High level changes due to new laws on credit institutions (2)

High level changes from the new Laws on Credit Institutions (effective Jan 2011) (LCI) Definition of credit institutions  According to LCI, foreign branch branches are no longer defined as credit institutions Therefore new regulations must mention FBB if they are to be applied to FBB Definition of credit provision  LCI defines the provision of credit facilities to include loans, guarantee, factoring, discount & other types of credit facilities Factoring is now defined as a form of credit provision “Discount” is more broadly defined to cover the purchase of valuable papers and transferable instruments; and discount is with recourse and for a period of time  Lending restrictions towards Parent Bank:    Lending restrictions towards Executives & related parties   VL & BGL are not allowed to provide credit facilities to Parent Bank (Article 126) (Refer definition of Credit facilities above) VL & BGL are not allowed to provide credit facilities to customers based on any kind of loan security provided by the Parent Bank VL & BGL are not allowed to provide any kind of loan security to other credit institutions to provide credit facilities to Parent Bank VL is not allowed to provide credit facilities to members of Board of Directors, Board of Controllers, CEO and Deputy CEO and equivalent executives This prohibition is applied to parents, spouse, children of these persons BGL is not allowed to provide credit facilities to BGL CEO and Deputy CEO and equivalent executives This prohibition is applied to parents, spouse, children of these persons Other lending restrictions  VL & BGL is not allowed to provide credit facilities on preferential conditions or unsecured for the following persons: (i) external auditors/audit company, inspector, (ii) chief accountant of VL & BGL, (iii) major shareholder/owner, (iv) credit appraiser and credit approver and (v) the bank’s subsidiaries Total credit exposure to (i, ii, iii, iv) must not exceed 5% the bank’s equity Single customer credit exposure (SCCE)  must not exceed 15% of VL or BGL’s equity (not on Parent Bank’s equity) Single customer credit exposure for a customer and its related parties must not exceed 25% of VL or BGL’s equity (changed from 50%) SCCE excludes entrustment lending and borrowings from other credit institutions       Use of Capital    SCCE includes investment in corporate bonds issued by customers Special approval for SCCE excess must be obtained from Prime Minister of VN and total not exceeding times of the bank’s equity Note: Credit exposure means exposures for loan, discount, finance lease, factoring, guarantee and other types of credit facilities and investment in corporate bonds This is new definition Previously Circular 13 only regulate Total Loan Exposure (15%) and Total loan and guarantee exposure (25%) for a single borrower; Total Loan Exposure (50%) and Total Loan and Guarantee Exposure (60%) for a group of related parties VL can use its charter capital & reserves to make capital contribution to establish or buy a subsidiary, an affiliate operating in the following areas: (i) securities (securities issuance underwriting, trader, distribution of funds units, securities portfolio management and stock trading); (ii) finance leasing, (iii) insurance VL can buy shares or contribute capital in enterprises working in insurance, stock, remittance, foreign exchange, gold, factoring, card issuance, consumer lending, payment intermediary, credit information Total investment should not exceed 11% of that enterprise’s chartered capital Total capital used for capital contribution or share purchase in an enterprise or its subsidiaries/affiliates must not exceed 40% of the bank’s charter capital & reserves Charter capital  Must maintain net value of charter capital or granted capital (for foreign bank branches) equal to regulatory capital as minimum Prudential ratios  Apart from the existing ratios (liquidity ratio, capital adequacy ratio, maximum use of short term funding to extend medium and long term loans, FX/gold position as compared to equity, Loan/Deposit ratio), the new law introduces the ratio of medium & long term Deposit/medium & long term Loan 10 Trading of properties  It is not allowed, except for (i) the case of buying, investing and owning properties for the purpose of its own office building, (ii) leasing part of its owned building, (iii) properties held from mortgage security enforcement 11 License withdrawal New conditions introduced e.g violation of compulsory reserve requirements, breach of prudential ratios compliance, dissolution of parent bank  12 Special supervision Banks can be put under special supervision by SBV if falling into one of following scenarios  Liquidity issues (demonstrated via consecutive times of non-compliance to liquidity ratios)  Uncollected bad debts (bad debts >= 10% total loan exposure or >= 100% equity within consecutive months)  Accumulated loss greater than 50% charter capital & reserves  Min CAR ratio not maintained within year or less than 4% within consecutive months  years ranked by SBV as poor performance 13 Policies  internal policies must be in place and approved by the Board of Directors e.g risk management policies, credit policies, loan classification and provisioning policy, capital adequacy compliance policy, liquidity management policy, internal control and internal audit policy, credit rating policy, KYC & AML policy, crisis management policy 14 Reporting to SBV  Within 180 days from financial year end, audited financial statements of Parent Bank must be submitted to SBV Reporting is required to SBV on changes in organisation structure, corporate governance, financial situation and other changes which seriously impact the business and operations of the bank  15 Information confidentiality  CIs must not disclose information relating to account, deposit, assets and transactions of customers to other parties unless as required by competent authorities or consented by customers 16 Back up site  CIs must build its back up site to ensure business safety and continuity 17 Licensing  Apart from commercial banking activities, banks are allowed to offer services in advisory including corporate finance advisory, M&A advisory and investment advisory; trading government bonds and corporate bonds; monetary broker services Need to apply to SBV if these activities are not mentioned in the bank’s license  18 Corporate governance  A number of new requirements on corporate governance e.g term of Board, qualifications of Board members, conditions for Board members, non-executive directors requirements, independent & resident full time controllers, qualifications/conditions of CEO and executives, rights & responsibilities of Owners, Board members and executives, etc ... required to SBV on changes in organisation structure, corporate governance, financial situation and other changes which seriously impact the business and operations of the bank  15 Information confidentiality... Board, qualifications of Board members, conditions for Board members, non-executive directors requirements, independent & resident full time controllers, qualifications/conditions of CEO and executives,... lease, factoring, guarantee and other types of credit facilities and investment in corporate bonds This is new definition Previously Circular 13 only regulate Total Loan Exposure (15%) and Total