Equity hunt on to help FDI aims

Scores of FDI projects are capital hungry

The central bank last week announced its approval of Huanan Commercial Bank, Deutsche Bank AG and Overseas  Chinese Banking Corporation to raise their registered capital in the country.

Of which, Huanan Commercial Bank branch in Ho Chi Minh City will increase its registered capital from $15 million to $65 million, Deutsche Bank AG Ho Chi Minh City branch from $24 million to $50.08 million and OCBC Ho Chi Minh City branch from $19 million to $25 million.

Last month, Chinatrust Commercial Bank was permitted to increase chartered capital from $15 million to $50 million. The Ho Chi Minh City and Hanoi branches of the Mizuho Corporate Bank were also allowed to increase chartered capital from $15 million to $133.5 million.

The increase means that foreign bank branches can expand the credit scale to a single customer, under the new Law on Credit Institutions.

The law, took effect on January 1, 2011, regulates a foreign bank branch and a locally incorporated bank will no longer provide loan to  a single customer exceeding 15 per cent of its own equity.

The regulation aims to control banking system risks, but the lending limit means foreign investors will have trouble finding funds for foreign direct investment (FDI) projects in Vietnam.

Thomas Tobin, chief executive officer of HSBC Vietnam, said foreign banks needed to raise equity in Vietnam to operate effectively and conform to the Law on Credit Institutions.

Brett Krause, Citi country officer for Vietnam, agreed that raising equity was a way of coping with the lending limit regulation.

“For foreign banks that do not have large capital bases in Vietnam, the new single lending limit will likely be a material constraint,” said Krause.

He said for the market as a whole, domestic financing would remained important for many companies and projects and the new limitations would make it harder for foreign banks to support Vietnam’s growth.

Currently, Vietnam is home to 51 foreign bank branches.

Foreign-owned banks and foreign bank branches are major lenders to foreign direct investment (FDI) projects in Vietnam, where foreign investors have committed to pump nearly $200 billion in. Last year, $11 billion of FDI flowed into Vietnam and the government also expects to lure at least $11 billion this year.

The lending limit will not impact on existing projects and companies that already have funding arrangements in place, but it may make it increasingly difficult for new projects to arrange financing.

The challenge will be for new and sizable foreign direct investments where companies would previously had simply relied on their home-country relationship banks to support their expansion into Vietnam.  “If those banks are now unable to lend sufficient amounts, the investors will need to turn to other, often more costly alternatives,” said Krause.

He added for many international banks simply bringing fresh capital to Vietnam was not likely to be an easy equation or viable option. “Bank capital is a scarce resource that should get allocated to the most profitable markets, on a risk-adjusted basis,” said Krause.

For Citibank, Krause said, the bank branch did not plan to raise equity in Vietnam at this moment. But the bank had submitted procedures to State Bank for establishing a locally incorporated bank in Vietnam, that should has equity at least VND3 trillion ($145 million).