Struggling banks grapple with enhanced requirements of CAR updates

Struggling banks grapple with enhanced requirements of CAR updates

Vietnam Introduces Tighter Capital Adequacy Ratio Standards for Banks

Vietnam's State Bank of Vietnam has issued Circular No. 14/2025/TT-NHNN, effective from September 15, 2025, introducing stricter Capital Adequacy Ratio (CAR) requirements for commercial banks and foreign bank branches. The new regulations aim to align more closely with Basel III capital adequacy standards, improve risk management, and promote lending to specific sectors like agriculture, rural areas, Small- and Medium-Sized Enterprises (SMEs), and social housing.

Key changes and implications of Circular 14 include:

1. Stricter CAR Requirements Circular 14 sets higher minimum CAR thresholds that banks must maintain, reflecting strengthened capital standards consistent with Basel II/III principles. This means commercial banks need to hold more capital against their risk-weighted assets to absorb potential losses and ensure financial stability.
2. Adjusted Risk Weights Supporting Priority Sectors
3. Personal loans in agriculture and rural sectors now have a reduced risk weight of 50% instead of 100%, lowering the capital requirement for these loans.
4. Personal loans under VND 8 billion (~ USD 320,000) have their risk weight reduced from 100% to 75%.
5. Social housing loans receive flexible risk weights from 20% to 50%, depending on the loan’s risk profile.
6. Loans to SMEs see a slight reduction in risk weight from 90% to 85%. These reliefs reduce the capital banks must hold for these loans, encouraging greater credit flow to these strategic sectors.
7. Real Estate Lending Risk Weighting The previous automatic application of a 200% risk weight on real estate loans is replaced by a conditional application. The high 200% risk weight applies only if the borrowing enterprise fails to provide financial statements or has negative equity, mitigating excessive capital charges on sound real estate loans.
8. Transitional Implementation Roadmap The Circular provides two phases:
9. Transitional phase until December 31, 2029, during which banks may calculate CAR using either the new Circular 14 framework or the older Circular 41 standardised approach, pending registration with the State Bank of Vietnam.
10. Full implementation phase from January 1, 2030, when all banks must adopt the standardized approach under Circular 14. This phased approach offers banks time to adapt their systems and capital planning.
11. Emphasis on Internal Credit Rating Systems Circular 14 requires credit institutions to develop or enhance internal credit rating systems that underpin credit approval, quality management, and provisioning. This aligns with Vietnam’s broader regulatory efforts to modernize risk management leveraging technology and improve credit quality and transparency.
12. Implications for Banks Banks face challenges to comply with higher capital buffers and enhanced risk assessment, requiring improved credit rating models, technology adoption (including AI and big data), and refined capital planning. However, by lowering risk weights selectively for strategic sectors, Circular 14 facilitates more inclusive credit growth while safeguarding the banking system’s resilience.

In summary, Circular No. 14/2025/TT-NHNN tightens capital adequacy standards for banks with higher CAR thresholds, recalibrates risk weights to better reflect actual risk and policy priorities, and mandates advanced internal risk rating systems, with a clear timeline for full adoption by 2030. This modernization aims to enhance systemic stability and credit allocation efficiency in Vietnam’s banking sector.

Nguyen Quang Thuan, chairman of FiinGroup, stated that Vietnam's banking sector still has a low CAR compared to regional and global standards. In regional markets such as Singapore and China, or foreign-invested banks in Vietnam like ANZ and Shinhan Bank, CAR can reach 25 per cent, revealing a significant gap compared to domestic banks.

1. The stricter Capital Adequacy Ratio (CAR) requirements outlined in Circular 14 could potentially push Vietnamese banks to increase their investments in business sectors like finance, industry, and banking-and-insurance to meet the higher capital standards.
2. In contrast to domestic banks in Vietnam, some foreign-invested banks like ANZ and Shinhan Bank in Vietnam have shown higher CAR levels, possibly indicating a more robust financial position, which could be advantageous in the competitive business environment, especially within the banking-and-insurance industry.

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