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Interest rate and exchange rate : Basically these rates have been liberalized. The StateBank only influences the interest rate and exchange rage through the money market andmonetary policy instruments. Therefore, interest rates and exchange rates currentlyreflect more closely the value of Vietnam dong, and follow the development of theinternational and domestic money market. Interest rates were gradually liberalized insequencing and with caution. First of all, the real positive interest rate principle wasintroduced since 1992. Deposit interest rates were liberalized in 1996, and lendinginterest rates were determined through negotiation since June 2002. The foreignexchange rate management was shifted from the fixed multiple exchange rate, withadministrative measures, to the flexible exchange rates that are regulated on the market

basis.

II. Banking Reform1. Beneficiaries of the reformFocusing on SOCBs and joint-stock commercial banks2. Objectives of the reform- Enhance financial capacity and competitiveness- Enhance management, governance, and operation efficiency- Making Vietnamese commercial banks strong enough for regional andinternational integration3. Reform contents3.1 For SOCBs- Financial restructuring, includes:+ Re-capitalization to increase statutory capitals, ensuring capital adequacyratios+ Solving NPLs (Non-Performing Loans), cleaning banks balance sheets:(i) Formulating special mechanism to solve NPLs incurred before 31/12/2000;(ii) Classifying and solving NPLs in consistency with international standards andbest

practices- Re-structuring the organization and operation, including:+ Differentiating between policy lending and commercial lending+ Completing Business Strategy and Credit Manuals+ Establishing specialized departments in charge of risk-management andasset/liabilitymanagement+ Establishing management information systems+ Completing the internal control and internal audit mechanism+ Practicing auditing in consistency with international accounting standards- Formulating the Proposal on SOCBs equitization, primarily focusing on equitizingthe twobanks, VIETCOMBANK and MHB3.2 For joint-stock commercial banks- Increase the capitals to expand business scope:+ Merger and acquisition of small joint-stock commercial banks into bigger joint-stockcommercial banks+ Call on shareholders to increase capitals or issue more shares to call for morecapitals- NPL solutions:+ Provision for risks

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12+ Solving security assets (collateral), collecting debts to the end from customer+ Debt re-structuring by: selling off the debts, transforming the debt into equity,re-scheduling the debt, and rolling over

3.4.2 Financial re-structuring

- Re-capitalizationAs of now, SOCBs statutory capitals have been injected with nearly 13.000billion dongs bythe Ministry of Finance from the source of special Government bonds and othersources; increasingSOCBs total statutory capitals to 17.000 billion dongs, step-by-step raisingequity, significantlyimproving capital adequacy ratio in consistency with international standards(8%).

Joint-stock commercial banks have also continuously issued shares to call forequity fromshareholders and the public. Almost all joint-stock commercial banks have

reached the capitaladequacy ratio in accordance with the State Bank of Vietnams regulations.-Solution of NPL90% of NPLs incurred before 31/12/2000 have been solved by such measures as:collection in cash, solution of security assets (collateral), using provisions forrisks and theGovernment has also assisted by the State budget. As of now, joint-stockcommercial banksNPLs are below 5% of the total debt outstanding (by the Vietnamese AccountingStandards).

III. Prospects for the Vietnamese Banking Sector in the comingtimeAs of 31/12/2004, Vietnamese commercial banks have basically solved all oldproblems,creating basis to apply stronger measures in the upcoming time, when Vietnam

joins the WTO andopens the markets as required under the US-Vietnam Bilateral Trade Agreement.Vietnam needs topush up liberalization of services of the financial and banking sector.In the coming time many foreign banks will be operating in Vietnam with manynew bankingproducts and services. This requires the Vietnamese banking system to furtherreform:+ About policy, legal environment: the Government and the State Bank of Vietnam have to revise,supplement, promulgate new regulations on banking activities, first and foremostregulations onaccounting, debt classification, allocation of provisions against risks, prudentialratios in bankingactivities in consistency with international standards and best practices; ensuringevery entityoperating in Vietnam in the same operation sector has the same rights andresponsibilities, without

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discrimination.+ Completing the mechanism and enhancing capacities for the State Bank of Vietnams Supervision force,performing the roles of supervision and monitoring over the banking systemagainst risks; formulatingearly warning procedures of risks, especially credit risks;

14+ Stepping up the implementation of re-structuring proposals in order to increasefinancial capacityand competitiveness of commercial banks, especially SOCBs, in: classificationand solution of NPLs; raising equity; formulating solution plans of NPLs of the Vietnamesebanking system onceall NPLs are classified in accordance with international standards; continuing tocooperate withforeign consultants and organizations for technical assistance in banking reforms.+ Customers of commercial banks are still mainly state-owned enterprises.However, in the past time,those enterprises were not working efficiently, some enterprises were atprolonged loss, unable torepay bank loans, leading to huge debt outstanding. The fact that theVietnamese Government isstepping up the equitization and re-arrangement process of State-ownedenterprises will dissolveinefficient and loss-making enterprises; creating a healthy business environment.In fact, equitizedenterprises are operating more efficiently and able to repay bank loans.In the process of re-arrangement of State-owned enterprises, being big creditors,commercialbanks need to actively participate in the financial analysis process of enterprisesfor better

re-arrangement decisions, making enterprises repayment more possible.+ Stepping up the process of SOCBs equitization to call for big capital from thepublic both at homeand abroad. In which, foreign individuals and organizations can hold shares of equitized SOCBsas well as can participate in governance and management of banks and modernbankingtechnology transfer for banks; thus giving a new impetus for SOCBs operation.