The State Bank put a freeze on the establishment of new commercial banks back in August 2008 due to a proliferation of new banks. Since then, only three banks have been licensed - Bao Viet Bank, Lien Viet Bank and Tien Phong Bank - each backed by a powerful corporate shareholder.

The new circular, when issued next year, would likely coincide with a lifting of that freeze, while also tightening the rules for creating a new bank.

Tran Du Lich, senior economist and former head of the HCM City Economic Research Institute, told Viet Nam News that he agreed with tightening the conditions on establishing a commercial bank.

"Viet Nam has more banks than any country in the region, and many are not really strong enough to survive," Lich said. "It's micro-credit institutions, not banks, that should be opened to reach more areas and industries. The banking business is much more complicated and requires highly strict conditions for the sake of security."

In the past two years, some banks have indicated their fragile capacity during a series of interest rate wars that have pushed them into insolvency, requiring them to seek help from other banks on the interbank market, Lich added.

"It's very difficult to say how tight the criteria or-how many banks are enough," Sacombank general director Tran Xuan Huy commented to Viet Nam News. "I think the new criteria were designed to implement Viet Nam's commitments to the World Trade Organisation and not just to manage the banking market."

Under the current draft of the circular, each new bank would be required to have at least three institutional founding shareholders. The founding shareholders would be required to together own at least 50 per cent of the bank's charter capital, and the institutional founding shareholders would be required to hold at least 50 per cent of the total capital held by all founding shareholders.

Within the first five years of the new bank's establishment, founding shareholders would be restricted from transferring common shares, except to other founding shareholders. Preferred shares of founding shareholders would be convertible to common shares three years after the establishment of the bank.

The new circular would also tighten the rules on what institutions or persons could serve as founding shareholders of a new joint stock bank.

Under the proposed regulation, an existing bank with at least VND50 trillion (US$2.63 billion) in assets and a bad debt ratio of less than 2 per cent could serve as a founding shareholder for a new joint-stock bank.

State-owned enterprises seeking to establish a new bank must obtain approval from the Prime Minister. Such enterprises must also have at least VND500 billion ($26.31 million) in equity and have been profitable for at least five consecutive years.

Under the circular, founding shareholders and their relatives would be banned from establishing more than one bank. An institution which holds 10 per cent of the charter capital of an existing bank would also not be permitted to set up a new bank.

The State Bank of Viet Nam is collecting public comment on the proposed circular, and the public can contribute ideas on the central bank's official website.

State Bank Governor Nguyen Van Giau said that amending the circular was a normal thing to do every five years as new economic conditions are reviewed.

Viet Nam currently has 39 joint stock commercial banks, two partly-equitised State-owned banks, four State-owned banks, five joint venture banks, five wholly foreign-invested banks, 45 branches of 33 foreign banks, eight foreign-invested non-banking credit institutions, and 56 representative offices of foreign banks.

Source: VietNamNet/Viet Nam News