Foreign bank branches to face lending restrictions in 2011
December 27 2010
Source : Vietnam Business News
Foreign bank branches in Vietnam will find it harder to give out loans as their lending operations will be restricted by the new law on credit institutions that will take effect early next year.
The law, which was passed on June 16 this year by the National Assembly, specifies the maximum credit line for a single customer is based on the capital of foreign bank branches, not their mother banks in foreign countries as currently allowed.
The credit line for a customer cannot exceed 15 percent of equity of commercial banks, foreign bank branches, people’s credit funds, and microfinance institutions. Meanwhile, the credit line for a customer and a related party cannot exceed 25 percent of equity of credit institutions.
This may impact strongly on the lending operations of foreign bank branches in Vietnam that have financed big projects using their mother banks’ financial resources. At the moment, legal capital of a foreign bank branch is only $15 million, or about 300 billion dong.
If those branches cannot increase their paid-in capital next year, they will have to reduce the credit line for their customers. Therefore, many foreign bank branches have been racing against time to increase their capital in recent times.
On Tuesday, the central bank approved the extra capital injections by four branches. Huanan Commercial Bank Ltd HCM City Branch increased capital from $15 million to $65 million, Chinatrust Bank HCM City Branch raised capital from $15 million to $50 million, and HCM City Branch and Hanoi Branch of Mizuho Corporate Bank revised up their capital from $15 million to $133.5 million each.
At the Vietnam Business Forum in Hanoi early this month, the Banking Working Group (BWG) asked the central bank to consider five issues to help minimise possible impacts on the economy.
BWG said the central bank should allow foreign bank branches to continue carrying out short term credit lines in the next two years for corporate customers borrowing capital in 2010. This will help enterprises maintain operations while foreign bank branches have more time to cope with their financing agreements.
BWG recommended the central bank allow foreign banks or branches to use foreign debt guarantees or a standby letter of credit from their headquarters in case the outstanding loan for a customer or a group of customers hit or nearly hit the credit cap under the local regulation.
This measure which is applied in many countries aims to finance capital for enterprises’ big projects as well as ensure credit risk management of banks, BWG said.
BWG also suggested eliminating loans guaranteed by local or foreign governments and export credit organisations from the credit line for one customer that borrows capital at a commercial bank.
The group asked the central bank to allow more than one branch of foreign banks in Vietnam to fix the credit line for a customer based on their combined capital.
A source from the National Financial Supervisory Council said it was asking the government to reconsider the credit line cap for foreign bank branches. – Saigon Times