Vietnam - Banking - Modernizing the System - What must be done:

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Vietnam - Banking - Modernizing the System - What must be done:
MACRO ISSUES
1. Developing Cash management products
Cash management services help the businesses to effectively manage their cash flow and liquidity. The
typical cash management products include Cash sweeping and pooling, inter-company lending and
entrustment lending. However, in an absence of specific legal framework and guidance from SBV on
such products, banks are not able to provide cash management services to clients. This prevents the
enterprises, especially the multi-national companies who have many subsidiaries and affiliates to access
effective liquidity management tools. This could adversely impact the competitiveness of the Vietnam-
based enterprises and the banking system as well as making the investment environment less attractive.
We would like to recommend that SBV promptly adopt the legal framework for cash management
activities so that local banks and foreign bank branches could utilise cash management services and
provide necessary support to their clients.
2. Risk management framework for enterprises
The foreign and local companies involved in large projects have strong demand to effectively manage
their Foreign exchange, Interest rate and Commodity rate risks. We suggest SBV to further develop
regulatory framework in this area such as issuing circular on commodity derivatives, permitting to
conduct CCS on top of interest risk hedging for foreign currency loans for the purpose of full protection,
recognize Net Opening Position of Cross currency swap, especially the close-out netting scheme allowed
in events of violation to create favorable conditions for the corporate to hedge their business risks at
low cost. We look forward to working closely with SBV in this area.
3. Digitisation
We are all experiencing the dominance of technology not only in business but also in every other aspect
of life and society. Tech-innovation in financial services, which we call "fintech”, has become
increasingly prominent in recent years. Vietnam, with young, tech savvy population and 23 million smart
phones in operation and 55 million mobile phone subscribers offers significant demographic advantages
for the development of financial technologies. We are seeing more and more local fintech products and
solutions such as mobile wallet platform, peer to peer lending, crowd funding platform which require
strong partnership between technopreneurs and banks. The formation of informed and timely policies
for these non-cash management solutions is important to facilitate favourable market conditions and
bring benefits to both urban and rural communities.
We therefore would encourage SBV to put digitisation high on your agenda and we are delighted to
assist you to develop a relevant FinTech ecosystem in Vietnam.
4. Regulatory enforcement
There are some regulations adopted with immediate effect (for example: Circular 15/2015/TT-NHNN
issued on October 2d,2015, came into effect on October 5th 2015 came into effect on September 28",
2015). In practice, it is very challenging for banks to implement new regulations immediately without a
proper preparation process. Banks need to revise their procedures, processes and products, to conduct
employee training and to inform the customers and clients about the upcoming changes. Therefore, it
requires some time for banks to implement new regulations properly and to fully comply. We strongly
recommend that for upcoming new regulations, there should be a deadline of minimum 45 days for the
regulations to take effect
In addition, there exist grey and impractical areas in some new regulations that make implementation
and compliance a challenge. For example, the requirement to identify related persons for the control of
single borrowing limit; and the restriction on opening no more than one Indirect Foreign Investment

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Capital account by foreign investor, entrustment lending and refinancing and requirements on
translation of documents for account opening in circular 23/2014/TT-NHNN.
We would like to recommend SBV to offer banks more opportunities to provide comments and
feedback on existing and new regulations before adopting the regulations. We believe a greater focus
on consultation process will make regulation even more effective and efficient and will help improve
regulatory enforcement.
TECHNICAL ISSUES SECTION A - KEY AND EMERGING ISSUES
The FOREIGN INVESTOR Banking Foreign investor ("FOREIGN INVESTOR GROUP") hereby presents to the
State Bank ("SBV") the following key issues:
1. Circular 07/2015/TT-NHNN on Bank guarantees
In the calculation of single credit limit in banking activities, local regulations including circular 07 on
banking guarantees only exclude guarantee balance in case the guarantee issuance is on the basis of the
counter guarantee by local credit institutions or foreign bank branches in Vietnam. In case the
guarantee is issued on the basis of the counter guarantee that by a foreign bank overseas, for example,
the foreign branches of the foreign bank branches in Vietnam or the mother bank of the guarantee
issuing bank, such a guarantee is still subject to single credit limit calculations. In fact, in both cases, the
credit risk for the guarantee issuing bank associated with this guarantee is almost the same since it
already rests with the counter guarantee issuing bank. This is also not in line with international
practices. The non-recognition of the counter guarantee issued by a foreign bank as an exclusion in the
single credit limit calculation would potentially restrict the capacity of foreign bank branches in Vietnam
to issue large-amount guarantees to support large FDI projects in Vietnam. With this, foreign bank
branches in Vietnam could only rely on local banks as a counter guarantee issuer with more limited
capacity in terms of capital and credit worthiness in comparison with foreign banks.
We recommend that SBV would allow the exclusion of the guarantees which are issued on the basis of a
counter guarantee issued by foreign banks overseas out of the single credit limit calculation to be in line
with international practices. In case of being concern by SBV on unable to manage the Credit
Institutions and Foreign Branches overseas, we recommend SBV to request such organizations for
provide the Annual report of these overseas names and the rating of the international Agencies for
SBV's assessment and comfort.
2. Simplifying requirements for account opening and market entry dossiers for foreign investors
Circular 123/2015/TT- BTC of the Ministry of Finance dated August 18, 2015 provides guidance on
foreign investment activities in Vietnam's stock market has removed many rules to simplify the
documentation for the foreign investors' participation in the Vietnamese stock market, including(1)
removal of the consularizing requirements; (2) removal of the requirement for translation of certified
documents in English; (3) removal of notarized translation for other documents in English.
But a foreign investor looking to set up a cash account at a bank must adhere to Circular 23/2014/TT-
NHNN, guiding on opening and use of transactional accounts at banking service providers, where the
client must submit a notarized translation of the applications for account opening and also notarized
translations of ID paper/passport that have been consularized in another country for the account
holder. The requirements of Circular 23 results in the inability to benefit from the paperwork simplifying
efforts offered by Circular 123.
In addition, Circular 23 also requested the authorization to use the account in writing, together with the
signature registration form and a valid copy of identity card or passport of the authorized person, while
according to international practice, the global custodian banks only send commands and instructions to
the depository bank in Vietnam through SWIFT from the registered SWIFT addresses, thus ensuring
optimal accuracy of instructions and directives. These organizations do not use the paper forms to send
orders / instructions to custodian banks in Vietnam. Therefore, the request for authorization

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documents, sample signature and copy of identity card / passport of the authorized person is not
suitable to customers using SWIFT.
We hope SBV considers simplifying further administrative requirements for foreign investors to ensure
consistent application of documentary requirements for foreign investors, as well as facilitate their
participation in Vietnam's stock market or to be specific: (1) removing the requirement for ID paper
provision for the registered agent or proxy of the account holder; (2) removal of the need for translation
of notarized English documents; (3) removal of notarized translation need for other documents in
English; and (4) removal of the need for consularization of the copies of relevant documents.
3. Recommendation for addition of banking products in SBV’s upcoming normative regulation
amendment and enactment
a. Refinancing for offshore loans - draft Circular on lending
FOREIGN INVESTOR GROUP provided comments on the draft circular, suggesting SBV consider allowing
loans used for repaying loans acquired from lending credit institutions and foreign bank branches
and/or other credit institutions and foreign bank branches on the basis that the Bank maintains clear
procedures to identify that such loans are not granted to conceal bad debt. In practice, there are many
companies borrowing foreign currency loans overseas (thanks to relationships of their parent company)
when they were first established in Vietnam. However, because of their revenue in VND and when their
financial and business status become stable, these companies then would like to borrower VND to repay
foreign currency loans. So, once again we suggest SBV consider this proposal in order to facilitate
customer business in case loan purposes are clearly not to conceal bad debt. We also recommend SBV
to allow rollover loans for the aim of transparency reporting and liquidity gap management instead of
re-pricing.
b. Agent banking
Article 106, CI Law, specifies that commercial banks may act as agents in areas related to banking
activities, insurance brokerage and wealth management in line with the State Bank's rulings. But SBV
has not released an implementing Circular addressing agent for banking activities. The Banking foreign
investor is ready to share information on international practices and work with SBV in pushing out early
these rules to facilitate and meet real users' needs for agent banking offerings and developments of this
field of expertise.
c. Cash Management product
Cash management activity offered by banks will provide clients with effective solutions in the
management of clients' cash flow and liquidity. In Vietnam, the Law on Credit Institutions classifies cash
management as one of the banking activities which commercial banks and foreign bank branches in
Vietnam can provide to clients.
However, in an absence of a specific legal framework and/or guidance from SBV on cash management,
banks could not be able to provide cash management service to clients. This would cause clients;
particularly multi-national companies with many subsidiaries and affiliates to lack access to effective
liquidity management tools such as cash management offered by local banks and foreign banks in
Vietnam. This could potentially have an adverse impact on the competitiveness of Vietnam's banking
system as well as the attraction of foreign investment into Vietnam. We recommend that SBV be able to
lay out the legal groundwork for cash management so that local banks and foreign bank branches in
Vietnam could be able to offer this service to clients.
d. Non- recourse discounting and factoring
Laws on Credit Institutions and Circular 04/2013/TT-NHNN dated March 1,2013 only recognize
discounting and factoring activities on a with recourse basis to the seller. This is not in line with
international practices, for products/ solutions such as factoring, bill discounting and any other product
where the bank has enforceable recourse to the buyer or the buyer's bank.

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The recourse imposed on the exporters restricts them from accessing good quality funding to finance
their working capital and reduce the payment risks from the buyer. Aligning Vietnam with the
international trade finance standards would help protect exporters in Vietnam against buyers' default
and delays of payment, ensuring a steady source of funding. As these products offer risk protections
against buyers and buyer's country risks, Vietnamese exporters would be more comfortable developing
commercial relationships with new markets or counterparties to grow their exports. We recommend
that SBV issue the regulations allowing discounting and factoring activities on a with recourse basis to
both the seller and the buyer.
Notwithstanding the above, we would like the SBV to consider issuing a new or supplementing
regulation on business of discounting bills, notes and other valuable papers without recourse and/or bill
of exchange. By nature, it is a transaction under which the bank extends credit to the buyer for yearly
payments to the seller for purchase of goods/services. Provided that the seller transfers its whole rights
relating to the sale contract/invoice executed with the buyer, and the buyer accepts to pay the whole
contract price/invoice amount to the bank by the original due date. The discounting charge shall be the
difference between the invoice amount and the one duly paid early to the seller, converted into a
percentage. The terms and conditions of this type of credit extension are quite similar to lending to the
borrower and disbursing funds to the supplier of the borrower. The current guideline given by the SBV
under OL 3212 of 08/05/2013 and OL 7294 of 05/10/2013 said that the above transaction scheme (i.e.
discounting bills, notes and other valuable papers without recourse and/or bill of exchange) is not for
credit businesses but would be regarded as international payment services. Kindly be advised that
under the (international) payment service, (i) the bank only collect remittance fees (not the discounting
charge) and (ii) the bank shall take the fund of the buyer and transfer it to the seller, but not by using its
own fund to pay to the seller first, then collecting it from the buyer afterward.
4. Accounting Treatment under UPAS LC
Usance Payable at Sight (UPAS) LC provides an option to beneficiaries to choose sight payment terms,
within a usance payment documentary credit transaction. If the option is exercised, Reimbursing bank
nominated by Issuing bank will make payment at sight to beneficiary. At maturity, Issuing bank will
reimburse Reimbursing bank for the face value of the LC plus accrued interests. Official Letter (OL) No.
3333/NHNN-TCKT dated 13 May 15 issued by the SBV provides guidance on accounting treatment for
Bank-to-Bank LC reimbursement. Under this guidance, LC reimbursement must be accounted as
Borrowing from Reimbursing Bank and Advances to applicant customers (at time of payment by
Reimbursing Bank to beneficiary. The accounting treatment for the reimbursement activity varies within
the market place. In line with international practice majority of banks consider a UPAS transaction as
normal import bill (accepted by applicants) payable at maturity by Issuing bank. As such, it does not fall
within the purview of OL 3333. While as per OL 3333 and treat UPAS bills as Loans/Advances to
customers. This inconsistency has created some confusion in the market place and in the minds of some
customers.
Clarification is being requested from the SBV if UPAS reimbursement is within the scope of OL 3333. If
that is the case, all LC reimbursements should be treated as Borrowing from the Reimbursing Bank and
as an Advance/Loan to Applicants/Customers.
5. Circular 36/2014/TT-NHNN on stipulating prudent ratios in operations of CIs and FBBs
Circular 36 is a great step to enhance safety and transparency criteria in the operation of Credit
Institutions, restricting cross shareholding and accelerating the banking restructuring. We appreciate
the intention of SBV to impose the limit of using short term funding to fund for long term asset.
However, we would like to bring the attention of the SBV 2 key issues faced by the FOREIGN INVESTOR
GROUP members:
The first issue in Circular 36 is the stipulation of 15% and 35% limit ratio of Government bonds holding
per short term funding for Foreign Bank Branches and Commercial Banks respectively is not in line with
Basel II and III where banks are required to hold substantially more Government bonds. In addition,
banks are perhaps the biggest (if not only) buyers for Government bonds and this requirement may

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adversely impact the Government plan in funding fiscal deficit next year and the development of an
active primary and secondary securities market.
The second issue is the identification of related persons for controlling credit granting limit is extremely
important though it becomes a huge administration steps for banks. The FOREIGN INVESTOR GROUP
members have taken positive steps in developing a uniform template which include all regulatory
requirements on related persons in circular 36 for common use. However, both the banks and
customers have faced tremendous difficulty in identifying and verifying the information on related
persons which we do not think as an effective way to ensure compliance. We recommend that the SBV
either amend the definition of related persons in line with international standards or provide guidance
to banks on how to identify those subjects for controlling the single borrowing limit.
6. How SBV could play a role in setting up an open platform for better market transparency,
benchmark fixing and conduct management
Recently, in response to the growing number of misconduct incidents (e.g.: Libor / foreign exchange
fixing), global regulators have been imposing very stricter standards on market conduct. As the Vietnam
market grows in size and complexity, the demands for higher ethical conduct and uniform practice
increase correspondingly. In helping to foster the market, we believe that Vietnam should adopt the
international best practices as well as safeguard the soundness of the system. We therefore would like
to recommend the introduction of market conduct, which covers the dealing in money market, foreign
exchange, derivatives and other market instruments as follows:
a. General market conduct to ensure the right behavior of financial institutions towards their
clients and counterparties in the financial markets.
In particular, it should provide basic dealing guidelines:
- Communication: e.g.: Dealer must not willfully spread rumors or disseminate false or misleading
information. In addition, care must be exercised when handling unsubstantiated market information.
Client communications in particular should have a reasonable basis, be fair and balanced, and not
contain any inaccurate or misleading information.
- Conflict of interest: e.g.: Dealer should act in good faith and in the best interests of clients.
Banks should implement internal policies and procedures which prohibit all forms of market
misconduct.
b. Benchmark rate setting
Benchmark rate setting to ensure it is reliable, transparent and subject to clear governance and
accountability mechanisms. Currently, there are some major benchmarks such as HNX fixing for bond
market (Ha No Exchange) and VNIBOR for money market. The HNX fixing is monitored by the HNX and
contributed by its members in accordance with Decision 56/QD- SGDHN of HNX - Ha Noi Stock
Exchanged dated 06 Mar 2013 and the Decision 160/QD- UBCK dated 15 Mar 2013 of the SSC - State
Securities Commission. For Money market and may be for foreign exchange or swap market in the
future, it is necessary to set out the governance, requirements and supervision.
7. Progress of court cases on non-performing loan and mortgaged asset disposal under Civil
Litigation Code 2014
Banks are having difficulties with the progress of the court cases on a number of cases where banks are
trying to retrieve funds.
a. Complicated and long process
In case the customer does not cooperate with lending bank (in most of bad debt cases), the bank must
sue the customer before the Court and spend 01 to 02 years to receive the judgment. After receiving
judgment or the decision on acknowledgment of agreements of the parties, the bank must submit the
Sentence Execution Agency application and spend more 02 to 03 years to auction the collateral. This

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long process increases the bad debt settlement expenses and decreases the value of the collateral,
affecting negatively the efficiency of loan collection.
b. Unreasonable decisions and requests of the Court or the Sentence Execution Agency
In many cases, the unreasonable decisions and requests of the Court or the Sentence Execution Agency
make the process of collateral disposal for debt recovery at the bank go to dead-lock. In case individual
customer runs away, the Court does not receive the lawsuit document or suspends the lawsuit for not
being able to find the current address of the defendant. For the corporate customer as 100% foreign
capital company, in case the legal representatives of the company runs away to their home country, the
Sentence Execution Agency requests to perform the foreign judicial authorization procedure via the
Ministry of Foreign Affairs to notify the decisions and documents of the Sentence Execution Agency to
the legal representatives of the company. In practice, this judicial authorization procedure takes long
time without any result and delay the auction process many years.
c. Unfeasible asset disposal via non-litigation process
The Joint Circular No 16/2014/TTLT-BTP-BTNMT-NHNN dated on 06/6/2014 between Ministry of
Justice, Ministry of Natural Resource and Environment, SBV allows the Bank to take the collateral into
custody and dispose for debt recovery without the mortgagor's agreement. However, because there is
not active support from the police department and the local authorities for the bank to take the
collateral into custody, the implementation of the Joint Circular 16 is not feasible.
FOREIGN INVESTOR GROUP therefore would like to propose some recommendations as follows:
- Shorten the time of the Court and the Sentence Execution Agency process;
- In case the individual borrower or the legal representative of the corporate borrower run away,
the Court can open the hearing in the absence of the borrower and it is not necessary to perform the
foreign judicial authorization procedure;
- SBV should cooperate with the relevant authorities to elaborate a clear and detailed legal
framework regulating the cooperation between the police department, the local authorities, the
relevant authorities and the Bank to support actively the Bank in taking the collateral into custody and
disposing the collateral for debt recovery without the mortgagor's agreement or cooperation.
Solving these difficulties and obstacles shall improve the efficiency of bad debt settlement task in all
banking system.
SECTION B - REVIEW OF PENDING AND LONG OUTSTANDING ISSUES
The foreign investor respectfully recommends that SBV reviews and provides its guidance on the
following matters raised previously.
1. Anti-Money Laundering (AML)
The foreign investor is delighted that Circular 31/2014/TT-NHNN, revising Circular 35/2014/TT-NHNN on
anti-money laundering was released on Nov. 11, 2014, in which many FOREIGN INVESTOR GROUP's
recommendations have been accepted. There are, however, several points in the Circular 31 revising
Circular 35, and Decree 116 that are in fact very hard or impossible to implement. So the FOREIGN
INVESTOR GROUP would hereby update SBV of the following information:
KYC activity
a. Collect identification information on branches or same group foreign associated companies
using the banking services or bank accounts opening in Vietnam.
Regarding the cases of subsidiary(ies) or other foreign affiliates of the same corporate structure (eg. a
bank branch in country X) being customers of the bank in Vietnam, due that these branches / affiliates
share structure, executive management and internal policies which is similar to the bank in Vietnam and
being managed/supervised by the same Group, from risk-based approach, we propose to have a
deviation for customer identification/KYC.

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b. Implementation of group's internal procedures on customer identification
As financial Institutions setup Relationship Management Application (RMA); or companies those have
normal international trade payments, there's no regular banking transactional movements. According to
internal regulations of the group, the bank has implemented minimal KYC measures such as:
- With regards to LC advising, LC confirmation, Collection, Guarantee, Discount, issuing bank must
have existing relationship with the bank group when the bank in Vietnam plays the Confirming Bank or
Discounting Bank role.
- Company names, Legal Rep, Authorized Signers have been screened against applicable
sanctions or local lists prior to transaction processing or as and when there is update/change of the
applicable sanctions or local lists.
- Verify customer name and address via business registration or reconcile with information
provided by other bank, in financial report or their official business website.
- Other Compliance checks will be done for example: Anti-Boy-Cott, AML red flags or other
independent check.
- Closely monitoring the transaction frequency for more stringent control.
- With regards to the Supplier Financing Program, companies those are buyers must be existing
clients of the bank in Vietnam which means all necessary customer identification have been done.
Financing for Suppliers (Sellers) is to support for the Companies (Buyers).
Therefore, we suggest SBV to allow the FBBs and 100% foreign capital banks apply internal simplified
procedures.
2. Decree 96/2014/ND-CP on Civil penalization in relation to monetary and banking practices
Decree 96/2014/ND-CP on Administrative sanctions in relation to monetary and banking violations does
not provide the mechanism of applying alleviation when banks have self-identified the breaches,
conducted necessary preventive measures and reported to SBV. This may prevent the banks from self-
improving their internal control system. Decree 96 also does not distinguish whether these breaches are
systematic or isolated then applying relevant alleviative or strict measures to tackle this. We suggest
that SBV should work with Government to consider amending Decree 96.
3. Reimbursement of interest subsidy
Over the last years, banks have been waiting for the reimbursement of 20% of due interest subsidies
under the interest rate support initiative that ended in 2009. Following our previous meetings with SBV
in late 2012, we note that the figures has been checked and finalized for a number of FOREIGN
INVESTOR GROUP members. We also understand that this is a complicated matter that may have
bearings on the public funding balance sheet and national financial health. However since the unpaid
accumulated reimbursements are presenting themselves as a problem with the banks in relation to
their internal accounting systems and audited financial statements, the foreign investor would
appreciate if SBV wraps this up and starts releasing this interest rate refund as soon as possible.
CONCLUSION
Many of the issues and comments mentioned in this paper come from a clear and urgent drive by the
State Bank of Vietnam to create a better governed more transparent banking system. We are moving
steadily and progressively to this aim and there is increasing confidence that we are moving in the right
direction. As noted in the beginning, we believe that Vietnam can shortly begin work on other aspects of
developing the financial markets, so that Vietnam has a solid and robust financial sector for future
growth.
The FOREIGN INVESTOR GROUP remains committed to help in any way possible in furthering Vietnam's
financial market development to serve the needs of our customers and the nation.

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Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com; if you
have any questions or want to know more details on the above. Oliver Massmann is the General
Director of Duane Morris Vietnam LLC.