Business
Vietnam banks tend to secure overseas long-term loan facilities
Cross-border lending serves as an effective alternative source to supplement banks’ mid- and long-term funding.
In recent years, the trend of securing long-term loan facilities from international financial organizations has become more popular amongst Vietnamese banks, according to Viet Dragon Securities Corporation (VDSC).
More banks have been upgraded by international rating agencies such as Moody’s or Fitch. The positive ratings, according to Fitch, considers the Vietnamese banking system's enhanced operating environment, with improved economic policies and authorities promote a stable and predictable macroeconomic environment.
These favorable conditions have contributed significantly to Vietnamese banks’ chances to get into more loan facility deals with international financial organizations, stated VDSC.
From international financial organizations’ side, cross-border loans are to support their own development objectives. Funding from these organizations is usually for lending that has strong social economics benefits, including promoting private sector, financial inclusion and access to credit of the country’s SMEs. This objectives is in line with the retail and SME banking strategy of most banks, those who are trying to approach these segments.
For example, the loans given by ADB and IFC were focusing on serving the unsolved borrowing need of SMEs and households. For SMEs, the long-term fund is becoming more important since Vietnam wants to become a manufacturing and trade center in South East Asia.
From local banks’ side, overseas borrowing can help banks to enhance liquidity and provide flexibility within their capital structures. To cope with stricter funding regulations by the State Bank of Vietnam (SBV), commercial banks have to borrow for medium and long-term capital. In the context of limited domestic funds and foreign ownership in Vietnamese banks, especially those who are already close to the limit, mobilizing funds from overseas can help them to tap into wider overseas and usually, lower cost funding sources.
Mobilizing from overseas also help banks to satisfy the regulations regarding the ratio of short-term fund used for long term lending in circular No.16 issued by the SBV. Accordingly, this ratio was to be reduced to 45% by January 2018 and to 40% by January 2019. To improve the ratio, banks can retain earnings or issue long-term bonds. Funds borrowed from international financial organizations is an effective way to mobilize long tenure, which supplements banks’ mid and long-term funding and improve the above-mentioned ratio.
Another benefit is that a long-term loan can contribute to improve a bank’s capital adequacy ratio (CAR). SBV's circular No.41, one of the regulation documents for Basel 2 criteria, stipulates that banks and branches of foreign banks must regularly maintain the CAR determined based on their financial statements of at least 8%. The circular will take effect as of January 1, 2020.
In addition, banks need to maintain a stable funding source in foreign currencies while meeting the need of foreign currency borrowing from customers.
Finally yet importantly, the engagement in overseas loan facility also have positive impacts on the long-term outlook of the local banking sector. The fact that some international financial organizations and others are funding some local banks would reinforce these banks’ reputation, creditworthiness and position not only in Vietnam but also in global markets. Once securing a loan facility agreement, banks also have more chances for stable long-term funding from those international financial organizations.
To win the deal, banks will need to prove that their operational capacity and development potential meet the high expectations of the lenders. The negotiation process and procedure might also take long as there is often no precedents for local banks. In addition, the fact that there are different laws in each country and different regulatory requirement could also slow down the negotiation and implementation of these cross border financial transactions.
Once getting the loan, the borrowing banks will need to deal with exchange rate fluctuations. In some cases, the funding source is designated to be used for certain lending purposes, leading to difficulties in loan disbursement.
These favorable conditions have contributed significantly to Vietnamese banks’ chances to get into more loan facility deals with international financial organizations, stated VDSC.
From international financial organizations’ side, cross-border loans are to support their own development objectives. Funding from these organizations is usually for lending that has strong social economics benefits, including promoting private sector, financial inclusion and access to credit of the country’s SMEs. This objectives is in line with the retail and SME banking strategy of most banks, those who are trying to approach these segments.
For example, the loans given by ADB and IFC were focusing on serving the unsolved borrowing need of SMEs and households. For SMEs, the long-term fund is becoming more important since Vietnam wants to become a manufacturing and trade center in South East Asia.
From local banks’ side, overseas borrowing can help banks to enhance liquidity and provide flexibility within their capital structures. To cope with stricter funding regulations by the State Bank of Vietnam (SBV), commercial banks have to borrow for medium and long-term capital. In the context of limited domestic funds and foreign ownership in Vietnamese banks, especially those who are already close to the limit, mobilizing funds from overseas can help them to tap into wider overseas and usually, lower cost funding sources.
Mobilizing from overseas also help banks to satisfy the regulations regarding the ratio of short-term fund used for long term lending in circular No.16 issued by the SBV. Accordingly, this ratio was to be reduced to 45% by January 2018 and to 40% by January 2019. To improve the ratio, banks can retain earnings or issue long-term bonds. Funds borrowed from international financial organizations is an effective way to mobilize long tenure, which supplements banks’ mid and long-term funding and improve the above-mentioned ratio.
Another benefit is that a long-term loan can contribute to improve a bank’s capital adequacy ratio (CAR). SBV's circular No.41, one of the regulation documents for Basel 2 criteria, stipulates that banks and branches of foreign banks must regularly maintain the CAR determined based on their financial statements of at least 8%. The circular will take effect as of January 1, 2020.
In addition, banks need to maintain a stable funding source in foreign currencies while meeting the need of foreign currency borrowing from customers.
Finally yet importantly, the engagement in overseas loan facility also have positive impacts on the long-term outlook of the local banking sector. The fact that some international financial organizations and others are funding some local banks would reinforce these banks’ reputation, creditworthiness and position not only in Vietnam but also in global markets. Once securing a loan facility agreement, banks also have more chances for stable long-term funding from those international financial organizations.
To win the deal, banks will need to prove that their operational capacity and development potential meet the high expectations of the lenders. The negotiation process and procedure might also take long as there is often no precedents for local banks. In addition, the fact that there are different laws in each country and different regulatory requirement could also slow down the negotiation and implementation of these cross border financial transactions.
Once getting the loan, the borrowing banks will need to deal with exchange rate fluctuations. In some cases, the funding source is designated to be used for certain lending purposes, leading to difficulties in loan disbursement.
