SBV to tighten non-core investment by banks

                                                                 Photo: Duc Anh

New circular aimed at strengthening transparency and risk management.

The State Bank of Vietnam (SBV) is drafting a new circular to tighten regulations on non-banking investment activities by banks in an attempt to improve financial sector transparency and risk management.

Three levels of risk classification will be adopted for three forms of investment: subordinate company, joint venture, and commercial investment, according to the working group on the circular.

Under the Law on Financial Institutions 2010, banks must invest in non-core business activities through a separate entity to reduce risks.

Several securities firms and insurance companies has therefore been opened with major or full ownership by banks, such as Vietcombank Securities (VCBS), fully owned by Vietcombank, and BIDV Insurance Company (BIC), in which BIDV holds 51 per cent.

In the subordinate company form, banks can own more than 50 per cent of a non-banking financial institution, while the joint venture form allows banks to own from 11 to 50 per cent of non-banking financial institutions, with commercial investment being less than 11 per cent ownership.

“Of the three forms, commercial investment is the most risky,” according to the SBV. “Commercial investment is mostly in other business activities, not banking and finance, which bears greater risk, especially investments in non-listed companies.” The SBV will therefore discourage banks from investing in this form. 

Ten conditions have been set in the new circular for banks who wish to make commercial investments, including the bank having earning profit for three consecutive years, bad debts being under 3 per cent, and sufficient risk provision in place, as regulated by law. Moreover, the invested units must have functions that relate to and support the bank’s operating activities.

For the joint venture form, the SBV said that in some cases the investee bank is unable to have the right to make crucial decisions on operations and risk supervision. As the ownership structure is more complex in the joint venture form, the invested financial institution may be manipulated by other investors, so the level of risk in joint ventures must be considered higher than the subordinate company form.

Current regulations still make risk assessments easy for banks when investing in a joint venture. In particular, the capital the bank can invest in the joint venture is not directly deducted from its Tier 1 capital when calculating its capital adequacy ratio (CAR), under existing Circular No. 36.

In the new circular the SVB will set stricter conditions for joint ventures compared to the subordinate form in terms of management, operations, and the experience of the financial institution.

by Hung Nguyen / vneconomictimes