Commercial banks grappling to meet Basel II standards

Hanoi (VNA) - The application of Basel II is considered the fundamental restructuring solution creating the foundation for promoting the safety, healthy development and competitiveness of the banking system amid the increasing international economic integration.

Basel II not only helps banks mitigate risks and capitalise on capital sources but also considerably reduce damage caused by changes in the economy.

The sooner banks meet Basel II standards, the more optimised their operations will become as the Basel II risk management framework includes relatively stringent criteria, from the legal corridor, database to capital adequacy ratio (CAR).

However, a number of banks are still struggling to satisfy these standards.

Under regulations, from January 1, 2020, banks will have to apply standards set in the State Bank of Vietnam (SBV)’s Circular 41/2016-TT/NHNN, which stipulates the CAR for banks and branches of foreign banks in the country. One of the most important points in this circular is that banks must have their CAR of at least 8 percent.

This is considered an important step in implementing Basel II for risk management in the entire banking system. However, only 18 banks have met the standards so far.

First banks to “graduate”

As early as 2014, the central bank built a road map for Basel II implementation and application in commercial banks and chose 10 banks to pilot the application, namely Vietcombank, VietinBank, BIDV, MB, Sacombank, ACB, Techcombank, VPBank, VIB and MSB.

In 2016, the SBV issued Circular 41/2016/TT-NHNN, requesting banks to officially apply a CAR in accordance with Basel II standards as from January 1, 2020.

In 2017, the Government issued Resolution 51/NQ-CP, requiring commercial banks to apply Basel II standards on CAR as from 2020, with the goal of 12 – 15 banks meeting the standards.

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So far, only 16 of the 35 domestic banks have declared their application of Circular 41, namely Vietcombank, VIB, MB, Techcombank, ACB, MSB, HDBank, OCB, VPBank, TPBank, VietBank, Viet Capital Bank, SeABank, BIDV, LietVietPostBank and NamABank, along with two foreign banks (Shinhan Bank and Standard Chartered Vietnam).

Vietcombank and VIC were the first two recognised to have implemented Circular 41 one year ahead of schedule by the SBV and also the first ones to apply Basel II standards in Vietnam, in November 2018.

Since then, the banking sector has witnessed strong moves by private joint stock commercial banks and some foreign banks to comply with Basel II standards.

Nguyen Dinh Tung, General Director of OCB – one of the banks having met Basel II standards early, said the application of Basel II is not only an inevitable trend or helps improve business performance, it also helps banks minimise risks in their operations, especially amid growing uncertainties in the global economy.

However, most of the banks already meeting the standards have just lived up to Circular 41, which means they have only managed to adhere to Pillar 1 of the three pillars of Basel II, while it is the second one that is the most difficult.

The three pillars are minimum capital requirements, internal capital adequacy assessment process (ICAAP), and information transparency and disclosure.


VIB is the only bank that has satisfied all the three pillars so far. The bank said it successfully implemented Pillars 1 and 3 of Basel II in 2018 ahead of schedule while enhancing its financial strength so as to constantly keep its CAR at over 9 percent, in line with Circular 41.

In 2019, VIB continued to carry out Pillar 2 to perfect its ICAAP early. As of September 30 last year, it had completed all policies, processes and methods for ICAAP and ensured that it is eligible to comply with Pillar 2 from January 1, 2020.

Tough road still ahead

Among the 10 banks chosen to pilot the Basel II application, two major banks, VietinBank and Sacombank, haven’t carried out the work.

At a recent meeting, leaders of Sacombank said this bank will provide official information soon as it is stepping up the handling of non-performing loans, and a plan for Basel II implementation will be issued in January 2020.

Meanwhile, VietinBank still has a long way to go to meet Basel II standards. The biggest problem to this bank now is how to raise capital. In early November 2019, VietinBank had a meeting with the SBV and the Ministry of Finance to discuss the retaining of cash dividends to increase its capital. Though the meeting’s outcomes have yet to be revealed, even if the Finance Ministry and the National Assembly allow it to keep cash dividends, this bank will still be in dire need of capital.

As one of the four State-owned commercial banks, Agribank is also encountering the same problem. The State is currently holding 100 percent of Agribank’s capital, and the bank hasn’t been permitted to keep its profit for many years.

As of the end of June 2019, its charter capital stood at 30.496 trillion VND, the lowest among banks invested with State capital.

While VietinBank and Agribank are unable to augment their capital due to policy-related obstacles, small banks failed because of poor-performing operations and unattractiveness to investors.

There remain a number of commercial banks with charter capital only equivalent to or slightly higher than the regulated minimum capital of 3 trillion VND. Some with charter capital of around 3 – 4 trillion VND include PGBank, Saigonbank, Kienlongbank, and National Citizen Bank.

In 2019 and previous years, there were reports on some banks holding negotiations with foreign partners, but there haven’t been any big boosts to their restructuring. Recently, several credit institutions announced that they are looking for capable partners to seek solutions./.