Foreign bankers have plenty to chew over

Tomaso Andreatta

Under Vietnam’s amended Law on Credit Institutions effective from January 1, 2011, a foreign bank branch’s lending to a single customer is capped at 15 per cent of the branch’s equity instead of the equity of its overseas head office. What will be the impacts of this rule?

The State Bank has removed restrictions on foreign branches’ dong denominated mobilisation, but has taken back more than it gave by taking away the possibility of doing dollar business in large volumes. Foreign banks can still extend loans in dollars in large volumes but offshore, which is subject to withholding tax.

Large banks that are committed to Vietnam have already started to adapt the capital of their branches to the new needs. This is the case for Sumitomo Mitsubishi Banking Corporation, which has brought capital into its two branches from $15 million each to $165 million in Ho Chi Minh City and to $335 million in Hanoi. Not all banks will follow the same example, though, and some will be discouraged from opening their first branch.

So supposing this is a short-term policy for reducing the global offer of dollars inside the country, the policy is rational though foreign banks don’t like it. But if the rule persists for long term, it may dump a little bit foreign business here.

Almost all of the 48 foreign bank branches in Vietnam have chartered capital of $15-20 million. This means their maximum lending to a single customer is only $2-3 million. What is the most viable way for foreign investors seeking to borrow tens or hundreds of millions  of US dollars, given that most of them often relied on their home-country relationship bank branches to source capital?

Sometimes with a branch you’re forced to do marginal business because you have to keep it busy. Many good international banks still do not have a branch here, but support the Vietnamese economy through offshore loans in foreign currencies, especially in trade and project financing. And they may introduce their customers to a good local bank, sometimes offering a guarantee to help the local bank give credit to a newly established presence here. Look at Piaggio’s successful investment, which was originally financed by a loan from a bank overseas and was then refinanced locally by the International Finance Corporation (IFC) and a local branch of an international bank.

Have you, as a banker, seen foreign investors disheartened about making direct investments in Vietnam given intensive macroeconomic concerns?

Foreign direct investors, who placed $11 billion in new money here last year to make productive investments, are not deterred by high inflation or the devaluation of the dong, especially if they are producing for export. If they export, neither the devaluation of the dong nor any other turmoil in the economy is a problem for them. The only problem is high interest rates if they are financed by local banks. But most foreign companies are not leveraged by local banks, thus they are not hurt by this situation.

I believe we won’t see another devaluation soon because the previous one was big enough to rebalance things to some extent. The currency situation is not as tense as before and that will certainly help exports. So, this is definitely a step in the right direction.

Inflation is caused by too much demand for the goods available. So demand has to slow down a little bit. If the growth of Vietnam slows to 6 per cent, it is not a drama. There won’t be unemployed people on the streets.

Also, Vietnam has an advantage over China. It is getting ever more expensive to produce in China and increasingly difficult from the point of view of the authorities being choosy about what type of investment they want. Vietnam still welcomes a lot of productive investment, especially quality technology investment, and this type of company is still coming to Vietnam. We have investors from Europe today in Vietnam looking around industrial zones and places where they want to locate their factories.