New regulation on credit limit may affect the attraction of foreign investment into Vietnam.
Under Article 128, Law on Credit Institutions (which took effect on January 1, 2011), banks with 100 percent foreign capital are not allowed to lend over 15 percent of its own capital in Vietnam. This is the reason why from late 2010 to date, many branches of foreign banks such as Deutsch, Huanan, OCBC, Chinatrust and Mizuho Corporate, etc. simultaneously raised equity capital.
Dr Le Xuan Nghia, vice Chair of the National Financial Supervisory Committee said the regulation on credit limit in Law on Credit Institutions is essentially to help domestic banks have more strength to compete with the group of foreign banks when the market is fully opened from 2011. The regulation, which is considered being inconsistent with international practice, has received reaction from foreign banks. However, when being asked, most banks expressed hesitancy in raising capital.
Thomas Tobin, general director of HSBC Vietnam said that foreign banks would have to consider carefully when entering Vietnam’s market, as the amount of capital investment, under the new regulation, would be higher than before.
Brett Krause, general director of Citibank Vietnam said that for foreign banks not having large capital base in Vietnam, limiting lending could be a necessity. However, for the whole market, this new regulation could give a hard time to foreign banks in supporting the growth of Vietnam. Specifically, regulation on lending limit would make investors more difficult to access capital and have to seek other sources of loans, leading to cost increase. Vietnam is currently competing with other markets to attract FDI, but this new regulation might lower Vietnam’s attractiveness.
Nevertheless, according to banking and financial experts, the regulation on lending limit would only affect small banks. The evidence is, in the recent time, while small banks simultaneously increased capital, large banks such as HSBC, Citibank, and ANZ, etc. have still been unruffled.
Krause also confirmed that for most lending contracts, Citibank arranged to borrow capital from external credit institutions and lent out. Since capital was not lent out directly by Citibank Vietnam, the branch is not governed by the new regulation. Krause added that since Citibank has operated in Vietnam for 15 years and increased its capital through the annual retained profits over the years, it has no need to immediately raise capital.
At present, most foreign banks still highly value the competitiveness of domestic banks, especially for the advantages of the nationwide networks and good understanding of the market as well as customers’ behaviours and ways of thinking. However, since foreign banks have been expanding their operations and recruiting a series of Vietnamese employees, Vietnam is gradually losing these advantages.
Meanwhile, although strategic cooperation has been strengthened, various domestic banks are still unable to compete on high technology and global products of foreign banks.
Dr Nguyen Hai Nam, a member of the team in charge of investment projects in Vietnam’s banking market of French bank Société Générale said although strategic cooperation between domestic and foreign banks have been promoted, with the current level of governance and infrastructure of domestic banks, accessing to modern banking technology is not simple.