Phung Khac Ke
Deputy Governor, State Bank of Vietnam

Since the launching of a comprehensive reform in the six Congress of the Communist Party of Vietnam to shift from central planned economy to the socialist-oriented market one, Vietnam has consistently renovated its direction and policies to develop multi-sector economy, with the private sector being increasingly promoted.

By the end of 1999, the Enterprise Law was enacted by the National Assembly of Vietnam (coming into force as of 1st January 2000), in place of the Private Enterprise Law and the Company Law. This was viewed as a breakthrough in changing the economic thinking, meeting the requirement of the private sector's development. Along with other laws, namely the Law on Domestic Investment Encouragement, the Law on Credit Institutions, the Law on State Bank of Vietnam, the Trade Law, the Customer Law ... a system of laws and regulations has created a smoother and more favorable legal framework to gradually develop a level-playing for all economic sectors.

The Ninth National Party Congress of the Communist Party of Vietnam decided to pursue a consistent policy of developing a multi-sector economy with the State sector taking the leading role; and the State and collective sectors increasingly becoming the solid foundation of the national economy. On this basis, the Fifth Party Central Committee Plenum worked out the specific tasks to implement the ninth Congress’ Resolution on developing the private sector: that is to assess the real situation to determine the orientation and important measures, aimed at facilitating the development of individual business households, and encouraging the extensive development of private enterprises in production and business trades and industries not forbidden by law according in the spirit of the ninth Party Congress’ Resolution.

Since the adoption of the renovation, particularly since the issuance of the Law on Domestic Investment Encouragement and the Law on Enterprises, the private sector has been encouraged to develop. In recent years, total output of the private sector constantly grew with the average annual rate of 7% in the 1996-2000 period; Contribution of the private sector to GDP ranged from 27-29%. In two years (2000-2001) the newly registered enterprises numbered more than 35 thousand, equal to the total number of enterprises registered during 9 years from 1991-1999, and more than 300 thousand new individual business households were registered; the total capital to increase to investment and expand new business scale and areas amounted to about 55,500 billion VND (approximately USD 4 billion); and business trades and industries were diversified; the development of the private sector in the two-year period resulted in the creation of about 750.000 new jobs, hence providing employment for about one third (1/3) of the annual increase of labor force in the economy.

the Banking industry in the process of developing the private sector

In May 1990, the President of the Socialist Republic of Vietnam promulgated the Decree Law on the State Bank of Vietnam and the Decree Law on Credit Institutions to meet the requirement of renovating the banking credit operations and to adapt to the international integration and market mechanism, these two ordinances were upgraded into laws in October 1998. The State Bank of Vietnam, through the management of the monetary policy has contributed to creating a stable macro-economic environment. In addition, various mechanisms and policies have been issued and implemented by the State Bank of Vietnam in order to create a smooth and open legal framework for all economic sectors to access to banking resources with the aim of expanding investment and developing production and business.

1. Managing Monetary Policy and stabilizing macro-economic environment to expand investment and develop production and business.

• The Management of monetary policies has been gradually shifted from direct instruments toward indirect ones, in line with state-regulated market mechanism: In the past, the direct and administrative management of the monetary policy brought about poor effect, but in 5 recent years, the monetary policy instruments have been implemented toward gradually reducing the utilization of direct instruments, and step by step turning to indirect ones: Exchange rate is basically formulated by market forces (exchange rate band was expanded); and Marketizing the interest rate and credit mechanism, phasing out the trading band of interest rate. Up to now interest rates of both VND and foreign currencies were already liberalized; Such other instruments as Open Market Operations, foreign and domestic currency inter-bank markets have gradually been perfected in order to become the active suppiers of resources to credit institutions.



• Stabilizing the macro-economic environment: Through the flexible management of monetary policy, the State Bank of Vietnam has put inflation under control, thus contributing to create a stable macro-economic environment, promoting investment and encouraging production of all economic sectors. In 1998, when the inflation rate reached a high level (9%), the State Bank of Vietnam implemented a tight monetary policy to ease the inflation pressure, while in 1999 and 2000 inflation rates were relatively low at 0.1% and 0.6%, respectively, the State Bank of Vietnam had to consistently pursued an expansionary monetary policy aiming at investment promotion. As a result, in 2001 and 2002 inflation rates were up by 0.8% and 4%, accordingly.

2. Renovating and perfecting mechanisms and policies to expand lending activities:

• Fund mobilization policy: over the past 5 years, the banking sector has mobilized domestic resources by various forms and made full use of the financial support of international institutions to timely and adequately meet the capital requirement for the economic development. Regarding the domestic resources, credit institutions have actively implemented various forms of fund raising, namely issuance of bank bonds and bills with different terms, and expanded the network of fund mobilization. With the application of flexible interest rate mechanism, the banking sector has attracted considerable capital sources. For concessional sources provided by international financial institutions, in general the objectives and requirements have been met in implementing such programs and projects as SOEs reform, trade reform, PRGF.

As a result, from 2000 to 2002 fund mobilization increased by 20% on average, of which fund raising in VND and in foreign currencies grew by 25% and more than 10% per annum, respectively; fund mobilization in VND and foreign currencies from the public accounted for 30% and 60%, respectively. With the above growth rate of fund mobilization, the banking sector could be able to timely and sufficiently provide capital to all economic sectors, including the private one.

• Renovating credit policy and mechanism: the mechanism and policy on lending and loan securiy were issued by the Government and the State Bank of Vietnam; up to now, credit mechanism and policy promulgated by the Government and the State bank of Vietnam have proved to be relatively consistant with the state-regulated market economy.

Credit mechanism (including regulations on lending, loan security and interest rate) has gradually provided the equal treatment to all economic sectors with no discrimination between state and private enterprises in terms of lending conditions, scale of loans, terms and interest rate of lending, measures on loan security as well as other provisions related to credit operations.

• Regarding the lending regulation: Since 1998 the lending regulation has changed 3 times with Regulation No 1627 issued on 31 December 2001 as the latest. With this changes, regulation governing the lending activities has been perfected to conform to market mechanism and unify with other related regulations. The latest lending regulation (Regulation No 1627) only stipulates the overall legal framework for all economic sectors in borrowing, regardless of their nature. In addition, this regulation is modified toward giving more autonomy to credit institutions in making lending decision, with the aim to create favorable conditions for economic sectors, including the private one to access to banking loans.
• Regarding the mechanism of loan security: mechanism of loan security has been issued and amended in accordance with market conditions and international practices. This was regarded as a fundamental change without any different treatment between economic sectors, in consistance with the relevant legal documens, thus creating a legal framework for more effective sound and safe bank credit operations. Loan security measures are stipulated in conformity with reality of domestic investment, production, business and livelihood.
• Apart from general mechanism, more favorable regulations are applied to private sector, in conformity with particuliarities of the private sector. In some cases, loans provided to the private sector require no morgage, such as a single loan of less than 10 million VND for a farmer household, a single loans of less than 20 million VND for a farm owner household and a single loan of less than 50 million VND for a private marintime breed enterpreneur. On 24 February, 2003 the State bank of Vietnam issued regulation increasing the size of non-mortgaged loans to farmer households, farm owners, and co-operatives.

Interest rate mechanism: since 1998 interest rate has been managed toward marketizing interest rate and credit sources, and enhancing the autonomy of credit institutions in setting their deposit and lending rates in conformity with market forces.

During the 1998-July 2000 period, only deposit rate was liberalized, while lending rate with the ceiling was applied for both rural and urban areas; from August 2000 to May 2001 the ceiling rate was replaced by prime rate. With that in mind credit institutions were allowed to set up their lending rates, not higher than prime rate plus a trading band, quoted by the State Bank of Vietnam. However, this mechanism was no much different from the ceilling rate since it remained subject to the maximum lending rate.

Since June 2001, apart from liberalization of deposit rate, lending rate in foreign currencies has officially been liberalized, and since June 2002, lending rate in VND has also been liberalized.

3. Access the private sector to bank credit:

The promulgation of the Law on Credit Institutions allowed diversification of credit institutions operating in Vietnam. On this ground, joint stock commercial banks, foreign banks and joint venture banks have been established to meet capital demands of those clients with no acees to SOCBs. Furthermore, the fact that SOCBs became universal banks also enhanced accessibility of private sector to bank financing. Competition among banks increased overtime as a result of diversification. Besides SOEs, efficient private enterprises, particularly those having foreign currency income from export, were also considered as a target for competition by a number of banks. As a result, joint stock companies and limited liability companies have increasingly been accessible to bank financing.

In the 2000-2002 period, loan outstanding of the whole banking system recorded fairly high growth with the average rate exceeding 20% annually. In that context, private sector lending also experienced continuous expansion with substantial increase in its ratio over total credit to the economy from 55% in 2000 to 58% in 2001 and 62% in 2002. Emphasis was given to credit to the rural and agricultural sector, the share of which rose from 24% in 1998 to 29% in 2002.

4. Problems and constraints of the private sector in accessing bank capital:

• The biggest difficulty of this sector is weak financial capability. Assets that can be used as loan security are small compared with capital demand, and many of them are imperfect in legal title;
• Production is small in size, piecemeal, dispersed, with backward technogoly, low productivity, poor quality and weak competitiveness in the market environment, therefore vulnerable to impacts of the economy;
• Due to limited capacity and competency of the management, private enterprises tend to lack directions and strategies for long-term and stable development and face troubles in preparing projects for borrowing;
• Regulations on accounting, auditing, and taxation have not been complied with strictly. A lot of enterprises do not have permanent address, making it difficult to assess financial conditions of enterprises in doing loan appraisal;
• Therefore, while credit quality of the private sector has been improved in recent years, its over due loans are still numerous compared with that of the whole economy.

5. Directions for the banking sector in the coming time:

In the coming time the State Bank of Vietnam will continue to implement the monetary policy by using monetary instruments in a flexible and efficient manner under market principles, in order to ensure macroeconomic stability, control inflation, promote production and consumption, stimulate development investment; gradually improve towards full convertibility of Vietnamese Dong; establish a transparent and sound environment and level playing field for monetary - banking activities; diversify forms of mobilizing, lending, banking services and facilities to all enterprises and population, thereby meeting timely the demand for capital in production, business and life, with emphasis on agriculture and rural areas.

5.1. Improvement of mechanism for capital mobilization

The State Bank of Vietnam will continue issuing regulations which set principles and create favorable conditions for credit institutions to have autonomy in forms of mobilization, interest rates etc., so that they can raise funds to meet credit demands while ensuring profitability and safety of operations;

• Increase interest rate of foreign currency deposits of credit institutions and the State Treasury at the SBV in order to compensate part of the costs incurred by commercial banks, thereby increasing foreign currency resources (which commenced in December 2002);
• As for foreign bank branches: SBV will consider relaxation of restrictions on demand and time VND deposit taking from Vietnamese individuals and legal entities without credit relations with the bank to 50% of its chartered capital. The ease of this restriction will create favorable environment and increase contribution by these foreign bank branches to the Vietnamese economy and is an inevitable trend in the integration process.
• Commercial banks should promote the diversification of funds raising products both in Vietnamese Dong and foreign currencies, introduction of bonus such as lottery savings, installment savings etc; dissemination and advertisement of banking facilities; improvement of service quality in parallel with modernization of banking technology aimed at mobilizing to the most extent resources of the public, particularly long-term one.
• The Bank for Agriculture and Rural Development amd the Bank for Social Policies should introduce small size fund raising in combination with lending through mobile banks so as to enhance outreach to poor and low income households.

5.2. Credit expansion solutions:

• Credit institutions have the autonomy to select and decide on lending without security to individuals and organizations in accordance with Decree 85/2002/ND-CP dated 25 October 2002, Decree 178/1999/ND-CP dated 29 December 1999 and the guidelines of SBV regarding loan security.
• Credit institutions are entitled to consider, make decision and take responsibility for the increase in unsecured lending limits to certain borrowers.
• Credit institutions are allowed to continue expansion of foreign currency lending scope in the country, with forcus on lending to production projects for export, important projects of the State and unprohibited borrowers.
• Credit institutions are allowed to use raised funds to contribute to the establishment of the SMEs Credit Guarantee Fund, so as to facilitate the efficient expansion of credit to cooperatives, farm owners, and SMEs. Commercial banks cooperate with the Guarantee Funds to expand lending to SMEs, cooperatives and farm owners. If SMEs operate efficiently and have good repayment record, commercial banks may consider and decide on unsecured lending limits and take responsibility for their decisions.
• Improve the determination of amortization and interest repayment by borrowers, especially rural households in line with business and production cycle of plants and animals and the repayment capacity of households and enterprises.
• Commercial banks continue to review mechanism and policies in order to simplify lending procedures, shorten approval time while ensuring compliance with laws and regulations; improve lending procedures through the introduction of indirect credit transaction via information network and mobile banks to create every favorable condition for borrowers, particularly the rural households; publicize and meet directly with customers to promptly guide them on lending procedures, maximum time for loan approval, lending conditions and possibility applicable to seasonal and production structure shifting credit demands.
• Credit institutions take initiative in seeking, appraising and lending to feasible, efficient, and financially viable production and business projects; enhancing appraisal capacity in order to expand lending secured by assets generated from borrowed funds, creditworthy lending and massive co-financing for projects of cooperatives, SMEs and farm owners.

State Bank of Vietnam