Local companies with acceptable credit risk, (including major private enterprises and State-Owned Enterprises (SOEs), have been able to obtain credit facilities, including import finance from foreign banks (SOE access to credit has been restricted following the default of a major SOE in December 2010, however). For these importers, confirmation of L/Cs opened by their foreign bank may not be required and faster payment can be expected.

 In the past, most Vietnamese companies have requested deferred payment L/Cs, with extensions of up to 360 and even 540 days. Most lenders have stopped this practice until the banking system’s liquidity status improves. At present, sight L/Cs and L/Cs up to 60, 90 or 120 days" are most common.

In years past, exporters had to ensure that Vietnamese banks opening L/Cs were located in Hanoi or Ho Chi Minh City, because they found a general lack of expertise in dealing with L/Cs at Vietnamese bank branches situated outside of these principal commercial centers. Most local banks have solved this issue by establishing two to three customer service centers to take care of L/Cs open at all bank branches, in an effort to provide customers with equivalent services. Care should also be taken as to which bank will open the L/C.

 Foreign banks have greater capacity, but costs will be lower if the L/C is opened by one of the four state-owned banks or thirty-eight private joint stock commercial banks. Costs will be higher if a foreign bank confirms the L/C, but L/C confirmation will shift risk from the Vietnamese bank and account party to a foreign bank, which can be a high quality risk. After establishing a commercial relationship with and the financial credibility of a local importer, foreign exporters have offered goods against less restrictive forms of payment, including consignment, but this can be risky.

In 2006, the Government changed a regulation that required Vietnamese companies to deposit 80 percent of the L/C value prior to its opening at the bank. Banks now collect the deposits from companies based on creditworthiness. This deposit can range from 0­100 percent.

How does the Banking System Operate

The opening of Vietnam’s economy has placed new demands on a financial sector that until the early 1990s operated largely in isolation from international standards and practices. Vietnam is making progress in developing the basic infrastructure to support a modern banking system and financial markets, but neither meets international standards.

The central bank, the State Bank of Vietnam (SBV), is the main financial regulatory agency. The SBV supervises two policy banks (the Social Policy Bank of Vietnam and the Vietnam Development Bank), four state-owned commercial banks (SOCBs) Vietinbank, BIDV, Agribank and the Housing Bank of Mekong Delta), 38 joint-stock (private) banks, five joint-venture banks, 53 representative offices of foreign banks, 33 branches of foreign banks, 15 financial companies and 13 financial leasing companies. The SBV is not an independent body like the U.S. Federal Reserve and it continues to operate under government oversight. Despite the 2010 passage of the new State Bank Law, which nominally expands SBV independence, in some key areas of operation, such as the provision of liquidity support, monetary policy, the management of foreign currency reserves and foreign exchange rates and issuance of banking licenses, SBV actions are subject to prime ministerial approval.

The Vietnam Bankers Association (VNBA) was founded in 1994 as the trade association for banks and acts as a link to the authorities, including: disseminating and implementing policies, mechanisms and laws on banking operations to its members; protecting the interests of the members; conducting training and research; and expanding international banking co-operation. VNBA’s authority over its members is limited.

The International Monetary Fund, the World Bank, and other international donors, including the United States, are assisting Vietnam to implement financial reforms to ensure the stability and promote the effectiveness of the banking system and the financial sector. The reform programs focus on three main areas: restructuring of joint- stock banks; restructuring and equitization of the SOCBs; and improving the regulatory framework and enhancing transparency. Other ongoing projects aim to modernize the interbank market, create an international accounting system and allow outside audits of major Vietnamese banks. The SBV is in the process of strengthening its own internal processes and enhancing the level of inspection and supervision of the banks within its jurisdiction. The SBV is also preparing regulations to implement the Basel capital accord in calculating risk-adjusted assets and risk-adjusted capital ratios. Increasingly, more SOCBs are audited by independent auditing firms.

The GVN requires all banks to establish controlling committees and institute internal audit functions. In practice, prudent banking practices are not always followed. According to SBV estimates, sector-wide non-performing loans (NPLs) increased to 2.8 percent of system-wide loans at end-2010 (2008: 2.1 percent; 2009: 2.5 percent) and sector-wide special-mention loans (SMLs) were about 11 percent. However, the true level of non-performing and under-performing loans is difficult to gauge, as there is a very low level of transparency and disclosure in Vietnam's banking sector. Secrecy laws cover much of the banking industry's data and meaningful information on individual financial institutions is not readily available. Some analysts estimate that NPLs in Vietnam’s banking system could actually account for 15-20 percent of outstanding loans.

In 2007, the SBV introduced rules for classification of non-performing loans, which conform to international standards. It also allowed banks to accelerate loan terms and gave them more discretion in setting penalty interest rates on overdue debts. As of December 2008, all financial institutions had instituted internal credit rating and risk assessment mechanisms.

Vietnam’s banking system is very weakly capitalized, with the market highly concentrated at the top and fragmented at the bottom. As required by SBV regulations, small banks are now in the process of raising additional charter capital to meet the increased minimum capital requirement of VND 3 trillion (USD 167 million), now due by the end of 2011, having been extended one year from the earlier deadline because of bank difficulties in reaching the increased capital target.

The GVN has said it intends to partially privatize ("equitize") all SOCBs in the future, but such plans continue to move slowly, having already passed earlier target dates for full equitization. The banking equitization process would allow foreigners to buy shares but cap foreign equity at 30 percent. These restrictions will be lifted in 2012 (five years after WTO accession). The first pilot initial public offering (IPO), Vietcombank's, took place in December 2007 after years of delays. Vietinbank conducted an IPO in December 2008. Both banks plan to list on Vietnam’s stock market. Theyhave not yet identified a strategic investor due to unresolved obstacles in IPO pricing and the state remains the controlling shareholder.

Joint-stock banks have been more successful at raising private capital, selling part of their equity to foreign investors (mainly investment funds or financial institutions) or issuing convertible bonds or additional shares. The joint stock banks are on average much smaller than the SOCBs, but they are more efficiently operated and professionally managed. The non-performing loans of these banks are widely believed to be lower than those of SOCBs.

Domestic banks can take dollar deposits. Foreign banks can also take dollar deposits, provided that the foreign bank is properly licensed. The previous cap on Vietnamese dong (VND) deposits with foreign banks was lifted effective January 1, 2011. Residents and non-residents can open and maintain foreign exchange accounts with authorized banks in Vietnam.

In 2008, the State Bank of Vietnam for the first time granted licenses to wholly foreign- owned banks: HSBC, Standard Chartered Bank, ANZ, Hong Leong and Shinhan Vina. The current ceiling for a single foreign strategic shareholder in a local joint stock bank is set at 20 percent of the total charter capital; total foreign holdings in a local joint stock bank may not exceed 30 percent.

Although the banking sector remains small, banking networks and services have been expanding rapidly and there is great potential for banks to develop the retail banking business (approximately 75 percent of Vietnam’s 86 million people have never accessed banking services while the remaining 25 percent have not taken full advantage of banking services.) In 2008, the GVN began paying its Hanoi and Ho Chi Minh City employees by direct bank deposit only, and since January 2009 all government employees nationwide (including provincial staff) are paid in this way. Since 2000, banks have been required to insure all dong deposits. The maximum insured amount is VND50 million (nearly $3,000) per account or individual per bank. The effectiveness of deposit insurance has not been tested. Vietnamese banks do not have Bank for International Settlement (BIS) tier ratings.

Foreign-Exchange Controls

Conversion of Vietnamese dong into hard currency no longer requires foreign exchange approval and Vietnam has not had a foreign exchange surrender requirement since 2003. The Law on Investment allows foreign investors to purchase foreign currency at authorized banks to finance current and capital transactions and other permitted transactions. The availability of foreign exchange has been an intermittent problem since the middle of 2008, continuing through 2010, largely because of an outflow of private portfolio investments.

Foreign businesses are allowed to remit in hard currency all profits, shared revenues from joint ventures, and income from legally-owned capital, properties, services and technology transfers. Foreigners also are allowed to remit royalties and fees paid for the supply of technologies and services, principal and interest on loans obtained for business operations and investment capital and other money and assets under their legitimate ownership.

In principle, most foreign investors are expected to be “self-sufficient” for their foreign exchange requirements, although this sometimes proves impractical. The GVN guarantees foreign currency for certain types of foreign investors in the event that banks permitted to trade foreign currency are unable to fully satisfy their foreign currency demand.

Project Financing

In principle, state-owned banks could provide export financing to foreign firms operating in Vietnam, but in reality such financing is more likely to come from joint-stock banks or the branches of foreign banks in Hanoi or Ho Chi Minh City. Many foreign firms finance such exports internally.

When dealing with importers or financing originating in Vietnam, foreign suppliers should request irrevocable letters of credit (L/Cs). They should have one of their correspondent banks confirm the L/Cs. Foreign banks tend to deal for trade financing only with the three state-owned banks (Vietinbank, BARD and BIDV) and major joint-stock banks (Vietcombank, ACB, EXIM Bank, Maritime Bank, SACOM Bank and Techcombank).

Project Financing: Vietnam secures a substantial portion of its development funding from Official Development Assistance (ODA), including from the multilateral development banks (primarily the World Bank (WB) and Asian Development Bank (ADB)), the Japanese Bank for International Cooperation (JBIC), and the United Nations Development Program (UNDP). American firms can participate in projects funded by these agencies.

The World Bank maintains a relatively large funding program for Vietnam. Projects focus on macro-economic policy, financing policies, and infrastructure projects in the power, energy, transportation and environmental sectors. Procurements for World Bank funded projects are conducted using competitive bidding procedures.

The Asian Development Bank (ADB) provides the largest development funding for investment projects concentrating in power, transportation, fishing, agriculture and the environment. Tenders are also conducted based on international bidding standards. Both the World Bank, through the International Finance Corporation (IFC), and the ADB, through its Private Sector Group, offer both debt and equity for private sector projects in a wide variety of business sectors. Financing through these agencies can have long lead times (12 months or more), so foreign firms need to apply early if they want access to support for investment projects.

The Japanese Bank for International Cooperation (JBIC) is a general untied funding agency which provides financing for infrastructure projects. American firms are eligible to compete for JBIC loan projects in accordance with procurement notices published by the recipient government or government-related agencies. Opportunities can include prime contractor and sub-contractor roles. foreign firms can also receive financing of up to 85 percent of an international trade transaction if the sale contains at least 30 percent Japanese goods.

The United Nations Development Program (UNDP) provides funding for industrial and agriculture development. UNDP is active in Vietnam across a broad range of industry and social sectors and sponsors numerous public sector, social, agricultural, and refugee assistance programs. Project tenders are conducted in the same manner as World Bank tenders.

In recent years, 12 domestic and international leasing companies have received licenses to conduct business in Vietnam. While the initial capitalization is small ($5-13 million), these companies could play a significant role as alternative financiers in the future, focusing on the leasing of capital equipment. At present, their ability to transact business is limited because credit insurance for lessors is not available in Vietnam. The lessors must therefore carefully scrutinize potential clients. There are also certain legal constraints to the ownership of leased goods.

Medium, and possibly longer-term, financing is also available from commercial banks in Vietnam, although loans are provided mostly in Vietnamese dong. Foreign investors are encouraged to approach the branches of major foreign banks, as the state banks tend to favor Vietnamese state-owned enterprises.

Another major source of project financing comes from over fifty private equity funds. These funds have been investing mostly in real estate, tourism, power, manufacturing, environment and infrastructure projects. As a result of the 2008-2009 global financial crisis, the availability of money through private equity funds has been more difficult to obtain than in the past.

Although Vietnamese banks and their regulators tend to have a strong preference for collateral, it may be possible for foreign firms to utilize parent company or third-party guarantees in seeking loans. That said, most foreign companies operating in Vietnam will not rely primarily on the local banking system for financing.

The State Bank of Vietnam (SBV) has adopted a crawling-peg foreign exchange control mechanism. In 2008, the SBV adjusted the official exchange rate (reference rate) and expanded the official trading band for dollar and dong exchange transactions several times, effectively devaluing the dong by 7.25 percent. The dong was devalued 5.4 percent in November 2009, and the trading band for dollar was then limited to 3 percent around the reference rate. The dong was devalued 3.4 percent in February 2010 and another 2 percent in August 2010. Most analysts believe further devaluation is likely in 2011. Commercial banks are allowed to determine the differential between currency selling and buying prices within the stated trading band. Slowed exports coupled with declining FDI and portfolio investments in 2010 put additional pressure on hard currency availability in general, and on dollars in particular.