Analyzing the current operation of commercial banking system and non bank financial institutions in vietnam

PART 1: VIETNAMESE COMMERCIAL BANKS In Viet Nam, commercial banking system is usually regulated by The State Bank of Vietnam SBV.. State-run commercial banks include: &x: Vietnam Bank fo

ANALYZING THE CURRENT OPERATION OF COMMERCIAL BANKING

SYSTEM AND NON-BANK FINANCIAL INSTITUTIONS IN VIETNAM

Bui Doan Khanh Linh Dinh Le Phuong Khanh Nguyen Quynh Nhu Truong Dang Anh Tram

Da Nang, November 8" 2024

TABLE OF CONTENTS

IV TRENDS FOR THE DEVELOPMENT:

Il SOURCES AND USES OF CAPITAL:

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PART 1: VIETNAMESE COMMERCIAL BANKS

In Viet Nam, commercial banking system is usually regulated by The State Bank of Vietnam (SBV)

Classifications:

Currently, Vietnamese commercial banks are classified as follows [2]:

a Based on ownership:

There are 5 types:

State-run commercial banks mean a commercial bank of which the State owns more than 50% of the charter capital

State-run commercial banks include:

&x: Vietnam Bank for Agriculture and Rural Development - Agribank, Global Petro Sole Member Limited Commercial Bank, Ocean Commercial One Member Limited Liability Bank, (Construction Commercial One Member Limited Liability Bank)

owned by the State

Ex: BIDV (Bank for Investment and Development of Vietnam), VietinBank, and Vietcombank

Joint-stock commercial banks: means a commercial bank organized in the form

of a joint-stock company

Ex: Techcombank, VPBank, OCB and ACB

Joint-venture commercial banks (Ngdn hang thuong mai liên doanh): means a commercial bank established in Vietnam with capital contributed by a Vietnamese party (consisting of one or more than one Vietnamese bank) and a foreign party (consisting of one or more than one foreign bank) under a joint-venture contract Ex: Indovina Bank Limited - IVB, Vietnam- Russia Joint Venture Bank - VRB, Vinasiam Bank - VSB, Vid Public Bank — VID

Wholly foreign-owned commercial banks (Ngdn hàng thương mại 100% vốn nudc ngodi): means a commercial bank established in Vietnam with 100% of its charter capital owned by foreign parties, including a foreign bank owning more than 50% of the charter capital (the holding bank)

Ex: HSBC (Hongkong - Shanghai Bank Vietnam Limited), SCBVL (Standard Chartered Bank (Vietnam) Limited), and ANZ (Australia and New Zealand Bank Group Limited)

Foreign branch bank: A bank established with 100% foreign capital under foreign law and permitted to operate in Vietnam

Ex: Citibank, Bangkok Bank, Shinhan Bank, Deutsche Bank

b Based on business strategy:

There are 3 types:

Wholesale banking: wholesale, transactions and providing services to financial companies or large enterprises

Retail banking: transactions, providing services to individual customers Mixed banking (both wholesale and retail): specializes in transactions and providing services to corporate and individual customers

c Based on the nature of operations:

There are 2 types:

Specialized bank: is a type of bank that only operates in a certain field such as agriculture, import-export, investment, etc

General business bank: is a type of bank that operates in all economic fields and performs almost all arising operations that a bank is allowed to perform according

to the provisions of law

In addition, there are many other types of banks such as: investment banks, development banks, cooperative banks, policy banks, etc

Nowadays, commercial banks in Vietnam are developing strongly with a wide range of financial services, including:

Thrift or saving function — Taking the surplus funds as deposits from individuals and institutions in the economy

Credit function — Providing principal source of credit for households, for most local units of government and for businesses

Payments function — Carrying out payments for goods and services on behalf of their customers

- Other functions:

business firm and to invest any temporary cash surpluses in interest-bearing assets until cash is needed to pay bills

customers For example, banks sell credit life insurance to their customers receiving loans, guaranteeing repayment if borrowers die or become disabled

individual stocks, bonds, and other securities without having to go to a security dealer

debts when those customers are unable to pay

acquisitions of other companies, dealing in a customer’s securities (1.e, new security underwriting), providing strategic marketing advice, and offering hedging services to protect their customers against risk from fluctuating world currency prices and changing interest rates

Ill RISKS IN BANKING OPERATION:

Commercial banks face several types of risks in their operations, which can impact their profitability, liquidity, and overall stability Below are the key nsks associated with commercial banking operations: [3]

1 Maturity risk (liquidity risk):

The risk that a bank will not be able to meet its short-term obligations due to a lack of available cash or liquid assets

2 Credit risk:

Credit risk is the biggest risk for banks It occurs when borrowers or counterparties fail to meet contractual obligations, leading to loan defaults

3 Interest rate risk:

Commercial banks must bear the risk and loss due to the difference in market interest rate fluctuations that can increase or decrease because the interest rate of commercial banks is formed on the basis of market interest rates, so it always fluctuates Or the decrease in the value of money at the time of lending will lead to a situation where the lending interest rate remains unchanged but the actual interest rate will decrease Therefore, the actual value of the interest/capital that the bank initially spends is higher than the capital received That risk causes the bank's business to suffer losses

4 Operational Risk:

Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading

5 Market Risk:

Market risk mostly occurs from a bank’s activities in capital markets It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading

The digital transformation of Vietnam’s banking sector is one of the most significant developments in recent years With a young, tech-savvy population and increasing internet and smartphone penetration, digital banking is now a core focus for commercial banks Through the assessment of the digital transformation process, it shows that: 95% of Vietnamese digital banks have, are building or plan to build a digital transformation strategy; about 80 banks are implementing Internet banking services, 44 banks are providing Mobile Banking services, about 20 banks are officially implementing the process of opening payment accounts by electronic means, many organizations provide payment intermediary services and QR payment

Additionally, partnerships with fintech companies are accelerating innovation By

technologies such as AI, big data, and blockchain to enhance customer experience, streamline operations, and offer more personalized services [4]

Developing retail banking services is in line with the inevitable trend in the operations

of commercial banks in the region, in the world in general and of Vietnamese commercial banks in particular Because expanding services to target groups of individual customers and small and medium enterprises helps banks diversify products, expand markets, manage risks more effectively, thereby helping banks achieve optimal business efficiency [5]

Currently, multi-channel banking is known for popular transaction channels such as: Internet Banking, Mobile Banking, transaction counters, ATMs and is applied by most Vietnamese banks However, these transaction channels still have many limitations when they are completely separate, not synchronized so that customers can optimize their experience, as well as perform seamless transactions on many different channels Omnichannel Banking - a form of banking that combines a multi-connected ecosystem, throughout and seamlessly across all customer interactions, will address these limitations of multichannel banking This model can also be expanded to many

connection protocols such as: social networking platforms, affiliate partners All are integrated in a single ecosystem, one touch right on the banking application, the user's transaction is completed [6]

PART 2: INSURANCE COMPANIES IN VIETNAM

2

a

Classifications:

Life insurance companies:

Offer products such as term life and whole life insurance, aimed at protecting individuals and their dependents from economic risks like premature death, poor health, or extended life spans

Life insurance companies offer:

Term life insurance

Whole life insurance

Source of funds:

Premiums

Provision of annuity plans

Capital: built by retaining earning and issuing new stock

Mortgages: all types of mortgages including one to four family, multifamily, commercial, and farm related

Policy loans: life insurance companies lend a small portion of their funds to whole life policyholders (called policy loans)

b Property and Casualty insurance companies:

Protect against fire, theft, liability, and other events causing economic or noneconomic damage These companies handle shorter-term policies compared to life insurance

« Premiums

more liquid to pay out on unexpected losses

universal life msurance, periodic payment insurance, retirement insurance, investment-linked insurance

insurance, aviation insurance, motor vehicle insurance, fire and explosion insurance, ship hull and civil liability of shipowners, liability insurance, credit and financial risk insurance, business interruption insurance, agricultural insurance

health care insurance

and requires both employees and employers to participate The benefits under

accidents, occupational diseases, retirement, and survivorship

¢ Voluntary Social Insurance: Participants can choose the contribution level and payment method that suits their income and financial situation The benefits under voluntary social insurance include retirement and survivorship Ill TRENDS FOR DEVELOPMENT:

Insurtech: Emerging as a strong trend in the development of health insurance products

in the Southeast Asian market, including Vietnam, insurtech enables seamless integration of insurance products with the purchasing process across various platforms, including e-commerce, fintech, and logistics

Digital Transformation: Insurance companies are accelerating their digital transformation, from digitizing operational processes to building digital platforms for customer interaction [8]

Artificial Intelligence (AD: AI is widely applied in activities such as:

companies

Climate Insurance: The insurance industry is focusing on managing financial losses caused by climate change, such as damage to agriculture or infrastructure, through climate insurance products [9]

Blockchain: Blockchain technology is applied to securely and transparently store insurance information, helping reduce fraud and increase customer trust

Zero-code platforms for product development: Zero-code platforms allow insurance companies to quickly develop and deploy new products across multiple channels without the need for complex coding

Expanding Distribution Channels:

Online Sales Channels: Insurance companies are increasingly focusing on developing online sales channels to reach younger customers

Partnerships with Distribution Partners: Insurance companies are expanding their distribution network through partnerships with banks, agents, and other

partners

PART 3: PENSION FUNDS IN VIETNAM

Voluntary pension plan: Vietnamese citizens aged 15 years or older and who are not subject to contribution to the compulsory pension fund can participate in this voluntary pension regime

Supplementary pension plan: employers and employees, individual employees and individuals aged 15 years and over who are not working under an employment contract can participate in this voluntary supplementary plan This plan was introduced in 2016 and is managed by voluntary pension fund management companies The fact that employers and employees participate in this plan 1s not common in practice

SOURCES AND USES OF CAPITAL:

Private pension funds:

Sources of funds: premiums from the employers and employees, investment income

Uses of funds:

backed securities

Public pension funds:

Sources of funds: premiums from the employers and employees, investment income

Uses of funds:

¢ Invest in government securities, financial instruments issued by government- owned commercial banks

Ill SCOPE OF PARTICIPANTS:

IV

Employees: Workers can participate through employer-sponsored retirement plans, such as 401(k)s or pensions, often involving both employee and employer contributions

Individuals aged 15 and above: Those who are at least 15 years old can independently enroll in retirement savings plans, such as voluntary pension schemes, without needing to rely on their employer This flexibility allows younger individuals or those not currently employed to begin accumulating retirement savings

Retirees and Beneficiaries: Individuals who have retired may continue to receive distributions from defined benefit plans, and beneficiaries named in retirement accounts can also be considered participants [12]

SHORTCOMINGS IN THE CURRENT OPERATION:

Low Coverage Rate: Around 30-40% of the workforce participates in social insurance, leaving a large portion, especially in the informal sector, without financial plans for old age

Insufficient Contributions: Contributions are often too low to guarantee stable retirement income, which may result in retirees relying on family support or living near poverty levels

Lack of Information: Many workers lack sufficient knowledge about their rights and responsibilities in pension funds, leading to low or inadequate participation and limited retirement benefits

Management Issues: Some pension funds face management challenges, resulting

in lower-than-expected returns, which impacts their ability to meet future obligations, particularly as living costs rise

Regulatory Gaps: Incomplete legal frameworks make it difficult to protect workers’ rights Current regulations may lack the strictness needed to prevent fraud and ensure fund transparency

Impact of Inflation: Inflation erodes the real value of pension benefits If returns don’t keep up, retirees may struggle to maintain their standard of living

Challenges from an Aging Population: Vietnam’s rapidly aging population increases pressure on the pension system, with a growing number of retirees and fewer contributors [13]

There are several notable deficiencies in the current functioning of pension funds in Vietnam: [14]