Government mulls tightening foreign bank laws

Shinhan Bank Vietnam has 30 branches and transaction offices in Vietnam. - VNA/VNS Photo

At a recent merger and acquisition (M&A) forum, Deputy Prime Minister Vuong Dinh Hue said that in restructuring of the country’s banking industry, the Government plans not to license any more wholly foreign-owned banks in Vietnam, instead encouraging foreign banks to acquire domestic banks.

According to Hue, the Government encouraged the M&A of small-sized banks into large-sized ones as the number of banks in Vietnam is still large and a reduction is needed to enhance the governance of domestic banks.

Financial and banking expert Nguyen Tri Hieu agreed with the Government’s plan, saying that with the advantages of an extensive network and experience in the international market, foreign banks would focus not only on providing services for foreign direct investment (FDI) firms or services related to international payment, but also rapidly expanding to consumer and retail lending segments. The expansion will create stiff competition between domestic and foreign banks.

Thus, it was better to encourage foreign banks to merge with domestic peers instead of setting up branches, Hieu said, adding it could help build a healthy banking system if done well and controlled properly.

Besides not establishing more banks, M&As were also in line with the State Bank of Vietnam’s policy of reducing the number of domestic banks and increasing their competitiveness, Hieu said.

Echoing Hieu, economist Nguyen Minh Phong said if the Government allowed wholly foreign-owned banks in the country to set up easily, it would be the same as allowing massive imports of goods into the Vietnamese market without controls. As foreign banks begin to dominate the local financial market, Vietnamese banks will be increasingly vulnerable.

It would be very dangerous if foreign firms control the domestic financial system, said Phong.

Phan Minh Ngoc, director of Intelligence Service Partners (Singapore) told theleader.vn that the plan to tighten rules on new foreign banks may emerge due to the extremely large number of commercial banks.

The State would like to restructure and merge these banks to reduce the number of banks in the system.

Even though limiting the number of new wholly foreign-owned banks in Vietnam could lessen the competitiveness of the market and decrease investment efficiency, it could also increase the stability of the banking system, he said.

Fierce competition

Currently, there are more than 50 foreign credit institutions operating in Vietnam, including nine wholly foreign-owned banks.

Foreign banks in Vietnam have been expanding their transaction networks and increasing their charter capital, meaning they are willing to compete with local banks to gain market share and will continue to create fierce competition in the local financial market. Korea’s Shinhan Bank Vietnam for example established four additional branches and transaction offices in Hanoi and HCM City in May, raising its total to 30 nationwide.

Some foreign banks have expressed great ambitions in the Vietnamese market, especially in retail banking.

Phạm Hong Hai, General Director of HSBC Vietnam told Phap luat thanh pho Ho Chi Minh (HCM City Law) newspaper that his bank was focusing on retail finance and corporate finance.

“On long-term development strategy, we will promote the development of digital technology platforms that help optimise and simplify the financial life of our customers”, Hai said.

As for domestic banks, though admitting reputation, experience, management level and financial health were the competitive advantages of foreign banks, Saigon Commercial Bank’s Finance Director Hoang Minh Hoang said foreign banks could not meet high demand for credit and diverse financial products due to their small scale of operations.

Besides, domestic banks had advantages than foreign banks in better understanding the culture and tastes of domestic consumers, Hoang said, believing that foreign banks have not really pressured domestic banks though they are increasing in quantity.