The increase in capital of the whole Vietnamese banking system was currently becoming dramatic, especially when Circular 41/2016/TT-NHNN on capital adequacy ratio (CAR) for banks and foreign bank branches took effect in 2020. Although Circular 41 only covered part of the Basel II Accord, to ensure these reasonably stringent requirements, it required significant efforts of banks.
According to Nguyen Tri Hieu, financial analyst, Circular 41 stipulated a minimum CAR of eight percent, which was close to Basel II risk management regulation. However, Circular 41 itself was only a part of Basel II, because the rules and criteria in this accord were much broader and more complex. Nevertheless, at least Circular 41, when regulating CAR, also recorded the main point of Basel II, offering methods to calculate risk assets with stricter risk factors.
The unique feature of Circular 41 was that the calculation of risky assets was different from that of Circular 36. If the risks in Circular 36 focused on credit, then with the requirements of Circular 41, in addition to risks credit, banks must include assets with market risks, assets with operational risks. Based on the ratio of equity on Total risk-weighted assets, the risk-denominator would be inflated because of the addition of risk-weighted assets and market assets or operational risk.
Therefore, if the numerator of the equity was not increasing and the denominator was inflating, the CAR would be meager. That was the reason why the CAR under Circular 36 was nine percent, according to Circular 41, reducing to eight percent, even though the current capital adequacy ratio of the whole system was over 12%. If it was calculated fully and correctly, following Circular 41, many banks would not satisfy. A bank that did not meet the minimum capital adequacy ratio of eight percent in a long time might be put under special control by the State Bank of Vietnam (SBV). If the rate dropped to a deficient level such as one percent to three percent, SBV might seek to deal with special measures prescribed in the Law amending the Law on Credit Institutions Vietnam 2010, including special lending, merger, and bankruptcy eventually.
Circular 41 would take effect on January 1, 2020, together with Circular 13/2018/TT-NHNN, valid on January 1, 2019, and the Law amending the Law on Credit Institutions, creating a strict legal corridor forcing banks to gain enough owner’s equity and to operate well, control risks well. If not, they would receive the last decision, which would be merger or bankruptcy.
However, according to Nguyen Tri Hieu, implementing Circular 41 with respect to Vietnamese banks currently faced two following issues.
Firstly, the numerator must increase. That meant, the equity must be increased to ensure that the bank would achieve a CAR of eight percent in the future because the denominator banks had to recalculate all their assets. Especially debts had to be calculated using the new methods of Circular 41, which was very complicated compared to previous Circular 36.
Specifically, for a business loan, previously, the risk ratio was 100 percent according to Circular 36, but then the coefficient might increase to 200 percent depending on the financial situation of the business. For example, if an enterprise did not have a financial statement, the risk was much higher, so a risk ratio of up to 200 percent became essential. All bank liabilities and bank assets must be recalculated to meet the new risk ratio. That was not a simple task because each bank had tens of thousands of customers, in which the financial situation of customers and the value of collateral changed often. Banks could not track manually, instead, mainly depended on the support of information technology. Even the inspection and supervision of SBV to ensure that banks complied with the provisions of Circular 41 would not be accessible at all.
Secondly, banks must have a database on all of its risk assets over the years, which told them about the risk level of each loan or each type of credit. Vietnamese banks faced many obstacles because some banks had not consistently stored data for years. Each year, the nature of the debt changed, such as real estate loans were sometimes counted as business, sometimes calculated into consumption. The inconsistent way banks kept property credit over the years had been the reason why banks had struggled to use past data.
Compliance with Circular 41 was not easy, but the benefits of implementing Circular 41 were clear when banks’ books were required to be more transparent which ensured that banks had appropriate owner’s equity to operate. Any banks that did not guarantee the minimum capital adequacy ratio would be especially ‘patronised by SBV,’ Tri Hieu emphasized.
In addition, from April 1, 2019, SBV applied credit rating of credit institutions on the basis of CAMELS criteria (capital, asset quality, management, earnings, liquidity and sensitivity) and rank by A (fair), B (good), C (medium), D (weak) and E (bad) levels. According to Tri Hieu, banks rated D and E were considered as ‘prepared to go into history’ one unless they raised capital and urgently restructured.
The Vietnamese banking system was still young compared to the financial system in the world. Over the past 30 years of development, Vietnam’s banking industry had come a long way and had grown into a modern banking system with the application of advanced information technology, financial capabilities and a greatly enhanced endurance of fluctuations in the market. However, in the past time, the level of trust had not been as expected with the appearance of many law violations in the banking system. The credit score of the banking system and the national credit score were still in low, non-investment grade and speculative.
Therefore, implementing Circular 41 to bring the Vietnamese banking system in line with international practices would improve the position of Vietnamese banks in the global financial market. Thereby raising capital from foreigner investors would be more favourable.
Among banks trying to call for investment from foreign investors, National Citizen Commercial Joint Stock Bank (NCB), over the past five years, demonstrated an active development in total assets, resources and management. Many foreign investors were interested in NCB when researching NCB’s development, ecosystems and business strategies. To meet the required standards and carry out the regulations of the regulatory agencies, NCB joined a group of banks that were able to apply Circular 41. NCB was trying to improve policies and operating procedures to satisfy the provisions of Circular 41 and Circular 13. That increased the attractiveness of NCB to foreign investors who were particularly interested in risk management and compliance.
