deviation
calculated by the international accounting standards. In addition, Tier 2
capital of the bank Vietnam is still limited, long-term borrowed capital to
equity capital is calculated on restrictions. On the other hand, the revaluation
of fixed assets of the Vietnam Bank for calculating the annual equity capital is
yet to be done.