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Legal regulations associated with the formation and development of financial companies in Vietnam
Posted date 01/04/2016
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Posted date 01/04/2016
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In Vietnam, finance companies (FCs) are a type of non-bank credit institution. As of December 31, 2015, Vietnam had 17 FCs with different forms of ownership. Like commercial banks (CBs) and other credit institutions (CIs), FCs in Vietnam have gone through many ups and downs and are also the subject of the restructuring process of CIs in Vietnam.
Dr. Nguyen Thi Huong Lan
Faculty of Finance and Banking, Dai Nam University
In Vietnam, finance companies (FCs) are a type of non-bank credit institution. As of December 31, 2015, Vietnam had 17 FCs with different forms of ownership. Similar to commercial banks (CBs) and other credit institutions (CIs), FCs in Vietnam have gone through many ups and downs and are also the subject of the restructuring process of credit institutions in Vietnam. Although having been present in Vietnam for nearly 2 decades, FCs are still considered a relatively new organizational model and are discussed with different views on the development direction for this type of enterprise. In the scope of the article below, the author will mention all the legal developments associated with the formation and development process of FCs in Vietnam, from which readers can visualize the organizational model and business context of FCs.
1. The early stages of formation and development of financial companies in Vietnam
Nowadays, when talking about the formation and development of credit institutions in Vietnam, people often mention 3 state-owned credit institutions established and put into operation in 1998: Postal Credit Institutions under the Vietnam Posts and Telecommunications Group established on August 7, 1998, Vietnam Textile and Garment Credit Institutions under the Vietnam Textile and Garment Group established on September 1, 1998 and Rubber Credit Institutions under the Vietnam Rubber Industry Group established on October 6, 1998. However, this is said to be since the Law on Credit Institutions 1997 was promulgated, meaning that the system of legal regulations was relatively complete.
In the first phase, Vietnam had 2 joint stock financial companies established on the basis of the Ordinance on banks, credit cooperatives and financial companies approved by the State Council on May 23, 1990. This document is considered the first legal basis for the establishment and operation of financial companies in Vietnam when the financial demand is increasing in volume and diversity of services. Therefore, commercial banks are not enough to meet the demand and have promoted the establishment of the first financial companies:
- Saigon Joint Stock Commercial Bank (SFC): Established in September 1991 with a charter capital of 42 billion VND, headquartered in Ho Chi Minh City. On May 14, 2003, SFC officially merged with Da Nang Rural Joint Stock Commercial Bank to establish Viet A Joint Stock Commercial Bank.
- Seaprodex Joint Stock Financial Company: Established in July 9, 1992 with a charter capital of 10 billion VND, also headquartered in Ho Chi Minh City. This financial company has a capital contribution from Vietnam Seafood Corporation (Seaprodex). On June 12, 2003, Seaprodex Joint Stock Financial Company was dissolved ahead of schedule based on the company's own dissolution application due to the difficult situation of Vietnam Seafood Corporation at that time.
Regarding the Ordinance on banks, credit cooperatives and financial companies, at point 4, article 1 stipulates: "Financial companies lend to buy and sell goods and services with their own capital or borrow from residents" ; Point 1, article 20 stipulates: "Financial companies operate with their own capital or borrow from residents by issuing credit notes, are not allowed to receive savings deposits from residents and are not allowed to use residents' borrowed capital as a means of payment".
The Law on Credit Institutions passed by the National Assembly on December 12, 1997 stipulates that a credit institution is a non-bank credit institution. Point 3, Article 20 stipulates:
A non-bank credit institution is a type of credit institution that is allowed to perform some banking activities as a regular business activity but is not allowed to accept demand deposits or provide payment services. Non-bank credit institutions include finance companies, financial leasing companies and other non-bank credit institutions.
For financial companies belonging to corporations, their establishment is also based on the provisions of the Law on State Enterprises dated April 30, 1995. Clause 3, Article 43 states: "Depending on the scale and important position, a state corporation may or may not have a financial company as a member enterprise."
1. The early stages of formation and development of financial companies in Vietnam
Nowadays, when talking about the formation and development of credit institutions in Vietnam, people often mention 3 state-owned credit institutions established and put into operation in 1998: Postal Credit Institutions under the Vietnam Posts and Telecommunications Group established on August 7, 1998, Vietnam Textile and Garment Credit Institutions under the Vietnam Textile and Garment Group established on September 1, 1998 and Rubber Credit Institutions under the Vietnam Rubber Industry Group established on October 6, 1998. However, this is said to be since the Law on Credit Institutions 1997 was promulgated, meaning that the system of legal regulations was relatively complete.
In the first phase, Vietnam had 2 joint stock financial companies established on the basis of the Ordinance on banks, credit cooperatives and financial companies approved by the State Council on May 23, 1990. This document is considered the first legal basis for the establishment and operation of financial companies in Vietnam when the financial demand is increasing in volume and diversity of services. Therefore, commercial banks are not enough to meet the demand and have promoted the establishment of the first financial companies:
- Saigon Joint Stock Commercial Bank (SFC): Established in September 1991 with a charter capital of 42 billion VND, headquartered in Ho Chi Minh City. On May 14, 2003, SFC officially merged with Da Nang Rural Joint Stock Commercial Bank to establish Viet A Joint Stock Commercial Bank.
- Seaprodex Joint Stock Financial Company: Established in July 9, 1992 with a charter capital of 10 billion VND, also headquartered in Ho Chi Minh City. This financial company has a capital contribution from Vietnam Seafood Corporation (Seaprodex). On June 12, 2003, Seaprodex Joint Stock Financial Company was dissolved ahead of schedule based on the company's own dissolution application due to the difficult situation of Vietnam Seafood Corporation at that time.
Regarding the Ordinance on banks, credit cooperatives and financial companies, at point 4, article 1 stipulates: "Financial companies lend to buy and sell goods and services with their own capital or borrow from residents" ; Point 1, article 20 stipulates: "Financial companies operate with their own capital or borrow from residents by issuing credit notes, are not allowed to receive savings deposits from residents and are not allowed to use residents' borrowed capital as a means of payment".
The Law on Credit Institutions passed by the National Assembly on December 12, 1997 stipulates that a credit institution is a non-bank credit institution. Point 3, Article 20 stipulates:
A non-bank credit institution is a type of credit institution that is allowed to perform some banking activities as a regular business activity but is not allowed to accept demand deposits or provide payment services. Non-bank credit institutions include finance companies, financial leasing companies and other non-bank credit institutions.
For financial companies belonging to corporations, their establishment is also based on the provisions of the Law on State Enterprises dated April 30, 1995. Clause 3, Article 43 states: "Depending on the scale and important position, a state corporation may or may not have a financial company as a member enterprise."
Electricity Finance Joint Stock Company - one of the financial companies with the largest equity capital today
2. The stage of formation and development of financial companies associated with state-owned corporations and groups
This can be considered the second phase, the establishment of financial companies in state-owned corporations. Since 1995, implementing the Law on State-owned Enterprises, according to Decisions 90 and 91, the Government has piloted the establishment of a number of State-owned corporations in a number of key industries to accumulate capital, focus on specialization to enhance competitiveness, and create momentum to promote the process of industrialization and modernization of the country. To achieve the above goal, the Government has introduced a series of policies and support measures, including the pilot establishment of a number of financial companies in state-owned corporations.
At the beginning, due to the initial stages of operation and the fact that the State had not yet issued sufficient legal documents guiding business operations, the scope of operations of financial companies was generally limited and their operational efficiency was not high. Financial companies operated on a relatively small scale, the legal basis for their operations was limited and most of them were operating on a pilot basis in two forms: joint-stock financial companies and financial companies in corporations (100% state capital).
However, on the basis of the Law on Credit Institutions 1997, clearer and more specific regulations on the organization and operation of financial institutions are more clearly defined in a separate document for that type of financial institution, which is Decree 79/2002/ND-CP dated October 4, 2002 of the Prime Minister on the Organization and Operation of Financial Institutions . Article 2 stipulates:
A finance company is a type of non-bank credit institution, with the function of using its own capital, mobilized capital and other capital sources to lend, invest, provide financial and monetary consulting services and perform a number of other services as prescribed by law, but is not allowed to provide payment services and is not allowed to receive deposits of less than one year.
It can be said that from here, new financial companies gradually played their proper role, function and position in the economy. However, it was not until 2006-2008 that a series of financial companies belonging to other key economic sectors were born one after another. During this time, the strong development of the stock market in Vietnam further created the premise for the formation and development of joint stock financial companies. To adapt to the changes of the economy as well as the requirements of the economic sectors themselves, some financial companies were equitized, some converted their company types, and changed their ownership forms. As of December 31, 2014, Vietnam had a total of 17 financial companies existing in 2 main forms: joint stock financial companies, single-member LLC financial companies (100% state-owned or 100% owned by a foreign organization). Of these, there are 10 financial companies with capital contributions from corporations/general companies organized in the form of general financial companies (multiple business activities), the remaining 7 financial companies are organized in the form of specialized financial companies (consumer credit).
Next, regarding the legal form, in Article 3, Decree 81/2008/ND-CP dated July 29, 2008 amending and supplementing a number of articles of Decree No. 79/2002/ND-CP dated October 4, 2002 of the Government on the organization and operation of financial companies, it is stipulated that financial companies are allowed to be established and operate in Vietnam in the following forms:
- One-member limited liability finance company (LLC).
- Limited liability finance company with two or more members.
- Joint Stock Finance Company.
With strategic investment from Credit Saison Financial Group (Japan), on April 22, 2015, Ho Chi Minh City Development Joint Stock Commercial Bank Finance Company Limited officially changed its name to HD SAISON Finance Company Limited or HD SAISON for short (the only LLC with 2 or more members in Vietnam to date).
3. Restructuring phase of financial companies in Vietnam
Most recently, on May 7, 2014, the Government issued Decree No. 39/2014/ND-CP on the operations of financial companies and financial leasing companies . Accordingly, financial companies are allowed to perform more activities of commercial banks such as: issuing credit cards, issuing bonds, promissory notes, trading foreign exchange... This Decree takes effect from June 25, 2014. The Decree stipulates that there are 2 types of financial companies, including: General financial companies and specialized financial companies (payment factoring financial companies, consumer financial companies and financial leasing companies).
A general finance company is a finance company that is allowed to carry out activities prescribed in the Law on Credit Institutions and this Decree.
Specialized finance companies include payment factoring companies, consumer credit finance companies, and financial leasing companies as prescribed in this Decree and the guidance of the State Bank of Vietnam. In which, payment factoring companies are specialized finance companies, operating mainly in the field of payment factoring. Consumer credit finance companies are specialized finance companies, operating mainly in the field of consumer credit. Financial leasing companies are specialized finance companies, operating mainly in the field of financial leasing; outstanding financial leasing debt must account for at least 70% of total outstanding credit.
The permission for financial companies to issue credit cards has been stipulated in the Law on Credit Institutions 2010, but due to the lack of specific instructions, it has not been implemented. Up to now, financial companies are also waiting for the Circular with specific instructions before officially issuing cards (with the condition that there must be accumulated interest for at least 2 consecutive years).
Considered a reasonable solution in the current context and conditions of Vietnam, in the first Draft (late 2014) of the Circular regulating consumer credit activities of financial companies , the State Bank stipulates:
“(1) Commercial banks that provide consumer loans are allowed to establish financial companies (Clause 2, Article 1);
(2) Forms of consumer lending include: Installment lending, Overdraft lending via credit cards, issuance of purchase cards (Clause 1, Article 1);
(3) From the effective date of this Circular, commercial banks are not allowed to sign additional consumer credit contracts ( Clause 3, Article 23 )”
At the same time, the State Bank is also drafting a Circular regulating lending activities of credit institutions with the provision: "This Circular does not regulate lending activities of credit institutions to customers borrowing capital to meet capital needs for consumption (Item c, Clause 2, Article 1)" as a content that "gives the green light" to start the race for commercial banks to rush to establish financial companies to provide consumer loans, but credit institutions with the desire and plan to register to establish financial companies, according to the Law on Credit Institutions, must still apply for a license and be licensed by the State Bank. This is the reason for the recent explosion of M&A deals related to financial companies, including: Ho Chi Minh City Housing Commercial Joint Stock Bank (HDBank) bought Société Générale Viet Finance Company (SGVF), renamed HDFinance Finance Company; Maritime Commercial Joint Stock Bank (Maritime Bank) purchased all 64.1% of Vinatex's shares in the Textile and Garment Finance Joint Stock Company, becoming the largest shareholder of this company; Vietnam Prosperity Joint Stock Commercial Bank (VPBank) purchased Vietnam Coal and Mineral Finance Company Limited (CMF) from Vietnam Coal and Mineral Group (TKV); Saigon - Hanoi Commercial Joint Stock Bank (SHB) purchased Viettel - Vinaconex Finance Company. Most recently, on March 18, 2016, Song Da Joint Stock Finance Company officially merged into the Military Commercial Joint Stock Bank.
It can be seen that the above trend originates from the State's intentional policy to promote the restructuring of financial companies. With financial companies that have been and will be bought, sold, merged, and consolidated as above, it means that there has been a rearrangement of the organizational model. In addition, the State Bank of Vietnam allowing foreign credit institutions and domestic commercial banks to buy back financial companies to convert them into consumer credit financial companies is also a solution to accelerate the restructuring of financial companies.
----------------------This can be considered the second phase, the establishment of financial companies in state-owned corporations. Since 1995, implementing the Law on State-owned Enterprises, according to Decisions 90 and 91, the Government has piloted the establishment of a number of State-owned corporations in a number of key industries to accumulate capital, focus on specialization to enhance competitiveness, and create momentum to promote the process of industrialization and modernization of the country. To achieve the above goal, the Government has introduced a series of policies and support measures, including the pilot establishment of a number of financial companies in state-owned corporations.
At the beginning, due to the initial stages of operation and the fact that the State had not yet issued sufficient legal documents guiding business operations, the scope of operations of financial companies was generally limited and their operational efficiency was not high. Financial companies operated on a relatively small scale, the legal basis for their operations was limited and most of them were operating on a pilot basis in two forms: joint-stock financial companies and financial companies in corporations (100% state capital).
However, on the basis of the Law on Credit Institutions 1997, clearer and more specific regulations on the organization and operation of financial institutions are more clearly defined in a separate document for that type of financial institution, which is Decree 79/2002/ND-CP dated October 4, 2002 of the Prime Minister on the Organization and Operation of Financial Institutions . Article 2 stipulates:
A finance company is a type of non-bank credit institution, with the function of using its own capital, mobilized capital and other capital sources to lend, invest, provide financial and monetary consulting services and perform a number of other services as prescribed by law, but is not allowed to provide payment services and is not allowed to receive deposits of less than one year.
It can be said that from here, new financial companies gradually played their proper role, function and position in the economy. However, it was not until 2006-2008 that a series of financial companies belonging to other key economic sectors were born one after another. During this time, the strong development of the stock market in Vietnam further created the premise for the formation and development of joint stock financial companies. To adapt to the changes of the economy as well as the requirements of the economic sectors themselves, some financial companies were equitized, some converted their company types, and changed their ownership forms. As of December 31, 2014, Vietnam had a total of 17 financial companies existing in 2 main forms: joint stock financial companies, single-member LLC financial companies (100% state-owned or 100% owned by a foreign organization). Of these, there are 10 financial companies with capital contributions from corporations/general companies organized in the form of general financial companies (multiple business activities), the remaining 7 financial companies are organized in the form of specialized financial companies (consumer credit).
Next, regarding the legal form, in Article 3, Decree 81/2008/ND-CP dated July 29, 2008 amending and supplementing a number of articles of Decree No. 79/2002/ND-CP dated October 4, 2002 of the Government on the organization and operation of financial companies, it is stipulated that financial companies are allowed to be established and operate in Vietnam in the following forms:
- One-member limited liability finance company (LLC).
- Limited liability finance company with two or more members.
- Joint Stock Finance Company.
With strategic investment from Credit Saison Financial Group (Japan), on April 22, 2015, Ho Chi Minh City Development Joint Stock Commercial Bank Finance Company Limited officially changed its name to HD SAISON Finance Company Limited or HD SAISON for short (the only LLC with 2 or more members in Vietnam to date).
3. Restructuring phase of financial companies in Vietnam
Most recently, on May 7, 2014, the Government issued Decree No. 39/2014/ND-CP on the operations of financial companies and financial leasing companies . Accordingly, financial companies are allowed to perform more activities of commercial banks such as: issuing credit cards, issuing bonds, promissory notes, trading foreign exchange... This Decree takes effect from June 25, 2014. The Decree stipulates that there are 2 types of financial companies, including: General financial companies and specialized financial companies (payment factoring financial companies, consumer financial companies and financial leasing companies).
A general finance company is a finance company that is allowed to carry out activities prescribed in the Law on Credit Institutions and this Decree.
Specialized finance companies include payment factoring companies, consumer credit finance companies, and financial leasing companies as prescribed in this Decree and the guidance of the State Bank of Vietnam. In which, payment factoring companies are specialized finance companies, operating mainly in the field of payment factoring. Consumer credit finance companies are specialized finance companies, operating mainly in the field of consumer credit. Financial leasing companies are specialized finance companies, operating mainly in the field of financial leasing; outstanding financial leasing debt must account for at least 70% of total outstanding credit.
The permission for financial companies to issue credit cards has been stipulated in the Law on Credit Institutions 2010, but due to the lack of specific instructions, it has not been implemented. Up to now, financial companies are also waiting for the Circular with specific instructions before officially issuing cards (with the condition that there must be accumulated interest for at least 2 consecutive years).
Considered a reasonable solution in the current context and conditions of Vietnam, in the first Draft (late 2014) of the Circular regulating consumer credit activities of financial companies , the State Bank stipulates:
“(1) Commercial banks that provide consumer loans are allowed to establish financial companies (Clause 2, Article 1);
(2) Forms of consumer lending include: Installment lending, Overdraft lending via credit cards, issuance of purchase cards (Clause 1, Article 1);
(3) From the effective date of this Circular, commercial banks are not allowed to sign additional consumer credit contracts ( Clause 3, Article 23 )”
At the same time, the State Bank is also drafting a Circular regulating lending activities of credit institutions with the provision: "This Circular does not regulate lending activities of credit institutions to customers borrowing capital to meet capital needs for consumption (Item c, Clause 2, Article 1)" as a content that "gives the green light" to start the race for commercial banks to rush to establish financial companies to provide consumer loans, but credit institutions with the desire and plan to register to establish financial companies, according to the Law on Credit Institutions, must still apply for a license and be licensed by the State Bank. This is the reason for the recent explosion of M&A deals related to financial companies, including: Ho Chi Minh City Housing Commercial Joint Stock Bank (HDBank) bought Société Générale Viet Finance Company (SGVF), renamed HDFinance Finance Company; Maritime Commercial Joint Stock Bank (Maritime Bank) purchased all 64.1% of Vinatex's shares in the Textile and Garment Finance Joint Stock Company, becoming the largest shareholder of this company; Vietnam Prosperity Joint Stock Commercial Bank (VPBank) purchased Vietnam Coal and Mineral Finance Company Limited (CMF) from Vietnam Coal and Mineral Group (TKV); Saigon - Hanoi Commercial Joint Stock Bank (SHB) purchased Viettel - Vinaconex Finance Company. Most recently, on March 18, 2016, Song Da Joint Stock Finance Company officially merged into the Military Commercial Joint Stock Bank.
It can be seen that the above trend originates from the State's intentional policy to promote the restructuring of financial companies. With financial companies that have been and will be bought, sold, merged, and consolidated as above, it means that there has been a rearrangement of the organizational model. In addition, the State Bank of Vietnam allowing foreign credit institutions and domestic commercial banks to buy back financial companies to convert them into consumer credit financial companies is also a solution to accelerate the restructuring of financial companies.
References:
1. The 12th National Assembly of the Socialist Republic of Vietnam, 7th session (2010), Law on the State Bank of Vietnam , June 16, 2010, Hanoi.
2. National Assembly of the Socialist Republic of Vietnam, 12th tenure, 7th session (2010), Law on credit institutions , June 16, 2010, Hanoi.
3. Government (2002), Decree No. 79/2002/ND-CP dated October 4, 2002 of the Government on Organization and Operation of Finance Companies .
4. Government (2008), Decree 81/2008/ND-CP dated July 29, 2008 of the Government amending and supplementing a number of articles of Decree 79/2002/ND-CP of the Government on the organization and operation of financial companies.
5. Government (2014), Decree No. 39/2014/ND-CP dated May 7, 2014 of the Government on the activities of finance companies and financial leasing companies.
6. State Bank, First Draft (late 2014): Circular regulating consumer credit activities of financial companies.
7. Some articles reporting on the situation of mergers and acquisitions between commercial banks and financial companies in Vietnam on electronic information sites.
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