CIRCULAR

PROVIDING FOR PRUDENTIAL RATIOS IN OPERATION OF SMALL SCALED FINANCIAL INSTITUTIONS

OF GOVERNOR OF THE STATE BANK OF VIETNAM

-         Pursuant to the Law on the State Bank of Vietnam No. 01/1997/QH10 issued in 1997 and the Law on the amendment, supplement of several Articles of the Law on the State Bank of Vietnam No. 10/2003/QH11 issued in 2003;

-         Pursuant to the Law on the Credit Institutions No. 02/1997/QH10 issued in 1997 and the Law on the amendment, supplement of several Articles of the Law on the Credit Institutions No. 20/2004/QH11 issued in 2004;

-         Pursuant to the Decree No.178/2007/ND-CP dated 03/12/2007 of the Government providing for the functions, duties, authorities and organizational structure of the Ministries, Ministerial level agencies;

-         Pursuant to the Decree No. 28/2005/ND-CP dated 09/03/2005 on the organization and operation of small scaled financial institutions operating in Vietnam and the Decree No.165/2007/ND-CP dated 15/11/2007 on the amendment, supplement, abrogation of several articles of the Decree No.28/2005/ND-CP,

          The State Bank of Vietnam (hereinafter referred to as the State Bank) hereby provides for prudential ratios in operation of small scaled financial institutions as follows:

Chapter I. general provisions

Article 1. Governing scope and subjects of application

1. Small scaled financial institutions operating in Vietnam shall be required to maintain prudential ratios in accordance with provisions of this Circular, including:

a. The minimum capital adequacy ratio;

b. The lending limit to customer

c. The liquidity ratio.

2. Based on inspection, examination result of the State Bank Inspectorate on the operational performance of small-scaled financial institutions, the State Bank may request small scaled financial institutions to maintain prudential ratios, which are higher than ratios stipulated in Article 4 and Article 7 of this Circulation.

Article 2. Interpretation

In this Circulation, following terms shall be construed as follows:

1. The total risk adjusted “Assets” shall be the total value of “Assets” of small scaled financial institution which is adjusted to the risk level provided for in Article 5 of this Circular.

2. Claims are on-balance sheet “Assets” formed from deposits, loans and from the performance of other operational activities under the guidance of the State Bank.

3. Immovable assets of the borrower are lands to which the borrower has the legal use right; houses, construction works tied to land and other immovable assets in accordance with provisions of applicable laws under the ownership of the borrower. In the event where immovable asset has been leased by the borrower, the use of asset as a pledged asset must be agreed by the lessee during the lease term.

4. A single customer is a legal entity, an individual, a family household, a cooperative group, a private enterprise, a partnership company, or other organizations that have credit relationship with a small scaled financial institution.

5. A group of related customers includes two ore more customers who have credit relationship with a small-scaled financial institution and have mutual credit relationship, belonging to one of following cases:

5.1. An individual customer who owns at least 25% of charter capital of another legal entity, which is being a customer of a small scaled financial institution;

5.2. An individual customer who is a member of the family household in accordance with provisions of the Civil Code, which is being a customer of the small scaled financial institution or other individuals of which (including individuals who are independent subjects, taking self liability with their own asset) are also being customers of the small scaled financial institution.

5.3. An individual customer who is a member of a cooperative group in accordance with provisions in the Civil Code, while such cooperative group is a customer of the small scaled financial institution.

5.4. An individual customer who is a partner of a partnership company, which is a customer of the small scaled financial institution.

5.5. An individual customer who is an owner of a private enterprise, which is a customer of the small scaled financial institution.

5.6. An individual customer who is a member of the administrative, executive and controlling mechanism of a legal entity which is being a customer of the small scaled financial institution.

5.7. A legal entity customer who owns at least 50% of charter capital of another legal entity which is being a customer of the small scaled financial institution.

5.8. A legal entity customer who is being a customer of the small scaled financial institution, meanwhile the representative of which is a member in the administrative, executive and controlling mechanism of another legal entity, which is also a customer of the small scaled financial institution.

6. Total loans outstanding shall include the entire balance of current loans and overdue loans of small scaled financial institutions.

7. Undistributed profit shall be the profit, which is determined through auditing by an independent auditing institution after the tax payment and setting up of funds have been completed in accordance with provisions of applicable laws and retained for the small scaled financial institution’s capital supplement in accordance with provisions of applicable laws.

Chapter II. specific provisions

Article 3. Own capital

1. Own capital of a small- scaled financial institution shall include:

1.1. Tier 1 capital:

a. Charter capital;

b. Capital officially financed, without refund, by organizations, individuals to small-scaled financial institutions;

c. Funds as provided for by the Ministry of Finance (Including: reserve fund for supplement of the charter capital; financial provisions fund; fund for the operational investment and development);

d. Undistributed profits.

The Tier 1 capital shall be used as the basis for the determination of the limit on purchase of, investment in fixed assets of the small scaled financial institution.

1.2. Tier 2 capital:

a. 50% of the increased value of fixed assets, which are revaluated under provisions of applicable laws;

b. Debt of the small scaled financial institution which satisfy following conditions:

- Being the debt, of which the creditor is subordinate to other creditors, specifically: in any case, such creditor shall only be paid after the small scaled financial institution has completely made payment to all other secured and unsecured creditors;

- Its initial term is more than 10 years at the minimum;

- It is not secured by asset of the very small-scaled financial institution;

- The small scaled financial institution is entitled to stop the interest payment and carry over accumulated interests to the following year, if the interest payment results in the loss in the current year’s business activity;

- The small-scaled financial institution is only entitled to repay its debt to the creditor prior to the maturity after obtaining the written approval from the State Bank.

- The increase of interest rate shall only be made after 5 years from the signing of the contract and for one time only during the loan term.

c. General provisions (reserves), which are equal to 1.25% of the total risk adjusted Assets at the maximum.

2. Limitation on the determination of tier 2 capital:

2.1. Total value of the tier 2 capital shall be 100% value of the tier 1 capital at the maximum.

2.2. Total value of debts stipulated in point 1.2.b Paragraph 1 of this Article shall be equal to 50% value of the tier 1 capital at the maximum.

2.3.  During the last 5 years prior to the maturity date, debts included into the tier 2 capital shall be annually deducted by 20% from the initial value.

3. Amounts to be deducted from the own capital:

3.1. The entire decreased value of fixed assets due to revaluation in accordance with provisions of applicable laws.

3.2. Business losses, including accumulated losses.

Article 4. Minimum capital adequacy ratio

1. Small scaled financial institution must maintain a minimum ratio of 10% of the own capital over the total risk adjusted Assets.

2. The way to determine the minimum capital adequacy ratio is guided in Appendix A attached to this Circular.

Article 5. Classification of Assets

Assets are classified by risk levels as follows:

1. The group of Assets with risk coefficient of 0% includes:

1.1. Cash;

1.2. Deposits at the State Bank;

1.3. Loans from funds financed, entrusted for lending under trust contracts, by which, the small scaled financial institution only enjoys trust fees and shall not be subject to any risk;

1.4. Loans secured by 100% of deposit (voluntary savings and/or compulsory savings) at the very small scaled financial institution;

1.5. Outstanding principal and interest of the loan which is secured by compulsory savings at the very small scale financial institution;

1.6. Claims from Vietnam Government, including: Government bond (Treasury bills, Treasury bonds, bonds for Central Government’s projects, investment bonds, Government bond for construction of Motherland), bonds guaranteed by the Government;

1.7. Loans secured by valuable papers which are issued by the Government, State Bank.

2. The group of Assets with the risk coefficient of 20%, includes:

2.1. Deposits at domestic commercial banks, credit institutions;

2.2. Loans outstanding (principals, interests) to credit institutions, other small scaled financial institutions (if any);

2.3. Loans outstanding (principals, interests) to be secured by deposits at credit institutions, which are operating in Vietnam;

2.4. Loans outstanding (principals, interests) to be secured by valuable papers, which are issued by credit institutions operating in Vietnam, state-owned financial institutions;

2.5. Cash, which is in collection process.

3. The group of Assets with the risk coefficient of 50%, includes

3.1. Loans outstanding (principals, interests) to be secured by immovable assets of the borrower;

3.2. Small scaled credit outstanding (principals, interests) to small-scaled financial customers with loan term of less than 1 year.

4. The group of Assets with the risk coefficient of 100%, includes:

4.1. Immovable assets and other fixed assets;

4.2. Other claims other than those stipulated in Paragraphs 1, 2 and 3 of this Article.

Article 6. Internal regulations

1. Pursuant to provisions of this Circular, current provisions of the State Bank and actual performance, the small scaled financial institution shall draw up and issue internal regulations on:

1.1. The determination and classification of a single customer, a group of related customers, lending limits applicable to a single customer and a group of related customers, including following contents:

a. Criteria for determining, classifying a single customer and a group of related customers shall be implemented in accordance with provisions in Paragraph 4 and Paragraph 5 in Article 2 of this Circular.

b. Determination of lending limits applicable to a single customer and a group of related customer; competence to decide lending to a single customer and a group of related customer.

c. Determination of the manner of following up loans exceeding 5% of own capital of the small scaled financial institution.

d. Limit, maximum lending ratio in total loan outstanding to small scaled financial customers and those other than small-scaled financial customers.

1.2. Management of the liquidity with following main contents:

a. Assigning an officer who is in charge of supervising the liquidity of small-scaled financial institutions.

b. Implementation plans to secure the liquidity in case of temporary default as well as in case of potential insolvency.

c. Regulations on the management of budget, receipts, expenses, daily capital source and provisions on holding valuable papers which are freely convertible into cash.

2. Board of Directors of small-scaled financial institutions shall be responsible for the consideration, assessment of internal regulations as stated in Paragraph 1 of this Article for timely adjustment in necessary cases in order to ensure the prudential activities of small-scaled financial institutions.

Article 7. Lending limit to customer

1. Lending limit of a small scaled financial institution to its customer shall be as follows:

1.1. Total loans outstanding of the small scaled financial institution to a single customer, who is not a small scaled financial institution, shall not exceed 10% of the small scaled financial institution’s own capital.

1.2. Total loans outstanding of the small scaled financial institution to a small scaled financial institution shall not exceed VND 30 million. This loan level may be adjusted from time to time by the Governor of the State Bank.

1.3. Total loans outstanding of the small scaled financial institution to a group of related customers as stated in Paragraph 5 Article 2 of this Circular shall not exceed 15% of the small scaled financial institution’s own capital, in which, the lending limit to a single customer shall not exceed the ratios provided for in Points 1.1 and 1.2 in Paragraph 1 of this Article.

2. Limits stipulated in Paragraph 1 of this Article shall not be applicable to following cases:

2.1. Loans from entrusted funds of Vietnam Government, of organizations, individuals against which the small scaled financial institution is not required to make and use provisions for dealing with credit risks.

2.2. Loans secured entirely by deposits of the customer at the very small scale financial institution.

2.3. Loans to credit institutions, other small scaled financial institutions with the term of less than 1 year (if any).

2.4. Loans secured by Vietnamese Government’s bonds, bonds guaranteed by the Vietnam Government.

Article 8. Liquidity ratio

The small- scaled financial institution must regularly maintain the minimum liquidity ratio of 20%.

2. This ratio shall be calculated as follows:

2.1. Numerator: includes assets as cash and assets which are easily convertible into cash, specifically as follows:

a. Cash;

b. Deposits at the State Bank (excluding required reserve deposit);

c. Deposits at credit institutions;

d. Government bonds, bonds guaranteed by the Government.

2.2. Denominator: Total deposits, including compulsory savings and voluntary savings.

3. The way to determine liquidity is guided in Appendix B attached to this Circular.

Article 9. Reporting, dealing with violations

1. Small scaled financial institutions shall make report on their implementation of provisions on prudential ratios in accordance with current provisions of the Governor of the State Bank on the statistic reporting regime applicable to small scaled financial institutions.

2. Any small scaled financial institution which violates provisions of this Circular, depending on the seriousness of the violation, shall be subject to administrative punishment in line with provisions of applicable laws.

Chapter III. implementing provisions

Article 10. Implementation effectiveness

This Circular shall be effective after 45 days since its signing date.

Article 11. Responsibility of implementation

The Director of the Administrative Department, the Director of the Banks and Non-banking Credit Institutions Department, Heads of related units of the State Bank, General Managers of State Bank branches in provinces and cities under the central Government’s management, Chairman of the Board of Directors and General Directors  (Directors) of small scaled financial institutions shall be responsible for the implementation of this Circular.

In the implementation, any query that may arise should be timely reflected to the State Bank for instruction and settlement.

Appendix A: the way to DETERMINe the minimum

capital adequacy ratio

A. The own capital for the determination of the minimum capital adequacy ratio of the small scaled financial institution (SSFI) A as of 31/3/2008:

As of 31/3/2008, state of capital and assets of the SSFI A is as follows:

1. Tier 1 capital:

Unit: VND billion

2. Tier 2 capital:

Unit: VND billion

Note:

- Total debts are VND 3 billion, equaling 6.4% of tier 1 capital (less than 50% of tier 1 capital), satisfying requirements stated in item b, point 1.2, Article 3 of this Circular.

The own capital (A) of the SSFI A as of 31/3/2008 = Tier 1 capital + tier 2 capital

= VND 47 billion + VND 4.1 billion  = VND 51.1 billion

3. Amounts to be deducted from own capital:

- Decreased value of fixed assets due to revaluation in accordance with provisions of applicable laws: 0

- Business losses, including accumulated losses: VND 0 billion.

Own capital (A) for calculation of prudential ratios of SSFI A = Own capital – amounts deductible

A = VND 51.1 billion – VND 0 billion = VND 51.1 billion

B. Value of risk-adjusted Assets on balance sheet (B)

Unit: VND billion

C. Minimum capital adequacy ratio

C          = (A/B)*100%

                        = (51.1/254)*100% = 20.118%

Appendix B. the way to Determine liquidity ratio

Unit: VND billion