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The State Bank of Vietnam has spelled out the procedures local lenders are to follow if they wish to borrow funds from foreign financial institutions.

image source: sacombank

Under the rules in Document 340/NHNN-QLNH released last week, state-owned commercial banks are required to have written approval from relevant authorities to borrow medium- and long-term loans from foreign financial institutions.

In the document, medium- and long-term loans are categorised as longer than 12 month terms.

The introduction of the new rules followed Prime Minister Nguyen Tan Dung’s introduction of Direction No. 1568/CT-TTg on August 19, 2010. The direction regulates state-owned enterprises’ borrowing from foreign financial institutions.

These enterprises include state-owned banks Vietnam Bank for Foreign Trade (Vietcombank), Vietnam Bank for Industry and Trade Bank (VietinBank), Bank for Investment and Development of Vietnam (BIDV), Vietnam Bank for Agriculture (Agribank) and Mekong Housing Bank (MHB).

The Prime Minister’s direction was designed to better control state-owned enterprises’ foreign debts.

In accordance with the prime minister’s direction, Document 340 provides specific guideline to state-owned banks on how to access foreign financial institutions’ loans.

According to an executive from Vietcombank, foreign financial institutions normally provide relatively cheap credit.

“As borrowing costs in foreign markets are quite cheap at around 1-2 per cent per year, we can get at around 2.5-3 per cent per year cheaper than in the domestic market,” said the executive.

A member of VietinBank’s board of directors also revealed that the bank regularly obtained cheap loans from a Japanese bank, where interest rates had been around the zero mark for the past few years.

“Currently, local lenders are mobilizing dollars locally at 5-6 per cent per year, much more costly than funds we borrow from foreign banking partners,” said the official from VietinBank.

In 2010, the large gap between lending rates for Vietnamese dong and dollar meant dollar-denominated bank credit growth grew at double the pace of credit in the local currency.

By December 31, 2010, the banking sector’s total credit was estimated to increase by 29.81 per cent year-on-year. Total lending in Vietnamese dong increased by 25.3 per cent