SBV's head quarter in Ha Noi. — VNS Photo Doan Tung

HA NOI (Biz Hub)– The State Bank of Viet Nam (SBV) is drafting a circular on further tightening the non-core investment of credit institutions to strengthen transparency and risk management in the banking system.

Under the draft, the central bank classifies the capital contribution and the stake purchase of credit institutions into three groups based on their levels of risk. The classification is in accordance with Viet Nam's legal regulations and international rules.

The three groups are subsidiary company, joint venture and commercial investment.

According to the current legal regulations, including the Law on Financial Institutions 2010, banks must invest in non-core business activities such as securities, insurance, consumer finance and payment intermediation through a separate entity to reduce risks.

In the subsidiary company form, banks can own more than 50 per cent of a non-banking financial institution, while the joint venture form allows banks to own from 11 to 50 per cent of non-banking financial institutions, with commercial investment being less than 11 per cent ownership.

According to the drafting board, of the three forms, commercial investment is the most risky since it is mostly in other business activities, not banking and finance, which bear greater risk, especially investments in non-listed companies.

The SBV, therefore, discourage banks from taking part in commercial investment, the board said.

Under the draft circular, 10 conditions must be fulfilled by banks who wish to make commercial investments, such as the bank must have earned profit for three consecutive years, bad debts are under three per cent and sufficient risk provision is in place, as regulated by law. Moreover, the invested units must have functions that relate to and support the bank's operating activities.

For the joint venture form, the SBV said in some cases the investee bank is unable to secure the right to make crucial decisions on operations and risk supervision. As the ownership structure is more complex in the joint venture form, the invested financial institution may be manipulated by other investors, so the level of risk in joint ventures must be considered higher than the subordinate company form.

Current regulations still make risk assessment easy for banks when investing in a joint venture, so that under the new circular, the central bank will set stricter conditions for joint ventures compared with the subsidiary form in terms of management, operations and the experience of the financial institution. — VNS