On May 24th 2011, the Ministry of Finance published the draft of the new decree on financial regime applicable to credit institutions and foreign bank branches (“Draft”) for public comments and feedbacks.

This new decree is designed to replace the decree no 146/2005/ND-CP released on November 23rd 2011 regarding the same matter (“Decree 146”) in order to implement Article 136 of the Law on Credit Institutions which came into effect on January 1st 2011 (“New Law”).

This article aims to summarise, highlight and evaluate the key changes under the Draft in comparison with the Decree 146 and in the light of the New Law.

 

Scope of application

The first and foremost important change under the Draft is the expansion of the governing scope of the draft to include “foreign bank branches established, organized and operated pursuant to the [New Law]” which is indicated throughout the Draft.
This inevitable adjustment is required to implement the financial regime under the New Law since under the New Law foreign bank branches shall be governed by the laws on a “national treatment” basis. Some particular regulations however still distinguish between local credit institutions and foreign bank branches, which are mentioned below.

 

Management and Use of Capital and Assets

The Draft has introduced a slight change in the management of capital, whereby credit institutions may use not more than 50% of their charter capital and reserve fund for supplementation of charter capital for investment in construction and procurement of fixed assets (under Decree 146 the cap 50% was put on “the level one equity” which is basically of the same nature). Notably, this principle is extended to foreign bank branches (Article 6) which take into account the allocated capital and reserve fund for supplementation of allocated capital.

 

The Draft also replicate Article 129.5 of the New Law which stipulates that credit institutions shall not be permitted to purchase shares in and/or contribute capital to other enterprises and credit institutions which are the share holders or capital contributors of that credit institutions (Article 7.4).

 

A long list of required reverses for contingencies during operation as part of business operational expenses under Decree 146 will be replaced by the guidelines by the State Bank and the Ministry of Finance (Article 8.5). This guideline however is not yet in place.

 

The above changes in the Draft are consistent with the New Law which aims to avoid cross-ownership and to ensure safety of the nation’s banking system.

 

Revenue, Expense and Business results

Regarding expenses, the Draft makes an important clarification that fines on administrative violation, including violation of transportation laws, business registration regulations, accounting reporting regime, tax regulations, etc are not permitted to be accounted for as business expenses (Article 17). This is consistent with section II.2.3 of Circular 12/2006/TT-BTC dated 21 February 2006 providing guidelines for Decree 146 (Circular 12).

 

In order to reflect the new developments of social insurance regulations the Draft also adds “unemployment insurance” and “expenses for social activities pursuant to regulations” to the recognized expenses as (Article 16).

 

Profit and Establishing Funds

Chapter IV (Profit and establishing funds) contains significant changes in the Draft compared to its predecessor. Taxable income of credit institutions and foreign bank branches is now made reference to the Law on Corporate Income Tax (Article 20). All references to credit institutions (except for 100% state-owned credit institutions) are now extended to cover foreign bank branches.

 

Another new regulation of the Draft is to stipulate the deductions for setting up of the reserve fund for supplementation of credit institutions’ charter capital / foreign bank branches’ allocated capital by 5% (under Decree 146, there was no such reserve fund requirement).

 

The Draft also made a particular requirement for the distribution of the remaining profit of the credit institutions of which the State owns more than 50% charter capital, in such case the person representing the State-own capital must get a green light by the Ministry of Finance before voting at the general meeting for such a decision. This restriction is clearly aimed to protect the State interests in the credit institutions having a large portion of State-owned capital.

 

Accounting, Statistical and Auditing Regimes

While replicating the burdensome reporting requirements under Decree 146 and Circular 12 (e.g. financial plans reporting requirements, the audited financial statements being reported to both the Ministry of Finance and the State Bank of Vietnam) the Draft has made a commendable amendment on releasing the requirements for the establishment of financial plans which will now only be applied to 50%-100% State-owned credit institutions. By this change commercial banks with less than 50% capital owned by State and foreign branches shall not be obliged to prepare and report any financial plan.

 

The Draft however did not release any burden of reporting requirements under the Decree 22/2006/ND-CP dated 28 February 2006 on organization and operation of foreign bank branches, joint venture banks, 100% foreign owned banks and representative offices of foreign credit institutions in Vietnam (Decree 22) which stipulate heavy reporting obligations by foreign bank branches on the annual financial status, operation result; the M&A activities, liquidation, bankruptcy, dissolution; changes in major shareholders, Board of Directors, Executive Committee, and other extraordinary change causing major effects to organization, operation of the parent bank.

 

Responsibilities of the Board of Management, the Board of Members and the General Director (Director) of credit institutions and foreign bank branches

Under the Draft, the responsibilities of the Board of Management and the Board of Members are enhanced by adding the authority of making decision on investment projects, capital contributions or share purchases with other domestic and foreign economic organizations pursuant to law (Article 31.3).

 

The Draft provides a particular provision (Article 33) for the responsibility of the General Director (Director) of the foreign bank branches whereby he or she will in all respects be responsible for the operation of the branch and the observation of the financial regime required by laws. If the parent bank has more than one branch in Vietnam then the parent bank must delegate one General Director (Director) to be the single responsible person.

 

Examination, Inspection and Control over Financial Regime of the Credit Institutions

The last three chapters introduce welcomed changes which show great efforts of the lawmakers in distinction and separation of the power and responsibilities of the State Bank of Vietnam and the Ministry of Finance. According to the Draft, the Ministry of Finance shall examine and inspect credit institutions and foreign bank branches in their observance of the financial regime meanwhile the State Bank shall examine, inspect and supervise credit institutions, foreign bank branches and Vietnam-based representative offices of foreign credit institutions and other foreign institutions engaged in banking operations generally.

 

Conclusion

With a view to harmonise the financial regime regulations with the New Law, the draft decree on financial regime applicable to credit institutions and foreign bank branches has made essential and radical changes to its predecessor, especially the new regulations on the foreign branches to be in line with those imposed on local financial institutions. However, to avoid overlapping between the new Decree and the old regulations, it is suggested that the Draft should also address and minimize various control and reporting requirements over the operation of foreign bank branches and their parents under the old-fashioned Decree 22, which relies heavily on the expired Law on Credit Institutions.