The total credit limit granted to founding shareholders, major shareholders, family members and related parties must not exceed 5 percent of the charter capital of a credit institution.

This is stated in the draft of a new circular issued by the State Bank of Vietnam. The circular is designed to suppress the growing sophisticated ‘familisation', or cross-shareholding, at credit institutions, which, at the bottom line, tackles bad debt and improves system safety.

Credit limit for major shareholders and their family members also must not exceed their face-value-based capital contribution to banks.

The draft also restricts credit institutions from granting privileged loans without collaterals to auditing companies, auditors, chef accountants and major shareholders.

Such loans can also not be granted to founding shareholders, subsidiaries, companies or to those who bear certain relations with banks.

Regarding such lending plans, credit institutions must report to shareholders, owners and the central bank.

In another attempt to solve the illusion of bank capital and improve the transparency of capital flows, the draft requires credit institutions to report actual charter capital every six months.

The actual charter capital is determined after taking out risk provision funds and calculating all income and spending.

If the value of actual charter capital is lower than legislative capital, banks must seek solutions and report to the central bank. If actual charter capital falls under 80 percent of legislative capital, the State Bank will apply some measures to restrict operations of the banks.

In fact, cross-shareholding issues have complicated the process of restructuring the vulnerable banking system. The entire system had been on the verge of a crisis following many years of excessive credit growth and easy lending to state corporations along with cross-shareholding issues.

Financial reform is one of the three pillars in a programme of economic restructuring that Vietnam unveiled in late 2012. If the deep-seated problems in the banking system are not resolved, the progress of economic reforms might face long delays.-VNA