Document of

The World Bank

Report No. 14823-VN

STAFF APPRAISAL REPORT

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

OCTOBER 25, 1995

Country Operations DivisionCountry Department IEast Asia and Pacific Region

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Currency Equivalents

The Vietnamese currency is the dong (D). A currency reform in 1985 replaced ten old dong withone new dong.

Calendar 1994 December 1994US$ 1.00 = DI O,975 US$1.00 = Di 1,200Dl,000 = US$0.09 D1,000 = US$0.09

Fiscal Year

January I - December 31

Weights and Measures

Metric System

Abbreviations and Acronyms

ADB - Asian Development BankASEAN - Association of South-East Asian NationsATMs - Automated Teller MachinesBIDV - Bank for Investment and Development of Viet NamCB - Commercial Bank (participating in the project)CBPS - Commercial Bank Payment SystemCIB - Center for Informatics of the BankEDI - Economic Development InstituteESAF - Enhanced Structural Adjustment FacilityGDP - Gross Domestic ProductIBPS - Inter-Bank Payment SystemICB - International Competitive BiddingIDA - International Development AssociationIFC - International Finance CorporationIMF - International Monetary FundMOF - Ministry of FinanceNPC - National Payments CouncilPHRD - Population and Human Resources Development Fund (Japan)PMU - Project Management UnitPPC - Provincial Processing CenterSAPS - Settlement Account Processing SystemSBV - State Bank of Viet NamSIDA - Swedish International Development AuthoritySOCB - State-Owned Commercial BanksSOEs - State-Owned EnterprisesSWIFT - Society for Worldwide Interbank Financial TelecommunicationsUNDP - United Nations Development ProgramVDC - Viet Nam Data CompanyVNPT - Viet Nam Posts and Telecommunications

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Credit and Project Summary

Borrower: The Socialist Republic of Viet Nam

Implementing Agency: The State Bank of Viet Nam

Beneficiaries: The State Bank of Viet Nam - US$13.2 million equivalentAgribank - US$10.0 million equivalentBIDV - US$7.7 million equivalentEximbank - US$2.6 million equivalentIncombank - US$7.5 million equivalentMaritimebank - US$2.6 million equivalentVietcombank - US$5.4 million equivalent

Povery: Not applicable

Amun: SDR 32.9 million (US$49 million equivalent)

Terms: 40 years, including 10 years of grace, on standard IDA terms

Commitment Fee: 0.50% on undisbursed credit balances, less any waiver

On-lending Terms: In US dollars for 20 years, including 5 years of grace, at 6.25% per annum,applicable to commercial banks

Financing Plan: See para. 3.1 1

Net Present Value: Not applicable, but full cost recovery of inter-bank payment services by 2002

Project ID: 4VNMPA028

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

STAFF APPRAISAL REPORT

CONTENTS

Pagze No.

Credit and Project Summary .................... i

1. INTRODUCTION .1

2. THE FINANCIAL SECTOR AND PAYMENT SYSTEM DEVELOPMENT. 3

A. Sector Overview .3B. The Government's Financial Sector Development Strategy .5C. Payment System: Current Status, Constraints and Orientations .7D. The Bank's Assistance Strategy .10E. Lessons from Previous Bank Involvement .10F. Rationale for Bank Involvement . 1

3. THE PROJECT .12

A. Objectives .12B. Description .12C. Costs and Financing .13D. Implementation .17E. Staff Training and Development .22F. Telecommunications .22G. Legal and Regulatory Framework .23

4. THE BENEFICIARIES .26

A. Project Beneficiaries .26B. The State Bank of Viet Nam .26C. The Participating Commercial Banks .29

This report is based on the findings of a mission to Viet Nam in May 1995, comprising Shilpa Patel(Task Manager); Robert Keppler (Payment System Specialist); Martin Edmonds (Financial Specialist -Consultant); and Chander Ohri (Procurement - Consultant). Merle Mendis-Dennis assisted in theprocessing of the report. The project was prepared by the National Payments Council with assistancefrom PA Consulting Group. Peer Reviewers were Setsuya Sato and Ike Ikramullah. The Division Chiefis Pamela Cox, EAICO, and the Director is Callisto E. Madavo, EAI.

Page No.

5. FINANCIAL ASPECTS, BENEFITS AND RISKS ....................................... 33

A. Introduction ....................................... 33B. Cost Recovery ....................................... 33C. Benefits ....................................... 35D. Risks ....................................... 36

6. AGREEMENTS AND RECOMMENDATION ....................................... 38

A. Agreements ....................................... 38B. Recommendation ....................................... 38

ANNEXES

Annex 1 Description of Payment System Components of the Project .............................. 39Annex 2 Commercial Bank Improvement Specification and Scoping Studies ................. 57Annex 3 Draft Terms of Reference for External Audit and Diagnostic Review

of a Commercial Bank ............................................. 60Annex 4 Project Costs ............................................ 65Annex 5 Implementation Progress and Development Impact Indicators .......................... 72Annex 6 Draft Terms of Reference for Resident Advisor ............................................ 78Annex 7 Procurement Procedures ............................................ 80Annex 8 Estimated Credit Disbursement ............................................ 85Annex 9 Project Supervision Plan ............................................ 86Annex 10 Profiles of Participating Commercial Banks ............................................ 87Annex 11 Cost Recovery of the Inter-bank Payment System ........................................... 128Annex 12 Selected Documents Available in Project Files ............................................ 132

CHART

Chart I State Bank of Viet Nam Organizational Chart ............................................ 133

1. INTRODUCTION

1.1 An integral part of a well-functioning market economy is an acceptable medium ofexchange for economic transactions. As economic activity increases in sophistication, so too does theneed for an efficient and secure system of discharging financial obligations. Cash is a convenient form ofpayment for most small transactions where buyer and seller meet face to face. But most largetransactions require some form of non-cash payment instrument such as a paper check or an electronicpayment order to move funds. These non-cash payments also require the use of a financial intermediary,usually the banking system, to transfer funds from the payer to the payee. A payment system referscollectively to the institutions, instruments and procedures used for exchanging financial value betweentwo parties. Weaknesses in a payment system can result in the inefficient use of the available moneystock, inequitable risk sharing between trading parties, lack of confidence in the banking system, andinadequate support for the development of other financial services. l

1.2 Different payment instruments, each with a unique set of standards and processingrequirements, are required to serve user needs. Paper-based instruments such as checks are used for awide variety of transactions that are typically low-value and less time-critical. Electronic payments areinstructions passed between banks without a corresponding exchange of paper. Such instruments aregenerally used for high-value payments requiring immediate transfer of funds. Card-based paymentsrelying on automated teller machines (ATMs), and credit and debit cards are generally used for consumerpayments at the point of sale. Payment services are required to process: local inter-bank debit and creditpayments; non-local, inter- and intra-bank debit and credit payments; high-value and other time-sensitivecredit payments; and international payments in a variety of currencies.2

1.3 All payments require settlement, which refers to the transfer of value between banks inrespect of payment obligations. Settlement can be immediate (funds are immediately and irrevocablyavailable for use) or provisional (funds are available on a provisional basis pending confirmation at somelater time). The settlement mechanism is either net (payments are settled after netting debits againstcredits on an aggregate basis processed periodically in batches) or gross (payments are processed on atransaction-by-transaction basis). Settlement finality is guaranteed by the system operator and systemparticipants according to pre-defined rules.

A full discussion of payment systems is contained in "Modemizing Payment Systems in EmergingEconomies," Policy Research Working Paper 1336 (World Bank, 1994). A summary discussion is contained in"Project Design for Payment Systems," FPD Note No. 37 (World Bank, 1995).

2 A credit payment is the transfer of funds from payer to payee resulting from a payment instruction initiated bythe payer. A debit payment is the transfer of funds from payer to payee resulting from a payment collectioninstruction from the payee's bank to the payer's bank. Cashing a check is an example of a debit payment. Awire transfer is an example of a credit payment.

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Well-functioning payment systems depend on several critical factors:

* Speed: Most payments do not need to be transferred instantaneously, and indeed, evenin industrial countries, only large, time-critical payments are made in real time. Thisnotwithstanding, users of payment services must be confident that payments will beeffected within a prescribed time. Delays in payments result, inter alia, in loss of value,particularly in highly inflationary economies, and create float, thereby decreasing theefficiency of funds circulation in the economy.

* Certainty: The point at which funds are irrevocably available for use, or settlementfinality, is a critical requirement in any payment system. Uncertainties about thecompletion of the transaction hamper the exchange of goods and services in aneconomy.

* Reliability: A payment system must be reliable if it is to maintain user confidence.Failures in the payment system can have severe, long-lasting impacts on users'perceptions, and systems must have adequate contingency provisions and backupcapabilities.

- Security: A payment system must have adequate arrangements to deal with fraud,credit risk, protection against unauthorized use, and dispute resolution.

* Convenience: Even the best designed system is doomed to failure if it does not provideconvenience to users.

. Cost: Similarly, cost is an important consideration, and should be suited to theparticular transaction instrument.

1.4 Payment solutions must be tailored to the unique requirements of a given economy, andwill typically involve a series of tradeoffs among the above factors. Ultimately, all these factors have todo with promoting user confidence in the system in order to meet the needs of a growing economy.

1.5 This report presents the appraisal of the proposed Payment System and BankModemization Project for Viet Nam. The project was prepared by the National Payments Council withhelp from external consultants hired under a PHRD Grant for project preparation. Chapter II of thisreport contains a summary discussion of the financial sector, including the current status of the country'spayment system and the Government's sector development strategy. It also situates the proposed projectin the larger context of IDA involvement in the financial sector in Viet Nam. Chapter III contains adescription of the project and implementation arrangements, while Chapter IV discusses projectbeneficiaries. Financial aspects, benefits and risks of the project are discussed in Chapter V, and asummary of agreements to be reached is presented in Chapter VI. Annexes to this report present profilesof the beneficiary institutions, as well as summary discussions of key implementation topics. A ProjectManagement Plan, prepared by the National Payments Council, is dedicated to a fuller description ofimplementation plans and project management issues and is available in project files.

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2. THE FINANCIAL SECTOR AND PAYMENT SYSTEMDEVELOPMENT

2.1 The financial sector in Viet Nam consists essentially of the banking sector. The StateBank of Viet Nam (SBV) was the country's monobank until 1988, when a separation of commercial andcentral banking activities took place. Legislative reforms introduced in 1990 extended banking servicesto include a wide variety of ownership structures, and there are in operation today 4 state-ownedcommercial banks (SOCBs); 36 share holding banks (30 in urban areas); 69 credit cooperatives; 3 jointventure banks; 16 foreign bank branches (and 64 foreign bank representative offices); and 153 popularcredit funds. There are also two finance companies and one government-owned insurance company. TheGovernment is developing a securities market, and a limited debt securities market is expected to beoperational by end-1995. A full account of recent developments in the financial sector is contained inViet Nam Financial Sector Review. An Agenda for Financial Sector Development (World Bank ReportNo. 13135-VN), March 1995.

A. SECTOR OVERVIEW

2.2 Despite the impressive numbers of new banking institutions entering the market, VietNam remains an under banked country. The ratio of currency and deposit liabilities of banks (M3, orbroad money) to GDP appears to have stabilized in recent years at around 23%, a level considerablylower than that in other transitional economies and regional countries. Anecdotal evidence and data fromthe Viet Nam Living Standards Survey suggest that considerable savings in the form of foreign currency,gold and precious metals and stones remain outside the banking system. Increased public confidence inthe Government's macroeconomic stabilization policies and in the financial system is necessary to bringthese savings into the formal system. The share of narrow money (currency plus demand deposits, orMl) to broad money (M3) has grown from 46% in 1989 to 56% in 1994. Currency continues to make upabout 80% of MI, and thus the share of cash in broad money was around 45% in 1994. This compareswith a cash/broad money ratio of 10% in ASEAN countries and less than 25% in most transitionaleconomies. The large proportion of cash in the broad money ratio reflects a lack of confidence in thebanking system caused, inter alia, by deficiencies in the payment system and a lack of banking servicesgeared to the individual.

The State Bank of Viet Nam

2.3 SBV's role is slowly but steadily evolving as it modernizes its operations in the contextof a developing market economy. It ceased direct lending to the productive sectors in 1991 andterminated direct financing of the state budget in 1992. It is gradually adopting credit and money controlpolicies along the lines of central banks in market economies. Other central banking functions that theSBV currently undertakes include active management of the country's foreign exchange reserves and theconduct of inter-bank markets for domestic funds and foreign exchange. However, SBV still operatesunder government guidance, and steps should be taken to increase its independence.

2.4 SBV has its head office in Hanoi, and branches in each of the country's 53 provinces.This large branch network loses its relevance in a two-tier banking system. These branches are involvedin a variety of central bank activities such as supervision and clearing and settlement of paymenttransactions. There is a need to modify the SBV's organizational structure and to redefine the role of itsprovincial branches.

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2.5 Monetary Control. A key challenge for Viet Nam is to strike a proper balance betweenits desire for rapid growth and the need for macroeconomic stability. The Government has taken far-reaching steps to unshackle the economy from central control, and has faced severe macroeconomicimbalances in the transition process. Given the reemergence of inflationary pressures in 1994, theGovernment is focusing on further reducing the fiscal and external deficits under an economic programsupported by the International Monetary Fund (IMF) and the World Bank. For the foreseeable future,Viet Nam's monetary stance will have to be contractionary.

2.6 The SBV exercises monetary control through three instruments of monetary policy:setting interest rates on banking system assets and liabilities; varying the cost and availability of centralbank credit to banks; and stipulating reserve ratios on their deposits. SBV has recently introduced creditceilings, in the aggregate and bank-by-bank, in an attempt to contain credit expansion. These instrumentsare largely direct in character and their use retains elements of interventionism. The SBV is graduallydeveloping the tools and the skills to exercise indirect monetary control. An auction system to issueTreasury bills is being developed, and pilot auctions commenced in December, 1994.

2.7 Supervision and Prudential Regulations. Bank supervision has existed since SBV'screation in 1951, but needs to be modernized to better serve the needs of a rapidly growing bankingsector with diversified ownership. At present, SBV maintains an off-site surveillance system, developedwith technical assistance from the IMF, which is based on monthly prudential returns submitted bybanks. While improvements are required, the systematic collection and analysis of data are good firststeps in ensuring supervisory oversight of the deposit money banks. On-site supervision is largelybottom-up at the branch or sub-branch level, and is conducted by the SBV's provincial branch network.A change in the focus of supervision to a more top-down approach is required to ensure the health andstability of the banking system as a whole. This implies a redirection of resources to address the sourcesof greatest systemic risk.

The Commercial Banks

2.8 The commercial banking sector is dominated by the four state-owned commercial banks(SOCBs), which accounted for 87% of commercial bank operations in Viet Nam in 1994. There has beensubstantial growth of credit to the private sector since 1990, and although state-owned enterprises(SOEs) are still the dominant users of credit, their share of bank credit has dropped to around 60% in1994, from an average of 86% in 1991-92. Credit to the private sector consists essentially of short-termloans for agriculture and commerce. Long-term lending, provided mainly by SOCBs to SOEs, is largelyin foreign currency. The structure of commercial bank funding has changed in recent times. In 1994,around 40% of credit flows were met through a run-down of net foreign assets, reflecting in part anincrease in SOCB medium-term borrowing from foreign banks. The remainder was roughly equallydistributed among resources mobilized by the banking system on its own, net borrowings from the SBV,and float associated with the weak payment system in Viet Nam.

2.9 An accurate assessment of bank financial performance is problematic, since accountingpractices deviate in many ways from international norms. A Chart of Accounts for commercial banks hasbeen defined with IMF assistance and is being implemented in all Vietnamese banks. However,considerable upgrading is still required at the bank level to improve accounting practices. TheGovernment is canying out detailed portfolio audits and diagnostic reviews for two SOCBs, which willpermit a better assessment of their true financial situation. Similar diagnostics will also be undertaken forthe remaining four banks participating in the project. Chapter IV discusses the institutional framework

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and financial performance of the six banks participating in the project, and detailed profiles of thesebanks are given in Annex 10 to this report. Significant institution building is required to strengthen theVietnamese banking sector, and is being pursued through a variety of mechanisms, including theproposed project (Section B).

B. THE GOVERNMENT'S FINANCIAL SECTOR DEVELOPMENT STRATEGY

2.10 The development of the financial sector in Viet Nam is necessarily going to be a long-term process. Action is required on many fronts to create a modern financial system capable ofsupporting the country's transition from a centrally-planned economy to a market-oriented one. Acomprehensive discussion of the Government's policy orientations in the financial sector is contained inViet Nam Financial Sector Review (Report 13135-VN). Key elements of the Government's developmentstrategy are outlined below.

2.11 The Government is pursuing three key objectives for the further development of thesector in addition to maintaining a credible, sustained and stable macroeconomic environment. Theseare: (a) moving toward a market-based policy in monetary management; (b) fostering efficiency andcompetition in the sector through equal treatment for all participants and through modernization ofcommon systems; and (c) promoting public confidence in the banking system. Given the vast reformneeds and the institutional capacity constraints, the Government's strategy for achieving these objectivesis based on a building block approach in which areas of immediate concern are addressed as a priority.This strategy is also dictated by the Government's pragmatic political stance of gradual, but sustainedreform based on achieving a broad consensus among stakeholders.

2.12 In the area of monetary management, the Government intends to build upon itsachievements to date in moving from direct to indirect control. An auction system to issue Treasury billshas been established, which provides a basic building block in the development of open marketoperations. In the interim, steps are being taken to rationalize the direct instruments of monetary controlthat are presently utilized. Interest rates are positive in real terms, and the inverted rate structure (thestipulated rates for medium- and long-term loans are lower than those for short-term loans) is beinggradually redressed. Interest rate policy needs to be further modified to strengthen the financialliberalization process, and this is an important element of the on-going policy dialogue that both the IMFand the Bank are conducting with the Government. SBV's refinancing policy is being gradually modifiedto make the SBV truly a lender of last resort. As part of the IMF's Enhanced Structural AdjustmentFacility (ESAF) program, the Government has removed the subsidy element involved in the refinancingof specific, long-term loan contracts, and has limited the amount of such refinancing. The need for short-term refinancing to cover shortfalls in settlement balances will be greatly diminished with theconsolidation of settlement accounts proposed under the proposed project (Chapter 3). The Governmentprescribes a reserve requirement of 10% of deposits for all banks; however, effective reserves areconsiderably higher since banks hold high levels of non-statutory "liquidity" or "transactions" balanceswith the SBV. These pose a significant burden on the banking system, since reserves are not remuneratedon market terms. Here, too, improvements in the clearing and settlement function will eliminate the needfor large holdings of these other, non-statutory reserves.

2.13 A first step in rationalizing the role of the SBV branch network is being undertakenthrough the removal of settlement accounts from the provincial level and their consolidation at the headoffice level. The significance of this move should not be discounted. It represents an important step in

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rethinking the role of the provincial branches, notably with respect to their supervisory role, and is thepeg on which to hang further organizational reform of the SBV.

2.14 Improvements in accounting practices are required at the SBV, and the IMF is asignificant source of technical assistance in this area. Reforms in SBV's refinancing policy, includingcaps on the amount of central bank credit, should help strengthen the financial position of the SBV.

2.15 Constraints to intermediation are being gradually removed. A key constraint is theinadequate payment system (Section C), which is being addressed by the proposed project. TheGovernment intends to eliminate the turnover tax on banking activity (the tax ranges from 2% to 30%and varies by bank), which should reduce distortions in the system. However, additional measures areneeded to level the playing field. For example, the profit tax rate discriminates against the SOCBs, andshould be harmonized across banks. Provisions for doubtful loans are not tax deductible, leading todisincentives for adequate provisioning. The Government is studying these problems with a view tofinding phased solutions that are politically acceptable and that are budget neutral.

2.16 In order to encourage competition in the banking sector, the Government has pursued apolicy of relatively free entry, as a result of which several banks are now operating in the country.However, as discussed in Section A, the banking system is heavily dominated by the SOCBs, which arehampered by an accumulation of inherited bad debt in their portfolios. As a first step in accuratelyassessing the financial situation of these banks, comprehensive portfolio audits, carried out byindependent, international auditors, are planned for the four SOCBs and the two joint-stock banksparticipating in the project. The audit of Agribank is underway, and a draft report is expected before end-1995. Terms of reference for an audit of Incombank have been prepared with Bank assistance, and thataudit will be launched in the second half of 1995. Audits of the remaining two SOCBs as well as the twojoint-stock banks are expected to take place in 1996, and will be financed under the project. Thesereviews will form the basis of concerted portfolio restructuring plans, notably to rid the banks ofinherited bad loans, and to determine appropriate capital requirements based on an accurate assessmentof their portfolios.

2.17 The Government accords a high priority to the institutional development of the bankingsystem. Thus, training and technical assistance in modern banking techniques is actively being solicitedfrom a host of bilateral and multilateral sources. The largest bilateral donor in this area is the SwedishInternational Development Authority (SIDA), which is funding a multi-year training and technicalassistance project (Bank executed). This project has been instrumental in providing training to severalhundred middle and senior bank managers, and has facilitated Vietnamese participation in the SWIFTinternational payment messaging service, as well as in drafting the Check Law. The project has providedsignificant support to the National Payments Council (para. 2.29). Swedish assistance is also funding aspecial audit of one SOCB. German technical assistance is helping to develop a Bankers' Association (anindependent body representing the profession). Other bilateral donors include France, which is providingtraining in macroeconomics; Australia, which is funding the Agribank special audit; and the Netherlands,which has expressed an interest in funding four commercial bank audits in conjunction with the proposedproject. The Asian Development Bank (ADB) is presently undertaking its own Financial Sector Review,and has provided some technical assistance in the area of commercial banking and capital marketsdevelopment. The IMF is a significant source of technical assistance to the SBV, and has in place tworesident advisors who are working with the SBV in the areas of indirect monetary control procedures,improvement of supervisory control, and foreign exchange management. The IMF has also providedlegal technical assistance to support the development of payment systems to complement the Bank's and

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the Government's project preparation efforts. The Bank is assisting in the institutional development ofthe Agribank through the Agriculture Rehabilitation Project (Credit No. 2561-VN).

2.18 The above activities notwithstanding, there remains a significant need to upgrade theinstitutional and organizational capabilities of the commercial banks, and in particular, the SOCBs. TheGovernment is not keen to pursue an all-encompassing, top-down approach in such institutional andorganizational restructuring. There is likely to be significant resistance to such an approach from thebanks themselves, and the sheer magnitude of what needs to be done is likely to pose severe absorptiveconstraints. Current Government strategy is to address SOCB issues in a thematic fashion across allSOCBs, rather than to undertake the full gamut of organizational, institutional and financial studies on aninstitution-by-institution basis. One reason for such an approach may be Government desire to maintainall four SOCBs at similar levels so as not to be seen to be actively targeting any one institution.

2.19 The Government intends to develop securities markets as part of its financial sectordevelopment strategy. The International Finance Corporation (IFC) has provided significant technicalassistance to the SBV to put in place the necessary regulatory framework for such development. It isexpected that a national securities market, trading debt securities in an initial stage, will be operationalby the end of 1995. Adequate arrangements are required to facilitate the adoption of a delivery versuspayment methodology for securities trades, thereby ensuring an equitable allocation of risk to allparticipants in a transaction. Such risk sharing is a critical success factor in securities marketdevelopment. The Government's other financial market development activities concern the foreignexchange and inter-bank money markets. Adequate financial sector infrastructure, including satisfactorypayment arrangements, is essential to improve the transactional efficiency of these markets.

C. PAYMENT SYSTEM: CURRENT STATUS, CONSTRAINTS AND ORIENTATIONS

2.20 There have been significant improvements in the payment system in the past year.Payments within the major cities are now effected within two or three business days, a vast improvementover previous clearing cycles of two weeks or more. Nonetheless, the consensus among users is thatmuch more needs to be done to foster an effective and efficient system. Government payments betweenagencies, as well as other expenditures, are handled outside the banking system. There is no electronicpayment of payroll, even in the larger companies. Cash is the predominant means of payment in VietNam. The heavy reliance on cash has a historical basis, and can in part be traced to the legacy of amonobank, which was not geared to serving the individual. High inflation in the recent past has no doubtcontributed to the public's lack of reliance on the banking system.

Payment Instruments

2.21 The range of non-cash instruments is limited at present, and non-cash payments arepaper-based. The most commonly used non-cash payment instruments are authorized payment orders,which account for nearly three-quarters of all non-cash payments, and various forms of bank drafts.Individuals have only recently been allowed to open checking accounts, and personal checks are not yetwidely used. Recent improvements in checks include a more convenient format and color coding by bankto facilitate processing. Payment vouchers in denominations of D100,000, D500,000 and D1,000,000 areavailable, with an expiry date six months after date of issue. The denominations are considered too lowby commercial banks, and too high by certain payees. Payment vouchers are susceptible to fraud, giventhe printing techniques in use. A limited number of paper-based credit transfers takes place. Internationalcredit cards were first accepted in Viet Nam in 1990, and appear to be increasingly used. Four

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Vietnamese banks have recently been licensed by Mastercard to issue its cards. One domestic bank hasrecently introduced a local currency card, whose use remains limited.

Clearing and Settlement Arrangements

2.22 The SBV has a head office in Hanoi, and maintains a branch in each of the country's 53provinces. Each settlement bank is required to hold a settlement account with SBV in each province inwhich it operates. The SBV branches act as provincial clearing and settlement centers for inter-bankpayments. Intra-provincial (local) inter-bank transfers are made through an exchange of paper documentsbetween banks at one, and sometimes two, clearing sessions per day. Checks are verified by issuingbanks via a physical inspection of the documents, and output lists are used as a basis for posting netmovement of funds to clearing house accounts, then distributed to participants via paper, diskette ormodem for input into the banks' customer accounting systems. Inter-provincial (non-local) inter-bankpayments require the transfer of both electronic instructions and paper documents. The electronicinstruction is transferred either via a national communications network developed by the SBV's Centerfor Informatics of the Bank (CIB), or the commercial bank's own network. In the CIB network, transfersare processed by the provincial SBV branch, which inputs the infornation onto the CIB system. CIB thenroutes the transfer to the appropriate receiving SBV branch. Settlement accounts are debited and creditedaccordingly upon receipt of a copy of the transfer document.

2.23 Procedures for intra-bank payments depend on the degree of computer support availableat branch level within the commercial banks and on the size of the branch network. In general, bankscentralize the processing of inter-bank transfers at one (Hanoi) or two regional centers, and transferrequests are made via computer using dial-up links. Branches effect their transfers via their accountswith the regional center. In view of its large branch network, Agribank currently organizes its inter-branch transfers on a three-tier basis. Within a province, branches act for sub-branches and transferbetween each other, mainly via the postal system. Inter-provincial transfers are sent via dial-up link toregional centers, which in turn process them via accounts held at the head office in Hanoi.'

2.24 Foreign payments were, until recently, mainly routed through Vietcombank, whichtransmitted them via telex to correspondents. Several Vietnamese banks have recently joined SWIFT,and systems have now been set up to allow their branches to transmit and receive foreign payments viatheir respective head offices, with each branch having foreign currency accounts in the head office forthe posting of transactions. These banks are connected to the SWIFT access point in Singapore atpresent, although there are plans to establish a SWIFT access point in Viet Nam in the coming years.

Current Payments Volumes

2.25 The total value of all payments is reported to be six times GDP, which reflects both ashallow financial sector and relatively inefficient use of the money supply. In the more developedeconomies of the region, the corresponding figure is around 10, while estimates for developed countries(Group of Seven) range from 40-100. Nearly three-quarters of all payments are intra-bank, and over threequarters of all intra-bank payments are intra-provincial. The average number of daily inter-bankpayments is less than 10,000, and about two-thirds are intra-provincial. Payments are concentrated in afew provinces and cities (notably Ho Chi Minh City and Hanoi). There are signs of very rapid growth in

Details on the main information flows involved in intra- and inter-bank transactions are available in the projectfiles.

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non-cash payments, albeit from low levels: in 1994, the annualized rate of growth in payments averaged50%.

Constraints

2.26 The underlying weakness of the current Vietnamese payment mechanisms stems fromthe prior needs of a centrally planned economy. The current range of payment instruments and servicesdoes not fully address the needs of customers for the reliable, confidential, timely and cost-effectivemeans of payment that are essential in a market economy. The current payment system is also unable tocope with the anticipated significant increase in the volume of monetary transactions that arecharacteristic of the transition process. The insecure and unreliable nature of the presenttelecommunications infrastructure is a severe constraint on electronic funds transmission. Thecommercial banks are reluctant to use the national inter-bank electronic funds transfer network forreasons of speed, control and confidentiality. Most inter-provincial payments are achieved by acombination of intra-bank and local inter-bank transfers, resulting in payment delays with all theattendant consequences.

2.27 The requirement to fund settlement accounts at the provincial level ties up a significantportion of commercial bank resources - resources that could be used for productive purposes - andcreates severe coordination problems. It is difficult for the banks to optimize the use of settlement funds(either for clearing and settlement or for physical cash transactions) on a national basis, since there is noeffective mechanism for rapid transfer of funds between provinces. An electronic funds transfermechanism would permit the consolidation of settlement accounts at the national level.

Development Orientations

2.28 One of the key problems in the development of new payment arrangements is the need toharmonize the objectives and goals of the SBV with the comparable objectives and goals of the rest ofthe banking sector. The SBV also has the difficult task of developing and enforcing standards coveringpayment instruments, operating procedures, and rules and regulations. The new payment arrangementsmust be comprehensive and national in scope to meet the payment requirements of the Vietnameseeconomy in an efficient manner. Thus, the improvement initiative must cover local and non-local inter-bank payment transactions as well as intra-bank and international transactions. An additionalrequirement is the need for an efficient integration of payment processing with customer accounting andsettlement accounting procedures.

2.29 To provide advice on the various tasks to be carried out in modernizing the system, aNational Payments Council (NPC) was set up in July 1994, consisting of representatives of theconcerned departments of the SBV, the SOCBs and the banking sector as a whole. In addition, a Bankers'Association was established in August 1994. The NPC has established four working level sub-committees as follows: (a) Legal & Regulatory and Accounting & Standards; (b) Automation(computing & telecommunications); (c) Commercial Bank Modernization; and (d) Payment SystemOperations. These sub-committees provide advice on critical policy and design issues related to theirassigned area of involvement.

2.30 The SBV's guiding principles behind the design, establishment and operations of thenational payments arrangements include: (a) universality of access by financial institutions; (b) costefficiency and self-financing through cost recovery; (c) minimization of payment system risks; (d)integrity and reliability; (e) active user participation in all phases of system development; and (f) cost

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minimization in system design through trade-off between the use of new and existing equipment. Theproposed project has been prepared in accordance with these guiding principles.

D. THE BANK'S ASSISTANCE STRATEGY

2.31 The Bank is assisting in the development of the financial sector through a variety ofinstruments. Analytical support and policy advice have been provided through two sector reports, thefirst in 1990 shortly after the monobank was dismantled, and the second in 1995. These reports haveformed the basis of a policy dialogue with the authorities on financial sector development issues. Somepolicy reforms pertaining to the financial sector, such as the removal of the turnover tax and the carryingout of portfolio audits for two SOCBs, are being supported through the Structural Adjustment Credit(Credit No. 2657-VN). The Bank has been instrumental in mobilizing bilateral assistance for conductingthese audits, and has assisted the Government in drafting terms of reference for the same. The Bank has,since 1992, been involved in training and sundry technical assistance activities through two SIDA-financed Banking Sector Training and Technical Assistance projects. The Agriculture RehabilitationProject is supporting the institutional strengthening of Agribank through training and technicalassistance, and is providing a line of credit for inputs and on-farm development works to private,smallholder farm households. A Rural Finance Project is also under preparation, addressing the financingneeds of the rural poor by improving their access to the formal financial system.

2.32 Given the direct links between the real sector and the financial sector, a key element ofthe Bank's policy dialogue with the Government has been to stress the need for real sector restructuringin conjunction with bank restructuring. The Structural Adjustment Credit is supporting policy reforms inthe state enterprise sector. In addition, the Bank is executing UNDP-funded technical assistance througha State Enterprise Reform Project which is assisting the Government in legal reform pertaining to thesector and in implementing a pilot enterprise restructuring and privatization program.

2.33 The Bank has consistently sought opportunities to coordinate its financial sectorassistance with that of other donors in order to avoid duplication and to seek synergies between itsinterventions and those of other donors. The proposed project is a good example of that approach: itbuilds on the technical assistance provided to the SBV by SIDA in support of the NPC, SWIFTmembership and the Check Law, and it incorporates IMF technical assistance in the area of legal advicepertaining to payment system development. Agreement in principle has been obtained for bilateralcofinancing from the Netherlands to fund external audits of four banks (the remaining two SOCBs andthe two joint-stock banks that are participating in the project). In addition, the Economic DevelopmentInstitute has provided critical training during project preparation to familiarize the NPC with paymentsystem issues.

E. LESSONS FROM PREVIOUS BANK INVOLVEMENT

2.34 There has been one previous IDA operation with some banking sector involvement inViet Nam - the Agriculture Rehabilitation Project. This project involves, inter alia, a line of creditchanneled through Agribank, and includes technical assistance for strengthening of this institution. Whileit is too early to draw definitive conclusions from this operation, implementation experience suggeststhat the main project risks relate to the limited institutional experience. The proposed project has beenprepared bearing this constraint in mind. Lessons from other Bank experience in the payment systemsarea include: (a) the importance of tailoring payment system solutions to the country's geography,infrastructure, banking and legal structures, and culture; (b) the need for a formal project management

I1

structure, with the key involvement of the central bank; (c) active user involvement at both policy andworking levels in providing direction to the improvement efforts; and (d) a phased implementationprocess whereby the system is extensively tested before "live" operations, i.e., introduced on a pilot basisin an initial stage and only fully rolled-out after experience has been gathered in operation. These lessonshave been taken into account in the design of the proposed project.

F. RATIONALE FOR BANK INVOLVEMENT

2.35 The last Country Assistance Strategy for Viet Nam (Report No. 13545-VN), discussedby the Bank's Board on October 25, 1994, indicates that the greatest challenge facing the Govemment ismanaging the transition to a market economy. Modemizing the financial system is a high priority thatwill affect all sectors in Viet Nam, as is recognized in the Country Assistance Strategy, dated October,1995. The recent Financial Sector Review identified key bottlenecks in the sector, including hightaxation of the banks and a weak payment system that discourages the use of the banking system. TheCountry Assistance Strategy further states that one of the highest priorities in Viet Nan is to get thefinancial system to provide basic services to producers, especially private farmers and firms, and tomobilize capital now held in liquid forms outside the banking system. Put differently, a key task aheadfor the Government is to promote confidence in the banking system and make it more customer-oriented.

2.36 The rapid development of the Vietnamese economy requires the support of a robust andefficient financial sector which, in turn, requires an adequate banking sector infrastructure. Efficientpayment, clearing and settlement systems and the associated legal and regulatory framework are theprincipal building blocks of such an infrastructure. The Bank is uniquely placed to assist the Governmentin the design and implementation of such financial system infrastructure. It has experience in suchprojects and is well-equipped to deal with the variety of policy, design and implementation issuesinvolved. It can provide objective "best practice" advice, thereby ensuring that key strategic and policyissues involved in the design of such systems are fully taken into account. The proposed project is fullyconsistent with the Bank's broader financial sector strategy that is being pursued through analyticalwork, policy dialogue, lending operations and technical assistance. Furthermore, it complements on-going initiatives in private sector development.

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3. THE PROJECT

A. OBJECTIVES

3.1 The ultimate objective of the proposed project is to assist in the development of a modembanking sector able to service the needs of a growing economy, thereby increasing confidence in theVietnamese banking system. The immediate objectives of the proposed project are to: (a) improve paymentservices in the economy in order to reduce float, speed up circulation of funds and increase efficiency offunds transmission, while providing convenience and service to users; and (b) strengthen the institutionalcapabilities of participating banks in order to stimulate commercial bank initiatives to improve internalmanagement and customer service.

B. DESCRIPTION

3.2 The project consists of four components: (a) a national inter-bank payment clearing andsettlement system; (b) commercial banks' intra-bank payment systems; (c) commercial banks' institutionalstrengthening and (d) project management support. A schematic description of the project is provided inFigure 3.1. A detailed description of the payment system components of the project is contained in Annex 1.The first two components (inter- and intra-bank systems) will be procured on a turn-key contract basiswherein the contractor will provide the computer hardware, software, training and initial systems operation.Thus, although not identified as a separate project component for the purposes of this section, training andskills transfer is an integral part of project design and philosophy (see Section E). The commercial banksparticipating in this project have been selected by the SBV on the basis of their involvement in paymentprocessing activity: among them, they account for 90% of banking activity in the country.

National Inter-bank Payment Clearing and Settlement System

3.3 The national inter-bank payment clearing and settlement system will address the needs ofboth the SBV and the commercial banks and will provide local and non-local inter-bank clearing andsettlement services. This system will consist of two components: (a) an Inter-Bank Payment System (IBPS);and (b) a Settlement Account Processing System (SAPS).

3.4 The IBPS will handle intra- and inter-provincial domestic inter-bank payments in dong. Acurrency conversion facility will be available for non-dong denominated payments. IBPS will comprise twosub-systems: (a) a low value sub-system for credit transfers and pre-authorized debit transfers, able tohandle batches of items (bulk payments) as well as individual items, operating with a net settlementmechanism; and (b) a high value sub-system for credit transfers, providing a real-time gross settlementfacility for individual time-critical payments.

3.5 Direct access to IBPS will be restricted to settlement banks, each of which will have a singlecentralized settlement account at the SBV. For settlement purposes, IBPS will interact with SAPS.Participation criteria for settlement banks, covering financial strength, conformity with technical standards,and risk management ability, will be established by the SBV (see Section G). A bank without a settlementaccount may participate indirectly via a correspondent relationship with a settlement bank. IBPS has beendesigned to permit access by settlement banks through six provincial processing (clearing) centers as well asthrough the main banking centers of Hanoi and Ho Chi Minh City. Any commercial bank that meets theparticipation criteria established by the SBV can use the system.

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Commercial Banks' Intra-bank Payment Systems

3.6 The second component will address the intra-bank and international payments needs of thesix participating banks: the four SOCBs and as well as two joint-stock banks. There will be a CommercialBank Payment System (CBPS) for each of the six commercial banks (CBs) included within the scope of thisproject. Each system will be able to handle all domestic intra-bank payments, both intra- and inter-provincial. The CBPS has been designed to support the different customer accounting organizationstructures (centralized, decentralized, or a hybrid) used by CBs. The generalized CBPS architecture is thuscapable of accommodating the varying needs of the CBs in their present situation as well as those of theirfuture customer accounting improvement plans (para. 3.8).

3.7 Payment instructions from a CB branch will be electronically transmitted, after validation,to the account holding branches for updating of the customer accounts maintained for originators andreceivers. The stand-alone SWIFT-based international payments facility recently introduced at the headoffices of the CBs could, in due course, be integrated with CBPS to provide participating branches with theability to send payments to, and receive payments from, foreign correspondents.

Commercial Banks' Institutional Strengthening

3.8 The third component of the project consists of: (a) diagnostic reviews of the CBs'modernization needs, with particular emphasis on the design of appropriate customer accounting systems;and (b) diagnostic portfolio reviews and financial audits of the CBs to determine their true financialsituation. The introduction of an automated, integrated intra-bank payments and customer accountinginterface capability provides a sound infrastructure to allow the CBs to implement a range of new bankingproducts and other customer services by providing electronic access to customer accounts from allparticipating branches. The diagnostic reviews of the CBs' modernization needs will be undertaken in twophases. The first involves the drafting of detailed terms of reference, tailored to the specific situation of eachCB, which will be undertaken by consultants hired through the PHRD preparation grant (terms of referenceare contained in Annex 2). It is expected that these consultants will be fielded in December 1995. Thesecond phase involves the actual carrying out of the diagnostic reviews for each CB based on the agreedterms of reference, which will be undertaken within the project timeframe. Terms of reference for theportfolio audits are contained in Annex 3; these will be customized as necessary by each CB.

Project Management Support

3.9 The fourth component of the project provides support for project management, consisting ofconsulting services for: (a) procurement of the systems (para. 3.19); and (b) technical support to the ProjectManagement Unit (para. 3.18); including vehicles and miscellaneous office equipment.

C. COSTS AND FINANCINGProject Cost

3.10 The base project cost is D507 billion (US$45.3 million equivalent), and total project costincluding contingencies is D674 billion (US$53.9 million equivalent), with a foreign exchange componentof about 92%, or US$49.6 million equivalent. Physical contingencies represent around 10% of base cost,while dong price contingencies represent about 23%. Table 3.1 summarizes the cost estimates bybeneficiary and component; details are in Annex 4. Base costs are in January 1995 prices, and are derivedfrom the most recent equipment, material and labor cost data available for similar, turn-key operations.Price contingencies are estimated on the basis of escalation factors of 7% and 6% for local costs for 1995and 1996-99 respectively, and 2.6% for foreign costs. The Government of the Netherlands has expressed aninterest in cofinancing the portfolio audits of the four commercial banks (US$1 million).

Figure 3.1: Overview of Proposed Payment Applications

Inter-bank Payment Instructiohs Settlement Requdsts

o 0.. Low.Pper ValuedPivNe

Intra-bank Inter-bank(strategie tobdefnednPayment System Payment System

commercial:banks under the project) (to be provided for the B system udSetem te t j^ z X t3;~~~~~~~~~~~~~~~~~~~~~Low ValUe * .:(SAPS3)'

O : ~~~~~~~~Sub-System fn

Provinc 4;ia9000 ' ;: - D Lo t0 iValuet sb Setemn r,uismd8mnch . - Hybfid ; _ _ ~~~~~CrerJit Payment . .Falr

-L | Bo-6ving |~~ub-sto

Customer Account Migration Intra-bank Payment System National Inter-bank(strategies to be defined under the project) (to be provided for selected branches of 6 Clearing & Settlement System

commercial banks under the project) (to be provided for the SBV system under the project)

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Table 3.1: Project Cost Summary

Billion Dong % of Million US$ Foreign asForeign Local Total Base Cost Foreign Local Total % of Total

State Bank of Viet Nam 124.65 8.56 133.20 26 11.13 0.76 11.89 94Inter-bank System 117.41 7.74 125.15 25 10.48 0.69 11.17 94Project Management Support 7.24 0.82 8.05 2 0.65 0.07 0.72 90

Commercial Banks 341.68 26.44 368.12 73 30.51 2.36 32.87 93Agribank 95.21 6.96 102.17 20 8.50 0.62 9.12 93intra-bank system 81.77 6.96 88.73 17 7.30 0.62 7.92 92user requirements and audits 13.44 13.44 3 1.20 1.20 100

BIDV 74.07 5.96 80.03 16 6.61 0.53 7.15 93intra-bank system 60.07 5.96 66.03 13 5.36 0.53 5.90 91user requirements and audits 14.00 14.00 3 1.25 1.25 100

Eximbank 24.67 1.15 25.82 5 2.20 0.10 2.31 96intra-bank system 19.63 1.15 20.78 4 1.75 0.10 1.86 94user requirements and audits 5.04 5.04 1 0.45 0.45 100

Incombank 71.32 7.77 79.09 16 6.37 0.69 7.06 90intra-bank system 61.24 7.77 69.01 14 5.47 0.69 6.16 89user requirements and audits 10.08 10.08 2 0.90 0.90 100

Maritimebank 24.85 1.33 26.18 5 2.22 0.12 2.34 95intra-bank system 19.81 1.33 21.14 4 1.77 0.12 1.89 94user requirements and audits 5.04 5.04 1 0.45 0.45 100

Vielcombank 51.56 3.27 54.83 11 4.60 0.29 4.90 94intra-bank system 37.56 3.27 40.83 8 3.35 0.29 3.65 92user requirements and audits 14.00 14.00 3 1.25 1.25 100

Duties and Taxes 6.13 6.13 1 0.55 0.55 0

Total Base Cost 466.33 41.12 507.45 100 41.64 3.67 45.31 92Physical Contingencies 46.63 4.11 50.75 10 4.16 0.37 4.53 92Price Contingencies 107.40 8.42 115.82 23 3.78 0.30 4.08 93

Total Cost with Contingencies 620.36 53.66 674.01 133 49.58 4.34 53.92 92

Financing Plan

3.11 Table 3.2 summarizes the proposed financing plan for the project. IDA financing willaccount for about 81% of the total requirements of US$60.5 million equivalent. The proposed IDAcredit of US$49 equivalent will finance 99% of the estimated foreign exchange cost and will be madeto the Socialist Republic of Viet Nam at IDA's standard rate for a 40 year term, including 10 years ofgrace on repayment of principal. The SBV, on behalf of the Socialist Republic of Viet Nam, would bethe primary implementing agency. Part of the proceeds of the IDA credit would be on-lent to the CBs

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in the amounts shown in Table 3.3, at a fixed interest rate of 6.25%1 per annum, with repayment in USdollars over 20 years, including a grace period of 5 years. The dong/dollar foreign exchange risk wouldbe borne by the CBs. Assurances were obtained at negotiations that Implementing and On-lendingAgreements, satisfactory to IDA, setting out the terms and conditions of the on-lending arrangements inrespect of each CB's improvement plans and providing for CB carrying out of their respectivecomponents, would be concluded between the SBV and the CBs as a condition of effectiveness of theIDA credit. Draft Agreements were reviewed at negotiations and found satisfactory.

Table 3.2: Financing Plan(US$ thousands)

1995 1996 1997 1998 1999 TotalTotal Project Cost 407 14,857 22,539 12,695 3,419 53,917

Interest duringConstructionSBV 33 71 81 92 96 374Commercial banks 2 504 1,310 2,077 2,359 6,253

Total to be Financed 443 15,432 23,931 14,864 5,875 60,544

Financed by:IDA 227 13,286 20,071 12,145 3,271 49,000SBV 178 644 377 291 144 1,635Agribank 1 0 400 907 668 683 2,668BIDV 8 338 825 495 540 2,207Eximbank 2 112 172 163 175 624Incombank 8 328 938 500 514 2,288Maritimebank 2 122 183 171 173 651Vietcombank 6 203 457 431 374 1,471

Total Financing 443 15,432 23,931 14,864 5,875 60,544

The interest rate is based on the following formula: rate of not less than the average of the I 0-year USTreasury bond note and the 30-year US Treasury bond note as published in the International Herald Tribuneless a 0.3% rebate for on-time payment, on the principal amount so on-lent and withdrawn by the CBs, as thecase may be, and outstanding from time to time.

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Table 3.3: Credit Allocation(US$ thousands)

Participating Bank IDA/SBV Internal TotalState Bank of Viet Nam 13,200 1,261 14,461Agribank 10,000 968 10,968BIDV 7,750 827 8,577Eximbank 2,600 154 2,754Incombank 7,500 1,001 8,501Maritimebank 2,600 201 2,801Vietcombank 5,350 505 5,855

Total 49,000 4,917 53,917

D. IMPLEMENTATION

3.12 The project will be implemented by the SBV and the six CBs. Project implementationprocedures will vary by the type of goods and services to be procured. The system contract supplierwill initially be responsible for the full operation of both inter- and intra-bank systems. The inter-banksystem will be implemented by the SBV and the supplier in four phases after procurement:

* construction, including detailed systems specification on the basis of the technicalspecifications already prepared; site preparation and installation, system testing anddevelopment of training plans, required documentation and disaster recovery plan anddrill;

* initial pilot, in which the new systems will be installed in selected initial pilot sites,new settlement accounts will be established, and parallel running of old and newpayment systems will be ensured;

* pilot expansion, including site preparation for remaining sites, delivery of on-sitetraining, further acceptance testing and decommissioning of the old payment system;and

* operations and maintenance, in which the vendor will operate the new inter-banksystem for a period of one year after it has been installed in all sites covered by theproject.

In parallel, the SBV will finalize the legal and regulatory framework (Section G), operating rules andprocedures for membership in the new payment arrangements, and telecommunications serviceagreements (Section F). A tentative project implementation plan is contained in Annex 5. Annex Icontains details on the sites included in the project for both the IBPS and CBPS.

3.13 The intra-bank systems will be implemented by each CB, and will follow broadly thesame structure and phases as the inter-bank system. The pace of implementation will depend on theindividual implementation capacity of the CB concerned. Similarly, expansion of the system beyondthe sites selected for inclusion under the project will depend on the individual needs and financing

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capabilities of each CB. The institutional development component of the project will also beimplemented by each CB.

Project Management Arrangements

3.14 The proposed project will be a large and complex undertaking, involving manydifferent players. Project organization and management plans will need to change over time to supportthe shifting requirements of the project as it progresses from preparation to full operation. The ProjectManagement Plan (available in project files) is perforce an evolving document, which will describe atany given point the current thinking on project organization and implementation plans.

3.15 The SBV has ultimate executive responsibility for the project. The NPC (para. 2.29)will play an important advisory role in policy formulation, membership rules and guidelines, paymentsystem rules and regulations, standards, pricing and cost recovery. Operational support to the variousSBV departments and CBs will be provided by a Project Manager and a Project Management Unit.

3.16 Project Management Unit (PMU). The PMU was established in September 1995within SBV, and is primarily responsible for: (a) coordinating day-to-day implementation activities; (b)administering the IDA credit; and (c) serving as the focal point for Bank supervision activities. ThePMU has been staffed with appropriately qualified personnel and will be responsible for the planning,scheduling and executing day-to-day activities during the procurement, construction andimplementation phases of the project.

The PMU will be responsible for the following:

credit administration: procurement, disbursement, administration of on-lendingagreements, internal reporting;

* translation and interpretation: project translation and interpreter support;

project planning and monitoring: activity planning, resource management, costcontrol, progress reporting;

* risk management and change control: threat assessment and management, projectchange control;

* organization and communications: NPC, SBV, CB and third party communications,project library; and

* key relationship management: World Bank, telecommunications, suppliers,consultants, other ministries and agencies.

3.17 As the project progresses through each phase, the PMU will need to respond tochanging project requirements, and the relative importance of the different functions can be expected tochange over time. For example, project planning, organization and communications will be crucial atthe start of the construction phase, while emphasis will switch to risk management and change controlonce the principal project planning tasks are completed. Logistic support for the PMU, consisting ofthree vehicles and miscellaneous office equipment, will be provided under the project. Assuranceswere obtained at negotiations that the PMU will be maintained with staff in adequate numbers and withfunctions acceptable to IDA, for the life of the project.

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3.18 Resident Advisor. In order to assist the PMU, a Resident Advisor will be appointed.This individual would be an experienced technical specialist who would advise the PMU on technical,project management and vendor contract matters. Given the complexity of the project and the very fast-changing technological environment of computerized systems, it is advisable to have an experiencedprofessional during system construction and pilot operation to provide independent advice to the PMUon vendor proposed change orders and system design modifications. The SBV is particularly desirousof having such support in view of the limited local experience in dealing with foreign vendors and withimplementing of complex systems. The Resident Advisor will be hired prior to contract negotiationswith the vendor and so will be available at the very onset of the construction phase. It is crucial that theperson selected be committed to working in Viet Nam and be flexible enough to respond to the PMU'schanging needs. Terms of reference for such a person are provided in Annex 6.

Procurement

3.19 Procurement arrangements for the project are summarized in Table 3.4, and theprocedures to be followed are described in Annex 7. Consulting support will be provided to assist thePMU in procurement matters. The cost of each item includes its pro rata share of physical and pricecontingencies. The portion of the project not financed by IDA would follow the normal procurementprocedures of the entity concerned. All consultants will be retained on the basis of qualifications, termsof reference, and a selection procedure acceptable to IDA.2

Table 3.4: Procurement Arrangements(US$ millions)

Procurement MethodComponent ICB Other NBF Total

Computer Systems and Related Services 43.95 2.69 46.64(turn-key system contract) (41.75) (0.0) (41.75)

Vehicles and Equipment 0.11 0.11(0.08) (0.08)

Consultants 7.17 7.17(7.17) (7.17)

Total 43.95 7.28 2.69 53.92(41.75) (7.25) (0.0) (49.00)

Figures in parentheses represent amounts financed by the IDA creditNBF: not IDA FinancedOther: national shopping; consultant services

3.20 About US$43.95 million equivalent of goods and services, or 85% of the IDA credit,would be suitable for procurement through a single system contract following international competitivebidding (ICB) procedures according to the Bank's procurement guidelines and using the Bank's

2 In the event that the portfolio audits are financed by bilateral assistance from the Netherlands, qualificationsand terms of reference acceptable to IDA would be required.

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standard bidding documents. In the evaluation of bids obtained following ICB procedures, a margin ofpreference equal to 15% of the CIF price of imported goods or the actual customs duties and importtaxes, whichever is lower, will be allowed for domestic manufacturers. About 14.6% of the creditamount, or US$7.2 million equivalent, would be used for financing consultant services procuredfollowing the Bank's procedures for the use of consultants. Miscellaneous off-the-shelf, readilyavailable goods (including vehicles) with a per item value of less than US$50,000 equivalent would beeligible for procurement through national shopping (NS), with a minimum of three quotations, in anaggregate amount not to exceed US$1 10,000. Prior review and approval by IDA would be required forall bid documents, contract award recommendations and contracts for goods and services procuredunder the project. The total number of procurement packages is foreseen to be: (a) ICB - one package;(b) NS - four packages; and (c) consulting services - 12, covering some 500 person-months of servicesfor policy and implementation support.

Disbursement

3.21 The estimated disbursement of the IDA credit is shown in Annex 8 and summarized inTable 3.5. This assumes that the Credit Agreement will become effective by February 1, 1996. Theproject is expected to be completed by June 30, 1999. A credit closing date of June 30, 2000 has beenestablished. The credit is expected to be disbursed approximately 5 years after effectiveness based onthe advanced stage of preparatory work, particularly with regard to the largest contract (85% of creditamount). Retroactive financing not exceeding US$4.9 million equivalent of the proposed credit isrecommended for eligible payments made prior to the date of credit signing, but after the appraisal enddate of May 12, 1995. These expenditures would concern consulting services and equipment requiredto support the PMU, and will contribute to an efficient start-up of project activities, including bidpreparation for the system contract.

Table 3.5: Estimated Credit Disbursement(US$ millions)

IDA Fiscal Year

1996 1997 1998 1999 2000

Annual 1.47 17.15 19.60 8.82 1.96

Cumulative 1.47 18.62 38.22 47.04 49.00

3.22 The credit will be disbursed against: (a) 100% of foreign expenditures for goods, 100%of local expenditures for goods (ex-factory), and 75% of local expenditures for other items procuredlocally (all for the PMU); (b) 100% of total expenditures for consulting services, excluding taxes; and(c) 95% of the system contract supply and installation, exclusive of taxes. (The remaining 5%represents local handling, transportation and related costs.) Disbursements for all expenditures wouldbe based on full documentation. The SBV will open a Special Account in a commercial bank with anauthorized allocation of US$500,000 (representing an average of about 4 months' small disbursements)to facilitate payments for eligible expenditures. Application for replenishment of the Account,supported by appropriate documentation, would be submitted monthly or when the account is drawn

21

down by 20% of the authorized allocation, whichever occurs first. For withdrawals outside of theSpecial Account (application for direct payment or for issuance of Special Commitments), a minimumapplication value of 20% of the authorized allocation of the Special Account would be observed.

Monitoring, Reporting and Supervision

3.23 Performance Monitoring. Monitoring of payment system perfornance is animportant aspect of ensuring that the system meets the stated needs of users and generates the soughtafter improvements. To help build confidence in the system, a strict daily processing timetable will bedeveloped, as will a reporting system to demonstrate realized service levels to participants.Performance measures that will be monitored include: system availability, message throughput, delays,faults and errors, time-to-repair, and communication service levels and line speed. A detailed list ofperformance monitoring indicators is contained in the Project Management Plan (available in projectfiles). A list of implementation progress and development impact indicators is provided in Annex 5.

3.24 Project Accounts. The PMU will maintain separate project accounts for all projectcomponents. These accounts will be audited by an independent auditing firm. Audits will be providedwithin 9 months of the close of the Vietnamese fiscal year. Assurances were obtained at negotiationsthat project accounts, audited by a firm acceptable to IDA, will be provided within 9 months of theclose of each fiscal year.

3.25 Periodic Progress Reports. The PMU will provide semi-annual progress reports onthe status of on-going and planned project activities. These reports will be provided by September Iand March I each year, covering six-monthly activity from January to June and July to December,respectively, and beginning March 1, 1996. In addition to physical progress in project implementationand the status of key project activities, the progress reports will provide financial information relatingto expenditures planned, committed and disbursed. The PMU will monitor project performanceindicators on a regular basis, as described in paragraph 3.23, as well as general implementation anddevelopment impact indicators as described in Annex 5. For the purposes of the periodic progressreports to IDA, the PMU will provide summary statistics on: system availability (percent of normalbusiness hours that the system is ready and available for use); total number of payment messages perday (including number of messages during the daily peak hour); system performance (number of faultsand errors in hardware and software per month); and mean time to repair for major hardware andsoftware faults. These indicators will be calculated once the testing phase of the project is complete andpilot implementation has begun. Cost recovery indicators will also be presented in these progressreports (costs, including telecommunications, and pricing structure by payment message type). Inaddition, the PMU will provide any information relating to the project as may be reasonably requestedby IDA from time to time.

3.26 Supervision Plan. Supervision of the project by IDA will extend over a period ofapproximately five years (1995-1999). The focus of supervision will change as the project progressesthrough its different phases. In the very early stage, the focus would be on the procurement process forsystems and technical assistance services, including the establishment of the PMU for projectimplementation. Once the selected vendor has begun system construction, the focus will turn to thetechnical supervision of detailed system design and implementation plans. During this phase of projectimplementation, supervision would also concern the requisite operating rules and procedures andorganizational arrangements. On the technical assistance side, the focus of supervision would be onfollowing up with the selected consultants on the status of the institutional studies and audits. Once theinstitutional studies and audits have been completed, the supervision effort would switch to agreeing onthe appropriate follow-up to the results of these studies. Supervision of the project would require

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expertise in payment systems and commercial bank institutional development. At least two supervisionmissions would be required annually over the life of the project, and more frequent supervision supportshould be programmed for the first 18 months of project implementation. Such additional supervisioneffort will be facilitated by coordinating it with other missions to Viet Nam and the region. Banksupervision will follow the indicative plan provided in Annex 9, and will require an estimated 70staffweeks over the life of the project. Around 19 staffweeks will be at headquarters to review, interalia, procurement actions and progress reports.

E. STAFF TRAINING AND DEVELOPMENT

3.27 Staff training and development is one of the most important factors that will influencethe success of the project. The vendor will be required to train and develop staff in the SBV and CBs.In general, the level of training and development delivered by the vendor must be sufficient to ensurethat the inter-bank and intra-bank payment systems can be successfully operated and maintained byVietnamese banking personnel after one year of operational support. The training program will bemainly focused in three broad areas:

* application training will address the needs of technicians and end-users (bank branchpersonnel, systems operators, supervisors and managers) and train them in the use andoperation of the inter-bank and intra-bank payment system applications;

* technical training will cover the skills required to support the installation, operation,and maintenance of the computers and telecommunications equipment and services.This training will primarily be delivered to technical personnel in the SBV and CBs;and

* management training will cover the skills necessary to ensure that the new paymentmechanisms deliver the sought after improvements. This training will therefore focuson interpreting and using the information that will be generated by the system.

3.28 Due to the large numbers of personnel that will be involved, a cost effective approachto training delivery will have to be employed. It is envisioned that the training courses and materialswill be developed and delivered in modular and repeatable units. A "train the trainers" approach mayalso be used as a way to contain training costs. Vendors will be expected to provide a full set of easilymaintained materials and course notes for each training module. In their proposals, vendors will berequired to demonstrate that they understand the difficulties and complexities involved in developingand delivering a large scale training program in a foreign language in a transitional economicenvironment. The adequacy of the training and skills-transfer program will be an important element inthe evaluation of the proposals. Through these measures, it is expected that the SBV and CBs will be ina position to deliver any required on-going training by the end of the contract period.

F. TELECOMMUNICATIONS

3.29 The National Inter-bank Payment Clearing and Settlement component of project iscritically dependent upon the availability of a secure and robust data communications network. Withoutsuch a network, the ability to implement an Electronic Funds Transfer system will be severely limited.Two options are available to satisfy this need. The banking sector could: (a) build and operate adedicated closed user group data communications network; or (b) procure the necessary datacommunication services from a reputable supplier. Skills availability and economic factors strongly

23

support the second option, as it would obviate the need for the banking sector to develop a capabilitythat has no real relationship with banking and could be best satisfied by the nationaltelecommunications sector.

3.30 Improving the telecommunications infrastructure is one of the highest priorities of theGovernment, and significant investments are being committed to upgrading physical circuits andinstalling a modern telecommunications infrastructure backbone. According to current plans, there willbe digital fiber optic and microwave links across the country, digital switches in all 500 districts in VietNam by the end of 1995, and such switches in all 10,000 villages by the year 2000. Also, Viet Nam isin the process of implementing an X.25 data communications network. Viet Nam Post andTelecommunications (VNPT) have recently signed a contract with a leading internationaltelecommunications company, to procure, install and initially operate a nationwide X.25 datacommunications network. Installation planning is well advanced with equipment delivery expected byend-June 1995, initial implementation (6-8 major sites) by September 1995, access nodes in 30 citiesby the end of 1995, and nationwide coverage completed by the end of 1996.

3.31 This delivery schedule is in line with and adequately meets the timetable establishedfor the IBPS component of the project. The testing of the new payments mechanisms and the initialpilot implementations are expected to start in early- 1997, when the X.25 data communications networkwill be in operation in the IBPS pilot implementation sites. The architectural design of the envisagednew national payments arrangements is predicated on the assumption that VNPT will provide all datacommunication services required by the SBV and participating commercial banks. These services willinclude the provision of data quality physical circuits from the X.25 switch (owned and operated byVDC, the data communication subsidiary of VNPT) to the processing equipment located within thepayment system participant's premises. Specific communication interface requirements will bespecified by VNPT. The project includes the equipment to be installed within participants' premisesnecessary to establish the link/interface with the X.25 data communications network. All services andequipment required to establish the physical connection from a specific location to an X.25 access pointwill be the responsibility of VNPT/VDC. Minutes of Agreement between the SBV and the DepartmentGeneral of Posts and Telecommunications (which oversees VNPT and VDC), signed in September1995, provide a clear statement of intent by both parties to purchase or provide, respectively, initial andfuture data communications services required for payment operations. These Minutes were reviewed atnegotiations and found acceptable.

3.32 Appropriate pricing arrangements and Service Level Agreements are now beingnegotiated between the SBV/CBs and VNPT. Assurances were obtained at negotiations that therequisite X.25 data communications capabilities between the eight IBPS and PPC sites will be madeavailable by September 30, 1996. Agreements were also obtained that a Service Level Agreementdescribing the data communication service, service level parameters, service level performance values,and service credits and other consequences of non-performance would be entered into betweenSBV/CBs and VNPT, on terms and conditions acceptable to IDA, by December 31, 1996.

G. LEGAL AND REGULATORY FRAMEWORK

3.33 The SBV attaches great importance to the development of a comprehensive legal andregulatory framework to underpin all aspects of the new payments arrangements. Significant work hasalready been accomplished with the advice of the Legal & Regulatory sub-committee of the NPC tofacilitate the efficient and equitable operation of the payment systems to the benefit of all theparticipants involved. This sub-committee is advising on a series of decrees to ensure that:

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* the legal structure by which the payment systems are owned, controlled and monitored,including provisions governing membership or access to the systems and theestablishment of their rules and regulations, is soundly based and ensures properrepresentation of all the participants;

* procedures and regulations for the day-to-day operation of the systems, especiallyregarding the clearing and settlement timetable and the finality of the payment process,are clearly documented;

* specific rights attached to existing or newly proposed payment instruments, whether inpaper or electronic form, or related to the way they are handled and settled, areformalized unambiguously;

* the participants in the systems, as providers of services and users of instruments, areclear as to their rights, responsibilities and liabilities to each other and have statutory orsimilar protection and redress in the event that fraud or mistake by other participantsresults in a financial loss; and

- internationally accepted standards, definitions and procedures are adopted to the extentpossible.

3.34 Several major documents have been produced and are being readied for formal reviewand modification prior to final action by the appropriate Vietnamese authorities. These authoritiesinclude: the Governor of the SBV, the Ministry of Justice, the Ministry of the Interior, the Ministry ofTrade and the appropriate Standing Committee of the National Assembly. The primary documentsinclude: (a) the Decree Law on Checks; (b) the Regulation on Completing and Auditing AccountingVouchers and Maintaining Accounting Documents; (c) the Regulation on Electronic Fund Transfers;and (d) the Regulation on Organization and Technical Procedures for Inter-bank Clearing andSettlement Operations (available in project files). A variety of internal and external advisers havecontributed to the drafting of these major documents, including relevant departments from the SBV andcommercial banks, international legal firms, and the IMF. Comments from all sources have beenexamined and analyzed to determine their appropriateness to the realities of the Vietnameseenvironment. Prior to implementing the new payment arrangements, the SBV will produce an overviewdescriptive document detailing all the essential factors of interest to payment system participants in asingle place, thereby obviating the need to reference multiple documents.

3.35 Participation criteria and membership rules for commercial banks in the IBPS need tobe established. Typically, these criteria require that participants: be licensed to provide bankingservices in the country; be in good standing, meaning that they are financially sound and have notviolated any existing rules and regulations; have a settlement account with the SBV; and satisfy certainminimum transaction volume requirements. Furthermore, participants are normally required to acceptand work within any published rules, regulations, standards and operating procedures governing thepayment system. Draft participation criteria along these lines were reviewed at negotiations and foundsatisfactory. Assurances were obtained at negotiations that participation criteria, satisfactory to IDA,would be adopted by the SBV as a condition of effectiveness.

3.36 Operating procedures for the IBPS are being developed by SBV with advice from theLegal & Regulatory sub-committee of the NPC. Typically, such procedures cover: type of itemsprocessed; entry, storage, release and delivery of payment messages; primary and back-up computerfacilities; formats and reports; account identification numbers; charges; clearing and settlement

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procedures; liabilities for loss sharing; fraudulent transfers; operating hours; participant requirements;system inquiries; and administrative procedures. It is desirable to finalize these operating proceduresonce the system has been designed and tested, and after any implementation issues have been ironedout during the initial pilot phase. This would enable experience gained from actual implementation tobe incorporated into the operating procedures such that a tried and tested set of rules is made availableto IBPS participants when the system commences "live" operations. According to the presentimplementation schedule, "live" operation of the IBPS is not expected before June, 1997. Assuranceswere obtained at negotiations that drafts of the SBV regulation on electronic funds transfer (para. 3.34)and IBPS operating procedures would be prepared and furnished to IDA for comments, and thereafterissued by December 31, 1996, taking into account IDA's comments, and that the IBPS would beimplemented in accordance with such regulations and procedures.

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4. THE BENEFICIARIES

A. PROJECT BENEFICIARIES

4.1 The ultimate beneficiaries of the project are the Vietnamese people, who will have betterpayment services, and the Vietnamese banking system as a whole, which will be able to offer secure andreliable payment services to its customers. The direct beneficiaries of the project are: (a) the State Bankof Viet Nam (SBV) for the inter-bank payment system and for the institutional strengthening of thePMU; and (b) the participating commercial banks (CBs) for the intra-bank payment improvements aswell as for the commercial banks' institutional development component. Four of the banks are fullystate-owned: the Viet Nam Bank for Agriculture (Agribank), the Bank for Investment and Developmentof Viet Nam (BIDV), the Industrial and Commercial Bank of Viet Nam (Incombank), and the Bank forForeign Trade of Viet Nam (Vietcombank); and two are shareholding banks with public/privateownership: the Bank for Foreign Trade of Viet Nam (Eximbank); and the Viet Nam MaritimeCommercial Stock Bank (Maritimebank). These banks together account for around 90% of bankingactivity in the country.

B. THE STATE BANK OF VIET NAM

Organizational Framework

4.2 The SBV is the country's central bank. Prior to the banking reforms of 1988-89, it wasthe country's monobank, engaging in both central banking and retail credit activities. The State Councilpassed two Decree-Laws in May 1990 aimed at establishing a modem two-tier banking system (availablein project files). The SBV Decree-Law redefines the organization and functions of the SBV, while theCommercial Bank Decree-Law lays out the rules for organizing and operating commercial banks, creditcooperatives and state- and privately-owned financing companies. The SBV's retail credit operationswere hived off into two new state-owned commercial banks, Agribank and Incombank (para. 4.15).

4.3 SBVs' headquarters are in Hanoi and it has branches in each of the country's 53provinces. These branches act as quasi-independent central banks for their particular provinces. They areinvolved in clearing and settling payments at the provincial level, and perform a supervisory function forbanks within their province. Each provincial branch is headed by a director, and typically has four tofive departments.

4.4 The Center for Informatics of Banking (CIB) is a separate organizational unit within theSBV system and provides technical support for computerized bank applications. Its headquarters are inHanoi and it has a branch in Ho Chi Minh City. At present, the CIB operates the SBV's electronicpayment clearing system. The total staff of CIB number 120. The CIB is headed by a director whoreports to a deputy governor at SBV headquarters. An organizational chart of the SBV is attached to thisreport.

Budget and Control Procedures

4.5 The Accounting Department at SBV's headquarters is responsible for, inter alia,preparing annual budgets for the SBV system. A draft budget is prepared around September of each yearfor the succeeding fiscal year. The budget process may be characterized as being bottom-up and top-down: each of the operational units and branches within the SBV system (numbering approximately 60)

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submit their individual draft budgets, which are consolidated at headquarters, while in parallel, draftbudgets for the SBV system are prepared by the Accounting Department based on various strategic andoperational directives at headquarters for items such as credit, foreign exchange and gold purchases,personnel and salaries, training, construction and equipment purchases. The draft budget represents afusion of these two approaches. This budget is submitted to the appropriate director-level counterparts atthe State Planning Committee and the Ministry of Finance around October, and discussions are held withthese agencies to reach consensus on the draft budget. The draft budget is then submitted to the relevantdeputy governor, who discusses it with the directors of all the SBV departments to reach anotherconsensus on its contents. It is then submitted to higher level representatives of the State PlanningCommittee, the Ministry of Finance and the Board of Administration of the SBV for approval, typicallyin December.

4.6 Once approved, the total budget for the SBV system is allocated to each individual unitor branch. Around 10-15% of the total budget is reserved as contingency at headquarters for adjustmentsduring the course of the fiscal year. Once the individual budgets have been received, the branches andunits are free to make expenditures provided that they pertain to the approved expenditure categories andfall within the allocated amounts. Approval from headquarters is required for individual transactionsexceeding DIOO million for expenditures involving equipment and office supplies, small constructionworks, and the rehabilitation or upgrading existing fixed assets. The Director of the AccountingDepartment is authorized to approve expenditures under D300 million, while the approval of the deputygovernor concerned is required for per-item expenditures above this amount.

4.7 Within the allocated categories and prescribed limits, there do not appear to be specificgovernment procurement procedures that need to be followed for spending the resources allocated.However, all expenditures are subject to internal audit by the SBV. Each operational unit has two tothree internal auditors who review expenditures (and where applicable, revenues) for their individualunits. These auditors have a dual reporting relationship: to the director of the branch or unit concerned,and to the Internal Audit Department at headquarters. At headquarters, the Internal Audit Departmentundertakes the internal audits of organizational units such as CIB (in addition to the various headquartersdepartments), and may undertake its own audit of certain expenditures at the branch level. In addition,expenditures made by the SBV system are subject to Ministry of Finance review at the end of each fiscalyear.

Personnel Policies

4.8 SBV employs 4,900 staff at its headquarters and in its 53 branches.

4.9 Staff salaries are included in each individual unit or branch budget, and are based on theadministrative salary scale applicable to the SBV system. The Personnel Department at headquarters isclosely involved in any staff changes throughout the SBV system. For example, if a branch wishes torecruit additional staff, it must obtain the approval of the Personnel Department, which then instructs theAccounting Department to increase the salary allocation for the branch concerned. In addition to theirsalaries, SBV staff receive certain bonuses and allowances that, on average, amount to 60% of their basesalaries. In general, salary levels are low and uncompetitive with commercial banks (including state-owned banks).

4.10 Staff Training. The SBV runs two Banking Colleges which now offer, in addition to ageneral, banking college-level curriculum, specialized short courses for the benefit of the banking systemat large. They are also the recipients of significant donor assistance, including two SIDA-financed, Bank-

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executed Banking Sector Training Projects. These projects have provided: (a) training in generalbanking practices for middle and senior level managers drawn from domestic banks; (b) programs fortrainers to enable the Vietnamese to have their own training force; (c) computer skills courses focusingon banking applications; and (d) various specialized short courses in key functional areas such as foreignexchange transactions, loan appraisal, financial analysis of projects, etc.

4.11 The SBV is committed to upgrading the skills of its staff, and constantly seeks avenuesto introduce its staff to modem banking techniques. Training is provided through a variety of means:overseas study, through both long-term programs and study tours; in-country courses and seminars runby international experts; in-country training offered through domestic universities and colleges; and on-the-job training provided by resident experts and through rotational assignments. Specialized training inpayment systems has been provided in the course of project preparation by EDI. The provision oftraining in areas relevant to system implementation and operation has been built into the proposedproject by requiring the tum-key supplier to provide the necessary training as part of the contract, and byphasing out supplier operation as local staff are trained in the use of the new system (see Chapter 3).

Financial Performance

4.12 Selected financial performance indicators for the SBV are shown in Table 4.1. SBV'sprofits rose in 1994 as a result of an increase in income and a sharp decrease in expenditures, explainedto some extent by an increase in the efficiency of its operations, particularly with regard to foreignexchange operations. As a result, the declining trend in SBV's return on assets ratio seems to have beenreversed. Nonetheless, SBV's capital to assets ratio remains low, and could be a cause for concem ifthere are recurring losses.

Table 4.1: SBV Selected Financial Performance Indicators

Billions of Dong PercentTotal Income Expend Net Loan/ Capital! Capital/ ReturnAssets Profit Deposit" Assets Loans on Assets

1991 12,686 384 263 121 120 7.2 11.6 1.61992 24,821 545 608 -63 86 3.1 8.4 -0.31993 31,972 566 744 -178 75 1.5 4.3 -0.61994' 43,666 784 353 431 64 1.1 4.3 1.0

a Credits to currency in circulation.b SeptemberSource: State Bank of Viet Nam and staff estimates

4.13 The SBV is turning its attention to strengthening its accounting practices with assistancefrom the IMF. As with other areas of institutional development, the strengthening of SBV's operatingand accounting practices is going to take time. As a first step, a chart of accounts has been defined and isbeing implemented; improvements to the chart of accounts based on implementation experience will bean on-going process.

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C. THE PARTICIPATING COMMERCIAL BANKS

4.14 The participating commercial banks include the four state-owned banks (Agribank,BIDV, Incombank, and Vietcombank) as well as two joint-stock (shareholding) banks (Eximbank andMaritimebank). Banks within each group share many common characteristics. The paragraphs belowpresent these common features for each set of CBs. Detailed profiles on each CB are contained in Annex10.

State-owned Commercial Banks

4.15 Organization. Two of the four SOCBs were in existence even during the monobankdays prior to 1988: Vietcombank, established in 1963 to handle the country's foreign trade finance andmanagement of foreign exchange reserves, and the BIDV, established in 1958 to provide long-termfinance for public works and infrastructure projects, and to serve as the financing conduit for the Statepublic investment program in these areas. The other two SOCBs - Agribank and Incombank - were hivedoff in 1988 from the SBV's retail credit departments covering agriculture and industry, respectively. AllSOCBs operate under their specific charters, and while they still maintain a certain degree ofspecialization based on their historical role, they are by law universal banks and allowed to engage in anylegal banking activity.

4.16 All SOCBs are governed by a Board of Directors, which normally meets twice a year toestablish operating targets and objectives and to examine past performance. The Board is chaired by theGeneral Director of the SOCB and includes representatives from the MOF and the SBV as members.The General Director appoints Board members contingent on the approval of the Governor of the SBV.The General Director is the Chief Executive Officer conducting day-to-day activities and is appointed bythe Prime Minister at the proposal of the Governor of the SBV.

4.17 The SOCBs operate branch networks of differing extent, ranging from 17 branches atVietcombank to over 500 at Agribank. In addition, the SOCBs make extensive use of smaller sub-branches and transaction offices, which offer a narrower range of banking services and which serve asignificant resource mobilization function. The degree of autonomy and credit authority varies amongthe banks, and a number of factors usually weigh in credit decisions, including: the size of the branch,credit worthiness of the borrower, the size of the loan, the term of the loan, and the nature of the asset orproject to be financed.

4.18 Accounting. All SOCBs apply the Commercial Bank Chart of Accounts as mandated bythe SBV. This accounting framework deviates from internationally accepted accounting principles: thetreatment of earnings from problem loans is unclear, provisioning for problem loans is minimal or non-existent, and there are no guidelines for the consolidation of accounts. The Government mandates itemsas diverse as depreciation expense for equipment to allocation of retained earnings. The portfolio auditsand diagnostic reviews either underway or planned for the SOCBs will permit a better assessment ofthese accounting deviations.

4.19 Auditing. None of the SOCBs is subjected, in the normal course of events, to anindependent external audit. All of them have some form of internal audit procedures, exercised throughthe Comptroller's Department, which monitors compliance with internal policies and regulations. TheSOCBs have also implemented some form of "off-site" monitoring between headquarters and brancheswherein branches send in regular reports on credit outstanding, deposits mobilized, etc. All SOCBs are

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subject to SBV supervision, generally on an annual cycle. The MOF provides a certification of SOCBaccounts on an annual basis, generally within three months of the close of the fiscal year. Thiscertification is provided after the MOF has checked compliance with the latest rules and regulations onpast activity. There is a forward looking element of such financial control wherein the MOF renders anopinion on the financial viability of prospective SOCB activities, and ensures their consistency withGovernment directives.

4.20 Two SOCBs (Agribank and Incombank) are undergoing comprehensive financial auditsand portfolio reviews as part of the Government's general financial sector development program. Suchdiagnostic reviews for the other two SOCBs (Vietcombank and BIDV) will be undertaken under theproject for the 1994 and 1995 fiscal years (para. 3.8). Assurances were obtained at negotiations thatthese audits will be carried out in accordance with terms of reference and timing acceptable to IDA.These comprehensive diagnostic reviews will enable a better appreciation of the true financial situationof all four SOCBs, and will set the stage for portfolio restructuring, asset classification and portfoliomonitoring. Assurances were obtained at negotiations that financial statements for each SOCB, auditedby auditors satisfactory to IDA, will be submitted within 9 months after the close of each fiscal year overthe life of the project.

4.21 Staffing Policies. Each SOCB has an active program of staff recruitment, with well-defined procedures and criteria for selection. In general, new recruits must be university graduates infinance, accounting, economics, or banking, and must demonstrate proficiency in a foreign language.Basic computer skills are also required. Some SOCBs have rigorous testing procedures and the demandfor entry-level jobs appears to be quite strong. There appears to be little or no mid-career recruitment.The SOCBs are at a competitive disadvantage in recruitment compared to joint-stock banks, andparticularly foreign banks, due to their rigid, administered salary scales. Although SOCBs are allowed tosupplement the low base salaries through the payment of bonuses, the maximum amount of the bonusesthat can be paid is also administratively determined. The bonus ratio is determined on a bank-by-bankbasis by the SBV and the Ministries of Finance and Labor, and is based on the SOCBs' expected profitfor a given year. The bonus is distributed equally across a salary grade, and the system does not provideparticular pecuniary rewards (or sanctions) for performance. There is greater autonomy in promotiondecisions in recent times, and most SOCBs are now promoting staff based on performance and potential,rather than on seniority.

4.22 Training. All SOCBs recognize the critical importance of providing training to theirstaff in modern banking techniques. All of them participate in the various bilaterally funded trainingprograms offered in Viet Nam (para. 2.17), and they all encourage English language training throughspecial training allowances and other incentives. Some of the more enterprising SOCBs have set up in-country seminars and training programs provided by their correspondent banks. Overseas training is alsoprovided to some staff through bilateral programs and similar arrangements with foreign banks, andVietnamese banks have been accessing their correspondent network for this purpose. Such training isgenerally short-term in nature.

4.23 Taxation Regime. SOCBs are subject to the following taxes: (a) turnover tax; (b) profittax; and (c) a capital use tax. The turnover tax ranges from 2% to 30%, depending on the type of bank,and is applied to the interest margin (interest income less interest expenditure). A turnover tax of 6% isapplied to service and fee income on a gross basis. Turnover taxes are expected to be eliminated as partof the structural adjustment program being implemented by the Government. The profit tax rate forSOCBs is 45%, applied to net income before any provisions and reserves. The capital use tax is 6% on

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the statutory capital of the bank. "Excess profits" after the payment of these taxes and after theconstitution of the allowed reserves are turned over to the Government.

4.24 Provisions and Reserves. The SOCBs' equity accounts include three special funds thatcould be called general and specific reserves. A Bonus Fund consists of funds allocated for staffbonuses, while a Welfare Fund to provide for pensions and such, and a Fund for Construction andProcurement to finance fixed assets. Reserves for "Risk Prevention" are maintained by each SOCB,which is allowed to set aside 10% of net earnings each year for this purpose. However, no guidelineshave been established as how these funds are to be used to deal with problem loans.

4.25 Financial Performance. Summary financial performance indicators for the SOCBs (inaddition to the joint-stock banks) are shown in Table 4.2. Details are available in Annex 10.

Joint-stock Banks

4.26 Organization. Eximbank and Maritimebank operate as joint-stock banks. They haveonly been operating since the late 1980s, owing their establishment to the dismantling of the monobanksystem and to enabling legislation that permitted the creation of private banking institutions. Both banksconcentrate in financing particular commercial sectors: Eximbank focuses on exporting and importingactivities and Maritimebank works primarily in shipping and telecommunications. Although individualsown shares in both banks, institutions comprise the major shareholders. Not surprisingly, tradinginstitutions predominate among shareholders of Eximbank, and shipping and telecom firms own most ofMaritimebank's shares. The shareholders of these banks meet at regular intervals and elect a Board ofDirectors to represent their interests. The Board of Directors selects senior bank officers and exercisesconsiderable responsibility in bank policies and operations. Both Eximbank and Maritimebank are fairlysmall, with only a couple of hundred employees each, but both plan extensive expansions. Both bankshave only a handful of branches, concentrated in the major commercial areas of the country, and bothhave developed extensive corresponding banking relationships.

4.27 Accounting. Both Eximbank and Maritimebank comply with Vietnamese rules andregulations concerning the preparation of their financial statements. However, as noted previously,Vietnamese accounting does not necessarily follow internationally accepted principles. In view of thisfact, Maritimebank has invested considerable time and effort into revamping its accounting systems andcomputer capabilities to allow it to prepare financial statements that follow international norns, andthese should be available for the 1995 fiscal year.

4.28 Auditing. Both banks have an internal unit that performs an auditing function. Theseunits work to ensure compliance with internal policies and procedures. They function independentlywithin the structure of the banks and report to their Boards of Directors. The SBV exercises asupervisory role over both Eximbank and Maritimebank, as it does with all banking institutions in thecountry. Neither bank undergoes regular external audits. However, in 1992, Maritime underwent anexternal audit by an international accounting firm from Hong Kong as part of its participation in theVietnam Country Fund. Both banks indicate that the principal reasons for the past lack of external auditsare inadequate accounting standards and a lack of domestic auditing capacity. Comprehensive portfolioreviews and financial audits for the 1994 and 1995 fiscal year will be undertaken under the project.Although these banks are new and are not burdened with inherited bad loans facing the SOCBs, suchreviews will help identify weaknesses in the portfolio and in credit management that need to beaddressed for the future health and sustainable growth of these banks. They will also provide a measureof comfort to potential foreign investors. Assurances were obtained at negotiations that these audits will

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be carried out in accordance with terms of reference and timing acceptable to IDA. In addition,assurances were obtained at negotiations that financial statements for each bank, audited by auditorssatisfactory to IDA, will be submitted within 9 months after the close of each fiscal year over the life ofthe project.

4.29 Staffing Policies. Both Eximbank and Maritimebank recruit staff using the same criteriaas the SOCBs. They look for recruits who have a college-level education in a banking or financialdiscipline, who have a facility with a foreign language, and who are computer literate. New recruits atEximbank must undergo foreign language testing and endure a three to six month probation period.Maritimebank requires new employees to sit for a formnal examination after an initial training period.Eximbank is reportedly required to follow state guidelines concerning its pay structure. Despitesupplementing this pay scheme with a system of bonuses, Eximbank cannot compete with salariesoffered by other private and foreign banks, and bank managers report a serious turnover problem.Maritimebank, on the other hand, does not appear to be bound by government dictates in thedetermination of its salary structure, and offers relatively high wages which are further supplemented bybonuses. Consequently, employees of Maritimebank can earn appreciably more money than similarlyskilled staff working at SOCBs. Although managers at Maritimebank report that they still cannot matchthe salaries offered by foreign institutions, they report no significant turnover problems.

4.30 Training. Both Eximbank and Maritimebank are committed to enhancing theprofessional qualifications of their staff through training activities. In recognition of this fact, both banksreport that they contribute considerable financial and human resources to training their staff. Given thisexpense, Eximbank has enacted policies that attempt to recover training costs for staff leaving the bank.While most training concentrates on banking topics, foreign language training is also stressed. Bothbanks attempt to satisfy most of their training needs internally, but also utilize external trainingresources. They also provide their managers with limited overseas training, and have been creative inlocating funding sources to cover the associated costs.

4.31 Taxation Regime. Both banks pay a profit tax of 45%. However, they are subject todifferent rates with regard to the turnover tax. Eximbank pays a rate ranging from 6% to 25%, while therange formn Maritimebank varies from 6% to 1 5%.

4.32 Financial Performance. Summary financial data for Eximbank and Maritimebank(along with the SOCBs) are shown in Table 4.2. Details are available in Annex 10.

Table 4.2: Summary Financial Data, 1994(Dong billion, unless otherwise stated)

__________________ Agribank BIDV Eximbank Incombank Maritimebank Vietcombank

Total Assets 10,691.8 8,662.1 1,850.3 10,656.3 733.4 16,727.1Total Liabilities 9,872.8 5,247.6 1,695.1 10,178.8 644.8 16,201.6Total Equity 819.0 3,414.5 155.3 477.5 88.6 525.6Net Income 12.7 66.3 19.8 106.0 16.9 166.0Liabilities/Equity 92:8 61:39 92:8 96:4 88:12 97:3Loans/Deposits 282.6% 430.8% 86.3% 88.3% 98.8% 59.8%Int Expense/lnt Income 71.5% 46.8% 51.9% 68.4% 28.8% 46.3%Net Income/Avg Assets 0.1% 0.9% 1.4% 1.1% 2.7% 1.1%

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5. FINANCIAL ASPECTS, BENEFITS AND RISKS

A. INTRODUCTION

5.1 Much is required for efficient financial sector development: a sustained, stablemacroeconomic environment; sound financial sector policies; and a competitive and well-functioningbanking system. This project attempts to improve the functioning of the banking sector throughimprovements in basic financial sector infrastructure. A well-functioning payment system is a necessaryunderpinning to efficient financial sector development. A poor payment system can lead to inefficienciesin the use of the available money stock, inequitable risk sharing between trading parties, and inadequatesupport for the development of other financial services. Ultimately, a well-functioning payment systemincreases confidence in the banking sector. Confidence in the banking sector can also be increased bystrengthening the institutional capacities of the banks, and by enabling them to provide a range of newbanking products and services to their customers. Key first steps in this regard are being provided underthe proposed project: the carrying out of comprehensive portfolio audits to determine the banks' truefinancial situation, and the development of modernization plans, tailored to the specific needs of the CBs,to enable these banks to meet the demands of a fast-growing, market-oriented economy.

5.2 Section B of this chapter discusses financial aspects related to the inter-bank paymentsystem and presents an analysis of cost-recovery scenarios. Section C discusses major project benefits,while Section D presents an assessment of project risks.

B. COST RECOVERY

5.3 The SBV will operate the inter-bank clearing and settlement systems (IBPS and SAPS),incurring investment costs and on-going operating costs. These costs will be recovered by chargingdirect participants (settlement banks) appropriate fees for the services provided. Break-even prices havebeen calculated on the basis of estimated costs and for several scenarios of payment volume growth.Growth of payment volumes is likely to proceed in three stages: (a) further increases in the volume andvalue of industrial and commercial transactions, following past trends; (b) an influx of high valuefinancial market transactions within the next 3-5 years; and (c) rapid growth in the volume of low valuepersonal sector payments in the next 5-7 years. Given the uncertainty regarding the timing of futurevolume increases, the system has been designed to be readily expandable at short notice. In its presentconfiguration, the system is expected to accommodate the payment needs of the Vietnamese economyuntil the year 2003.

5.4 There are two major influences on the rate of growth of non-cash payment volumes:

* the rate of economic growth; and* the rate of migration from cash to non-cash payments, driven by the level of confidence

in the banking system and the technical quality and cost efficiency of payment services.

5.5 Real GDP growth is forecast at 8% per annum for the rest of the decade, while theproportion of Ml (narrow money) to M3 (broad money) is forecast to rise from 56% in 1994 to 85% by2000. Currency is expected to make up a lower proportion of Ml than in the past, reflecting greater useof the banking system. Most banks are predicting growth in payment volumes of at least 25% per year;growth in payment volumes was around 50% in 1994.

34

5.6 Total annual inter-bank payment volumes for the period 1995-2003 were estimated froma starting point of 300,000 for the last quarter in 1994. Four scenarios of payment growth wereconstructed:

* 10% growth per annum to 1997; 15% growth thereafter;* 10% growth per annum to 1997; 30% growth thereafter;* 20% growth per annum to 1997; 30% growth thereafter; and* 20% growth per annum to 1997; 60% growth thereafter.

5.7 System costs are fixed (initial investment and start-up; basic operation and annualmaintenance) and variable, or volume dependent (additional operating costs as volumes processedincrease). For a given year and a given scenario, there is a break-even price at which the stream ofrevenues is equal to the stream of costs. This break-even price is for the inter-bank clearing andsettlement only, and does not take into account the costs incurred by the commercial banks in processingpayments up to the point at which they enter IBPS as an electronic payment instruction, and on receipt ofelectronic instructions from IBPS. Furthermore, telecommunications costs are not included in theestimates pending negotiations with VNPT/VDC; however, rough estimates indicate that they would addbetween US$0.10-US$0.60 per transaction. Table 5.1 shows the results of this analysis for the variousscenarios described above.

Table 5.1: Break-even Prices for Inter-bank Clearing and Settlement(US$/transaction)

Demand Growth Scenario Price to Reach Break-Even in Year1997 1998 1999 2000 2001 2002 2003

10% to 1997; 15% thereafter 13.05 5.46 3.46 2.42 1.84 1.47 1.2110% to 1997; 30% thereafter 13.05 5.01 2.94 1.91 1.34 0.99 0.7520% to 1997; 30% thereafter 10.47 3.80 2.13 1.32 0.88 0.61 0.4420% to 1997; 60% thereafter 10.47 3.44 1.77 0.99 0.60 0.38 0.24

5.8 The above table indicates the range of average prices that must be charged to achievefull cost-recovery of the system under the different assumptions of volume growth and at different pointsin time.1 The actual tariff schedule will have to be determined based on the desired differentiation inrates for high value, time-critical payments requiring real-time gross settlement and low value bulkpayments that will be settled on a net basis. Telecommunications costs will also have to be incorporatedinto the tariff structure. It is envisaged that there will be an initial subsidy to encourage use, but that thiswill be recovered within the first few years of live operation. The system will generate a surplus afterbreak-even, which could be applied to further system expansion.

5.9 Even under the most conservative growth scenario, and allowing for full cost recoveryby 2000, barely four years into implementation, the average price that needs to be charged pertransaction is US$2.42 equivalent, not including telecommunications costs. Even if the high end of the

The model divides total cost incurred to date for the design, installation and operation of the system by thetotal number of transactions to arrive at the break-even price for a given year.

35

estimates available for telecommunications costs is used, the total cost per transaction is aroundUS$3.00. Clearly, the actual prices charged will depend on the type of transaction, and can be expectedto vary around this average figure. Nonetheless, this average cost should be compared to the present highvalue payment clearing and settlement charge of US$30 per transaction. Uncertainties with regard tofinal investment cost and payment volumes make it difficult to establish a pricing structure and feeschedule at the present time. However, SBV's guiding principles are: (a) full cost recovery of fixed andvariable investment, operating and maintenance costs; (b) full cost recovery in a 5-7 year timeframe,with an interim target of 70% cost recovery by 2000; and (c) differentiated pricing of payment servicesdepending on their time-criticality, value and settlement procedure. These principles are acceptable.Assurances were obtained that the pricing structure and fee schedule would follow agreed principles.

C. BENEFITS

5.10 The major project benefits relate to the alleviation or elimination of payment systemrelated problems facing the banking sector at the present time.

5.11 The decentralization of SBV settlement obliges the banks to keep multiple currentaccounts at each branch of the SBV, thereby tying up funds and increasing costs. The existing clearingprocedures do not allow a window before final clearing during which banks could cover deficits or placesurpluses on an inter-bank basis. No information concerning settlement account status is available duringthe day. Because of these constraints, treasury management within the commercial banks isimpracticable and inter-bank money market activity is marginal. The proposed project addresses theseproblems. At present, non-statutory balances held by the banking sector at the SBV amount to 12% oftotal deposits (in addition to the required reserves of 10%), or close to D3 trillion. With the new system,settlement accounts will be centralized, thus facilitating better treasury management and freeing upresources that can be used for productive purposes. The centralization of settlement accounts will alsogive a boost to the fledgling inter-bank market as banks rationalize their liquidity management.

5.12 Payment processing procedures are inefficient in that significant delays continue tooccur and result in uncertainty as regards to payment finality. Payment delays will be significantlyreduced under the proposed project, and float in the system will be reduced as a result. Float increasesintermnediation costs, and large and unpredictable float levels influence short-term liquidity in theeconomy, thereby introducing additional uncertainty in controlling monetary aggregates. Even if only25% of the total value of payments in the economy go through the banking system, one day's float in theclearing and settlement cycle represents 0.5% of GDP. Under the proposed project, high value paymentswould be processed in real time, rather than the present 2-3 days. For small value payments, the clearingand settlement cycle will be reduced from up to 15 days at present to 1-2 under the new arrangements.

5.13 The choice of payment instruments is limited and does not meet modem requirements.Modem payment systems will enable banks to develop new products (such as card-based consumersystems) which can attract customers into the banking system and which can become an importantsource of fee income. A strengthening of the intra-bank payment mechanisms will provide an effectivevehicle for developing the skills of CB personnel in essential management and bank operationalprocesses. The institutional development studies financed under the project will enable the CBs tointroduce customer accounting improvements. With centralized customer account management, CBs willenhance their ability to offer good quality customer services. Improvements in operational efficiency andcustomer service will improve the image of the banking sector, especially the image of the SOCBs. Thecarrying out of audits will be the first step in assessing the true financial situation of the banks, and will

36

enable these banks to present their financial statements in internationally recognized form. This willincrease the confidence of private investors in these banks. In the case of the joint-stock banks, this willfacilitate tapping foreign investors for capital.

5.14 Project preparation has provided a sound basis for developing the essential legal andregulatory framework for clarifying the rights and responsibilities of all parties in regard to theprocessing of payments transactions. This work is well advanced and, when enacted through decreesand/or regulations, will provide significantly increased user confidence in the banking system. Inaddition, the necessary standardization of payment instruments, bank/branch identifier codes, currencycodes and payments transaction processing methods will provide a sound basis for the design of efficientpayment and customer accounting procedures in all financial institutions within Viet Nam, and is beingwelcomed by these institutions.

D. RISKS

5.15 There are risks associated with every large and complex system development project,and the proposed project is no exception. Threats to the success of the project are those events that mightresult in an undesirable change to the project plan and implementation strategy. Formally identifying themajor threats, assessing their potential impact and formulating plans and strategies to eliminate or reducetheir impact are key elements of effective risk management. Such threats can stem from external sources,internal sources, and the project structure and scope. Against this backdrop, the major threats facing theproject have been identified and steps have been taken to manage the associated risks, as noted in thefollowing paragraphs.

5.16 Inadequate cooperation between the several stakeholders in the project could result in alack of commitment and failure to realize project objectives. Project preparation has fully involved thevarious stakeholders, and the project has received the approval of the various parties involved. Theestablished organizational structures will continue to be used for the procurement, construction andinstallation phases of the project. The roles, responsibilities, working level inter-relationships, andauthorities of the NPC, its various sub-committees and the PMU as defined in the Project ManagementPlan, will ensure the active involvement of all key parties to the project in making critical decisions.

5.17 A major project risk relates to the procurement process. The award of large contracts forcomputer hardware and software is technically complex, and needs to be carefully managed. This riskhas been minimized in the proposed project through the design of a transparent system for procurementunder a turn-key contract and through the provision of consultants to assist in the evaluation process.Procurement based upon incorrect transaction volumes and inaccurate descriptions of currently installedequipment could result in sub-optimal purchasing decisions. Steps are being taken to ensure that thenecessary information is obtained and referenced appropriately in the bidding documents. This willensure that the new arrangements make optimum use, as far as is practical, of all existing equipment andthat the capacity of newly acquired equipment is in line with real needs.

5.18 Incomplete understanding of the payment system requirements and their technical andoperational implications could result in sub-optimal decisions and a negative impact on overall systemquality. To avoid this threat and to ensure the medium-term availability of all essential skills andknowledge, the agreed acquisition strategy makes provision for the successful vendor to both operate andsupport the new payment arrangements for a period of one year after full system implementation as wellas providing comprehensive training to relevant Vietnamese personnel.

37

5.19 Inadequate project management and procurement skills could result in project delays,cost over-runs and adverse changes in project scope. Steps have been taken to limit these risks throughthe establishment of the PMU, the production of a Project Management Plan defining keyimplementation actions, the training of key PMU personnel, and the recruitment of a Resident Advisorand experienced procurement phase consulting support.

5.20 Pressure to implement changes in project scope during the construction phase of theproject could result in delays and cost increases. In any development project, the cost of making changesincreases as the project proceeds, and in a turn-key procurement, vendors may request excessive paymentfor implementing the requested changes. Steps are being taken to ensure that a well defined changecontrol function is built into the PMU to ensure that only essential changes are accepted for action andthat implementation is undertaken in a controlled manner. In order to supplement the technicalcapabilities of PMU staff in this area, an experienced Resident Advisor will be recruited to provide thenecessary expertise.

5.21 Inappropriate arrangements for the provision of data communications services fromVNPTNDC could result in project delays and excessive costs. Steps have been taken to prepare thePMU for the negotiations with VNPTNDC. Minutes of Agreement between the SBV and theDepartment General of Posts and Telecommunications record the intent of both parities to purchase andprovide, respectively, the required data communications services. Since the implementation oftelecommunications improvements is well advanced and expected to be completed by end-1995, andgiven that actual payment system operation is not expected before mid-1996 at the earliest, it is unlikelythat the lack of availability of data communication services will be a constraint on projectimplementation. Nonetheless, the definition of contingency plans in the event that the necessary datacommunications services are delayed will be required as part of the vendor proposals.

5.22 Delays in the construction of the primary and backup sites for the new inter-bank systemcould hold up project implementation. However, since new buildings are not essential to house the newsystems, the fall-back option of using existing facilities should mitigate this risk.

38

6. AGREEMENTS AND RECOMMENDATION

A. AGREEMENTS

6.1 The following will be required prior to effectiveness:

(a) signature of Implementing and On-lending Agreements, satisfactory to IDA, betweenSBV and each of the CBs (para. 3.1 1); and

(b) adoption of participation criteria by the SBV, satisfactory to IDA, defining commercialbank participation in the IBPS (para. 3.35).

6.2 Agreements were reached at negotiations with the Borrower on the following:

(a) the PMU would be maintained with staff in adequate numbers and with functionsacceptable to IDA for the life of the project (para. 3.17);

(b) project accounts, audited by a firm acceptable to IDA, will be provided within 9 monthsof the close of each fiscal year (para. 3.24);

(c) the requisite X.25 data communications capabilities between the eight IBPS and PPCsites will be made available by September 30, 1996. Assurances were also obtained thatService Level Agreements describing the data communication service, service levelparameters, service level performance values, and service credits and other consequencesof non-performance would be entered into between SBV/CBs and VNPT, on terms andconditions acceptable to IDA, by December 31, 1996 (para. 3.32);

(d) drafts of the SBV regulation on electronic funds transfer (para. 3.34) and IBPS operatingoperating procedures would be prepared and furnished to IDA for comments, andthereafter issued by December 31, 1996, taking into account IDA's comments, and thatthe IBPS would be implemented in accordance with such regulations and procedures(para. 3.36);

(e) CB audits and portfolio reviews will be carried out in accordance with terms of referenceand timing acceptable to IDA, and that financial statements of CBs, audited by a firmsatisfactory to IDA, will be submitted within 9 months after the close of each fiscal year(paras. 4.20, 4.28); and

(f) the pricing structure and fee schedule would follow agreed principles (para. 5.9).

B. RECOMMENDATION

6.3 Subject to the above agreements and conditions, the proposed project would be suitablefor an IDA credit of SDR 32.9 million (US$49 million equivalent), for a period of 40 years, including agrace period of 10 years, on standard IDA terms. The borrower will be the Socialist Republic of VietNam, and the implementing agency will be the State Bank of Viet Nam.

39 Annex 1

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Description of Payment System Components of the Project

A. NATIONAL INTER-BANK PAYMENT CLEARING AND SETTLEMENT SYSTEM

1. The national inter-bank payment clearing and settlement system will address theneeds of both the SBV and the commercial banks, and will provide local and non-local inter-bank clearing and settlement services to satisfy financial sector needs for the next eight years.This system will consist of two components: an Inter-Bank Payment System (IBPS) and aSettlement Account Processing System (SAPS). Figure I provides a schematic description of thescope of the new payment arrangements.

2. The Inter-Bank Payment System (IBPS) will be able to handle all domesticinter-bank payments, both intra- and inter-provincial , in Vietnamese dong. IBPS will comprisetwo sub-systems: (i) a low value sub-system for credit transfers and pre-authorized debittransfers, able to handle batches of items (bulk payments) as well as individual items, operatingwith a net settlement mechanism; and (ii) a high value sub-system for credit transfers, providinga real-time gross settlement (RTGS) facility for individual time-critical payments (see Figure 2).

3. Direct access to IBPS will be restricted to settlement banks, each of which willhave a single centralized settlement account at the SBV. For settlement purposes, IBPS willinteract with the SAPS. Participation criteria for settlement banks, covering financial strength,conformity with technical standards, and risk management ability, will be established by theNational Payments Council. A bank without a settlement account may participate indirectly viaa correspondent relationship with a settlement bank.

4. Each participating commercial bank will enter payment instructions into IBPSvia data entry terminals at its branches. Having been validated on input, these instructions willbe transmitted to a Provincial Processing Center (PPC) for automated clearing and routing to thebank branches of the recipients. A currency conversion feature will be available to handle non-dong denominated payments. Electronic data transmission between the participants will beachieved by using the VNPTNDC X.25 data communications network. As a fall-back option,there will be a facility for both magnetic diskette and paper-based message entry and distributionat each PPC. Commercial bank will have alternative routing options for inter-bank payments (seeFigure 4).

5. Multilateral netting of low value payments at each PPC will occur at designatedtimes, initially end-of-day. (see Figure 3). On completion of the netting process, settlementrequests will be submitted to SAPS at the National Settlement Center (NSC). An individualsettlement request will be generated and submitted immediately to SAPS for each high valuepayment received at a PPC. SAPS will make postings to settlement accounts unless there areinsufficient funds on the account to be debited and the funding requirement cannot be

40 Annex 1

accommodated with the bank's intra-day overdraft limit, in whicih case the settlement requestwill be held in a queue pending receipt of funds.

6. The automation of inter-bank payments clearing and settlement presents theSBV with important policy issues. The participation criteria for settlement banks, the volumeand timing of inter-bank payment flows, and the availability of intra-day liquidity will haveimplications for systemic risk and the cost-efficiency of the payment system as a whole. TheIBPS has been designed to permit changes in policy (for example, changes in settlement reservelevels) to be implemented without difficulty. The IBPS has also been designed using a modulararchitecture and thus can easily accommodate expansion in payments transaction volumes aswell as geographical coverage. Discussions on the essential policy issues have been initiatedwith relevant NPC personnel and broad agreements have been reached on the initial positions tobe adopted.

7. The inclusion of an RTGS capability will support the existing small number oftime critical payments transactions and will further support: (i) the needs of emerging inter-bankmoney market transactions; (ii) the needs of a delivery-versus-payment approach to clearing andsettling securities markets transactions; and (iii) a payment-versus-payment approach to foreigncurrency transactions.

8. The technical design of the IBPS includes appropriate backup capability of allcritical components and processes, and accommodates the long tern data storage requirementsspecified in relevant SBV regulations. In summary, the IBPS will provide an efficient, reliable,secure and cost-effective solution to the present and medium term future needs of theVietnamese financial sector for inter-bank payments.

Figure I - Scope of Future Payment System

application to bedeveloped Card-Based Payments

link to be developed Customer Accounting

Tier 1 Head Office

International Payments .es 2 Regional1

Provincial Branch

Tier 3 District Branch

I Secwities Clearing &Settlement delivery

-- -- againstpayment

Figure 2 - Overview of Fuiture Paymcnt Applications

inter-bankpayment settlement

instruictions reqLiests

I Paper-Based : Provincial iieti Instruments i Paper Clearing

Intra-Bank Inter-BankPayment Systems Payment System

Settlemienit4) |Pre-authorisedS Debit Payments -Accouint

E | Debit Payments | Low Value net ProcessingSub-System System

ai Low Value.o Credit Payments

HighValue L High Value grossCredit Paymlents [ SLb-Systcin |

settlementfailtire

Inter-BankBorrowinig

Figture 3 - Intlicative Daily Tinietablc

CBPS IBPS SAPS08:00 ................................................................. oX(o

o Intra-bank __payment

o 0 Real-Tilllc

Low value po F Grossinter-bank Settleieniltpayment

0 0

High value Real-Timeinter-bank 0 > Grosspayment Settlement

15:30 . . ........ ........ ..... ......................... ................... 15:30

16:00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... Same-Day 6:00Inter-Bank . Net

16:30. . . . . . . . . . . . . . . . . . . . Clearing .. . . . . . . . . . . . . .Sim *t 16:30

17:00 . .. ..... Intra.Bank.....7. .0.0......... . . . ........ . . . . . . . . . . . . . 17:00

Clearing

Next Day 's Next DaysIntra-Bank Iiic r-BankClearing Clearing

O.A

44 Annex 1

B. COMMERCIAL BANK'S INTRABANK PAYMENT SYSTEMS

9. The second major component of the project will address the payments needs ofthe four state-owned commercial banks as well as two share holding banks. The system has beendesigned to provide intra-bank and international payments services to satisfy the needs of theircustomers for the next eight years. The project will develop a separate Commercial BankPayment System (CBPS) for each of the six commercial banks included within the scope of thisproject (see Figure 2). Each system will be able to handle all domestic intra-bank payments,both intra- and inter-provincial. Initially, the main payment types will be credit transfers andpre-authorized debit transfers, principally bank drafts and direct debits. Electronic paymentinstructions derived from checks using truncation techniques and card-based transactions will beadded in due course.

10. Each participating commercial bank branch will enter payment instructions intothe CBPS via a data entry terminal. Electronic data transmission will be achieved through theVNPTNVDC X.25 data communications network. Delivery from and to the more remotebranches can be achieved by using dial-up modem links. The system has been designed tosupport the X.28 dial-up capability and thus remote branches can have a seamless access to thenational X.25 services. Payment instructions may be checked/validated at the originating branchwith reference to limits set by that branch or by a controlling branch at a district/provincial levelor indeed by the bank's head office. After validation, these instructions will be transmitted to theaccount holding branches for updating of the customer accounts maintained for originators andbeneficiaries.

11. The CBPS has been designed to support several customer accountingorganization structures including: (i) a fully centralized customer accounting structure; (ii) acompletely decentralized customer accounting structure; and (iii) a hybrid structure withcentralization at the provincial level (see Figure 1). Thus, the generalized CBPS architecturewill satisfy the varying needs of the several participating banks, as well as other prospectiveparticipants.

12. The stand-alone S.W.I.F.T.-based international payments facility recentlyintroduced at the head offices of the commercial banks can be integrated with CBPS, to provideparticipating branches with the ability to send payments to, and receive payments from, foreigncorrespondents.

13. The introduction of an automated, integrated intra-bank payments and customeraccounting interface capability provides a sound infrastructure for use by the participating banksin implementing a range of new banking products and other customer services by providingelectronic access to customer accounts from all participating branches.

Figure 4 - Alternative Routing Options for Inter-Bank Payments

settlement p ~requests ,

, ~~ payment direc-t entry or via CBPC instructions- 1

Originating evInstitution I

Bank A Bank B

r Rce

46 Annex 1

C. INFORMATION TECHNOLOGY DEVELOPMENT

14. The overall technical objective of the payment system design is to provide amodular and structured system architecture which follows best international practice. Thepayment system consists of three integrated but independent components: (i) an applicationscomponent: the software that provides the required business functions; (ii) a communicationscomponent: the telecommunications networks which are used to transfer data electronicallybetween applications held in different physical locations. Separate networks exist for the inter-bank and intra-bank payment systems, and there is one intra-bank network for each participatingcommercial bank; and (iii) a processing component: the computers and other devices which runthe applications software.

15. In line with modern design practices, a number of key design principles havebeen followed. These are described in summary terms in the following paragraphs.

* Application Independence. The application software modules will be independentof both the communications and processing architectures. This will (i) help ensuresystem data confidentiality, (ii) ease application software maintenance; and (iii)allow for separate business decisions regarding the choice of communicationscarrier, the introduction of new applications and the location of applicationprocessing.

* Open System Architecture. International public standards (CCITT X Series) havebeen used to ensure: (i) independence from vendors and their proprietary standards;(ii) a wide choice of potential vendors; and (iii) ease of implementation and systemstability.

* Common Communications Network. A network such as that being provided byVNPT/VDC will provide reliable, secure and cost-effective data message and filetransfer capabilities using the X.25 access protocol.

* Common Standards. These cover file and message formats, the identification ofbanks, bank branches and accounts to ensure: (i) inter-operability; (ii) ease ofmaking changes to the system; (iii) ease of implementing new participants and newbranches; and (iv) overall efficiencies.

* Modularity. This is to ensure that different applications or application modules canbe located on different computers at different locations depending on volumes andorganizational requirements.

* Security and Integrity. The system must be secure, reliable and readily availablefor use by participants. Consequently, its design incorporated the following: (i)terminal access controls; (ii) file access controls; (iii) validation controls; (iv)identification, certification and authentication; (v) software upgrades anddownloading; (vi) communications (Encryption/Closed User Groups); (vii)certification of interfaces; (viii) confidentiality (of specific data); (ix) paymentmessage integrity (acknowledgments/sequence checks/time stamping, etc.); (x)physical security; (xi) monitoring and measurement processes; and (xii) audit trailsto allow monitoring and tracing of every system event.

47 Annex 1

Reliability and Performance. As with all essential banking systems, care has beentaken to ensure that the system allows for: (i) ease of exception handling to permitthe rigorous treatment of such matters as validation errors, authentication failures,and hardware and software faults; (ii) high levels of overall availability in the 99.5 %plus region; and (iii) protection against major disruptions (disaster recovery) such asnatural disasters, but also covering such matters as loss of power supply or first levelcommunications.

16. In addition to addressing the specific needs of the banking sector for secure,reliable and cost-efficient payment systems, the project has been designed, at the request of theowner, to provide an upgraded overall computing capability in designated branches of the SBVand participating commercial banks. This has been accomplished by specifying additionalprocessing, communications and storage capacity to support existing and new applicationsystems. The technical architectures have been designed to permit modular expansion. Thus theprocessing equipment which make up the architectures in the designated upgraded branches canbe further upgraded as capacity needs change. These upgrades can be accomplished through on-site changes and thus can be made without disruption of services to existing users.

17. The detailed user requirement specifications will be described in the projectbidding documents. These requirements will permit qualified vendors to offer best practicesolutions to satisfy the needs of the Vietnamese banking sector. In addition, care has been takento ensure that vendor solutions will make optimum use of the existing equipment that has beenpurchased by the SBV and participating commercial banks during recent years.

18. Schematic presentation of the processing architectures of the NSC, PPC, CBPCand a typical CB branch are shown in Figures 5-8, respectively.

48 Annex 1

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49 Annex I

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Figtirc 7 - CBPC Processing Archuitectiurec

CBUIs /Inrer-Bankr NSC AcccsstkNetwrork

Netwwk lmutafc1

- Supporl'I'crminal Nuli'oik Adgiiiiiisgrauive anid ManagenmeII NcI%%uik

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LAN to LAN Rus Csire (C3SCC)

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LAN

Banking Informallon Syslem Processorshost coiiIpulrC

X

Figuirc 8 - CBB Processing Architectuire

Cu Proces.,,g Ccnilrc

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52 Annex 1

D. TELECOMMUNICATIONS SUPPORT

19. The payment systems component of the project is critically dependent upon theavailability of a secure and robust data communications network. Without such a network, theability to implement an Electronic Funds Transfer (EFT) system will be severely limited.

20. Over recent years, the Government of Viet Nam has demonstrated thatimproving the telecommunications infrastructure is one of its highest priorities. Significantinvestments are being made in upgrading physical circuits and installing a modemtelecommunications infrastructure backbone. Current plans contemplate a digital fiber optic andmicrowave links across the country, digital switches in all 500 districts in Viet Nam by the endof 1995, and such switches in all 10,000 villages by the year 2000. In addition, Viet Nam is inthe process of implementing an X.25 data communications network. Viet Nam Post andTelecommunications (VNPT) has recently signed a contract with Sprint International, a leadinginternational telecommunications company, to procure, install and initially operate a nationwideX.25 data communications network. Installation planning is well advanced with equipmentdelivery expected by end June 1995, initial implementation (6-8 major sites) by September 1995,access nodes in 30 cities by the end of 1995, and nationwide coverage by the end of 1996.

21. This delivery schedule is in line with and adequately meets the timetableestablished for the payment systems component of the proposed project. The testing of the newpayments mechanisms and the initial pilot implementations will not start until the first quarter of1996 at the earliest. Banking sector confidence in the delivery and successful operation of thedata communications network is likely to be enhanced through the contractual arrangementsbetween VNPT and Sprint International.

22. Based upon the above, the architectural design (see Figure 9) of the envisagednew national payments arrangements is predicated on the assumption that VNPT will provide alldata communication services required by the SBV and participating commercial banks. Theseservices will include the provision of data quality physical circuits from the X.25 switch (ownedand operated by VDC, the data communication subsidiary of VNPT) to the processing equipmentlocated within the payment system participants premises. The payment system participantequipment will be owned and operated by the respective SBV and commercial bankparticipants. Specific communication interface requirements will be specified by VNPT.

23. The scope of the payment systems component for data communicationsequipment will be limited to the equipment to be installed within participants' premisesnecessary to establish the link/interface with the X.25 data communications network. Allservices and equipment required to establish the physical connection from a specific location toan X.25 access point will be the responsibility of VNPTNDC.

53 Annex I

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54 Annex 1

E. IMPLEMENTATION AND MIGRATION

24. Modernization of the payment systems will be undertaken in four stages: (i) theconstruction and successful operation of a 'testbed' for the payment systems to ensure that allaspects of the initial new arrangements are appropriately tested in a controlled environment; (ii)successful demonstration of all key aspects of the arrangements in a carefully planned andexecuted initial pilot, which will test all aspects of the new arrangements in a real life operatingenvironment; (iii) the controlled roll-out of the new payment systems to additional SBV and CBbranches in the "first pilot network expansion"; and (iv) operation and maintenance of the newsystems for one year after the first pilot expansion.

25. The location of the inter-bank testbed will be Hanoi. The location of each of thesix intra-bank system testbeds will be in each of the CB's respective Processing Centers. Thefollowing will be provided for the testbed sites:

software development/modification and testing of the new systems;* test and certification of new software releases or upgrades prior to their

installation into the live active systems;* operational, maintenance and support (help-desk) services for the live systems;* education, training and support services for SBV and commercial bank

personnel; and* sufficient functionality to facilitate detailed and comprehensive testing.

26. During each pilot, the existing payment mechanisms will run in parallel until thenew systems are proven. The initial pilot will cover:

* establishment of an appropriate operating and administrative organization;* installation of the necessary equipment;* training of necessary personnel; and* establishment of a review group to monitor and report progress.

27. The IBPS Initial Pilot will run for at least three months, and will include:

* creation of a national settlements center (NSC) in Hanoi and at the back-up site;* development of the IBPS application software;* upgrading of the Hanoi and Ho Chi Minh City SBV branches to become

Provincial Processing Centers (PPCs) to handle electronic inter-bank payments;* creation of the pilot inter-bank network linking the NSC and PPCs to the X.25

data network;* connection of a number of CB branches to the inter-bank payment system

network; and* connection of CB head offices, via their CB processing centers, to the inter-bank

payment system network.

55 Annex 1

28. The intra-bank payment systems initial pilot will include:

* upgrading the processing capabilities of the CB headquarters and its processingcenter;

* upgrading the processing capabilities of a number of CB branches as follows:

Pilot Configuration

Bank Locations Head Office Branches

Agribank 9 Hanoi Ho Chi Minh City, Can Tho, Danang,Binh Dinh, Hai Phong, Bac Thai, YenBai, Nghe An

BIDV 7 Hanoi Ho Chi Minh City, Danang, QuangNam, Hai Phong, Can Tho, Vung Tau

Eximbank 3 Ho Chi Minh City Hanoi, DanangIncombank 10 Hanoi Hanoi, Ho Chi Minh City (2),

Danang, Can Tho, Hai Phong, QuangNinh, Vinh Phu

Maritimebank 2 Hai Phong HanoiVietcombank 5 Hanoi Ho Chi Minh City, Danang, Hai

=_________ ___________________ Phong, Vung Tau

* development, integration and implementation of intra-bank payment systemsoftware, including the interface to customer accounting systems;

* creation of a pilot intra-bank network linking the CB branches to the CBprocessing center; and

* connection of any upgraded CB branches in Hanoi and Ho Chi Minh City to thePPCs, thereby giving them direct access to the IBPS.

29. Following the successful completion of each initial pilot, both systems will beextended to include other branches and locations in the First Pilot Expansion phase. For theIBPS, the pilot expansion will occur over twelve months to cover:

* upgrading SBV branches in Hai Phong, Danang, Vung Tau, Can Tho, Nghe An,and Nam Dinh to handle electronic inter-bank payments;

* expanding the inter-bank network to link all the newly upgraded SBV branches;and

* providing additional local communications to connect CB branches into theIBPS.

56 Annex 1

The intra-bank pilot expansion will include:

upgrading the processing capabilities of additional CB branches as follows:

Bank Number of Branches atend of First Pilot Expansion

Agribank 57BIDV 54Eximbank 3Incombank 59Maritimebank 5Vietcombank 17

* expanding the intra-bank network; and* connecting the upgraded CB branches into the upgraded SBV branches thereby

giving them access to the IBPS.

30. Following the successful completion of the pilot expansion, it will be possible toinclude other commercial banks, and additional branches of the CBs, in the IBPS. Each newparticipant will need to meet the membership criteria established by the NPC. However, for thenext few years, there will be banks that will continue to rely on existing paper/manual paymentmechanisms, and it will be necessary to support existing payment methods during theimplementation of the new systems and for a period during their subsequent operations.

31. Settlement Accounts. At the start of the initial pilot, a national settlementaccount will be created at the NSC for each commercial bank. During the implementation period,each bank will need to maintain a settlement account at the SBV head office (NSC) and aseparate settlement account at each SBV branch to support the current method of payments. Asthe IBPS is rolled out, the commercial banks can migrate to full electronic payments and therebyreduce or eliminate their holdings of settlement balances at the SBV branches.

32. The vendor will provide full-time, on-site operational support at sites to bedesignated for each of the seven sub-projects (SBV and six CBs). This support will be providedduring implementation and for one year following the first pilot network expansion.

57 Annex 2

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Commercial Bank Improvement Specification and Scoping Studies

Consultant Terms of Reference for Study Definition Mission

Background

1. Initial steps have been taken by the six commercial banks participating in thepayments systems modernization project to develop an Information Technology (IT) Strategy tosupport their evolving business and banking needs. The commercial banks recognize that futurebusiness success will require a capability to respond rapidly to changing internal and externalneeds for information based services and decision support mechanisms within an acceptable costand pricing structure.

2. The on-going technical infrastructural investments in Viet Nam will provide abasis for carefully paced information technology based changes. Typical areas within thecommercial banks that are targeted for improvement include the centralization of customeraccounts, the development of customer information records, improved treasury operations forenhanced financial planning and control, as well as customer, portfolio and liquidity riskmanagement and the development of consolidated approaches to cash management. In summary,the commercial banks want to exploit the ways that information technology can improve both theinternal management and operational activities as well as the products and services that can bemade available to customers.

3. In order to identify these specific opportunities for realizing significant benefitfrom IT, detailed "Improvement Specification and Scoping Studies" are required for each of thesix commercial banks participating in the project. These studies are expected to provide ablueprint for the time phased implementation of selected initiatives designed to exploit the mostsignificant opportunities over a five year time period. Terms of Reference (TORs) for conductingthe Improvement Specification and Scoping Studies for each of the six participating commercialbanks are to be developed as a matter of urgency. The purpose of this document is to provide anoutline description of the objectives and scope of the Improvement Specification and ScopingStudies as well as the TORs for an initial short Study Definition Mission to develop and agreethe TORs for the detailed studies.

Objectives of the Improvement Specification and Scoping Studies

4. The primary objectives of the Improvement Specification and Scoping Studies isto provide each participating bank with a soundly based description of the way in which IT canbe used, during the next three to five years, to support its transformation into a moderncommercial bank. These IT strategies should be consistent with the current and future businessplans of the bank and therefore should identify how the cost effective use of IT can address themajor business problems or opportunities that exist. In this regard, careful emphasis should be

58 Annex 2

placed on the already identified needs to improve management infonnation and executivedecision support mechanisms as well as computer based enhancements in areas such as customeraccounting, credit management, financial management, asset/liability management and riskcontrol. Particular attention should be given to the progressive centralization of customeraccounts and their integration with the already planned enhancements in the inter and intra-bankpayment system arrangements. The study outcomes should also include cost justified and timephased implementation programs and technology acquisition strategies.

Study Definition Mission

5. As mentioned at the outset, a short Study Definition Mission will be undertakento develop and agree the TORs for the detailed studies. Although there is likely to be muchcommonality in the resulting TORs for each bank, the mission should recognize that customtailored TORs may be required. Based on the content of the resulting TORs and the views of theparticipating banks, the mission should discuss the advantages and disadvantages of differingexecution strategies. For example, is there a need for six separate studies; one for eachparticipating bank, or is there advantage in combining or partially combining the work of thedetailed studies? The mission should develop a clear recommendation in this regard.

6. The six participating banks are: (a) Agribank; (b) BIDV; (c) Eximbank; (d)Incombank; (e) Maritimebank; and (f) Vietcombank.

7. Specific issues to be addressed during the study definition mission, for eachbank, will include: (a) What key business and banking activities will be required to satisfy futureneeds? (b) Which of these activities can benefit from an enhanced use of IT? (c) What ITinvestments have already been made or are planned? (d) What benefits are being sought? (e)What do the business priorities dictate in terms of IT development or acquisition? (f) Whatapplication systems, hardware and networks are currently installed, can be modified or can bedeveloped? (g) What is an achievable level of (change) ambition during a three to five yearperiod? (h) What should be included in the scope of the detailed studies? (i) What preparationwork should be done prior to the commencement of the detailed studies? (j) How should thestudies be implemented? (k) What resources, human and financial, will be required to undertakethe studies?

8. Based on the information generated from the above, the mission should produceappropriately detailed Terms of Reference for each bank. These Terms of Reference shoulddefine the specific objectives of each study, the approach to be adopted and the expectedoutcomes. In addition, the Terms of Reference should clearly define the following:

* Project scope, structure and timing;

* Role of external consultants and commercial bank personnel;

* Guiding principles (For example; participative and designed to gain managementand user commitment at defined organizational levels);

* Definition of primary activities and key deliverables (For example, a statementof user requirement specifications for the progressive centralization of customeraccounts for inclusion in a subsequent Bidding Document);

59 Annex 2

* Estimate of required resources both internal and external expressed in weeks ofeffort; and

* An assessment of the primary sources of benefits.

As mentioned in paragraph 5, the mission should also make a clear recommendation as to theopportunities for combining the six studies or parts of these studies.

Study Definition Mission - Required Resource and Timing

9. The mission should make maximum use of the material that was generatedduring the recently completed.user specification phase of the payments system modernizationproject. In particular, use should be made of the 'Improvement Project Proposal(s)' that wereprepared by each of the six banks plus the associated meeting notes. These proposals broadlycovered the following topics:

Section A: Introduction and Summary

Section B: Description of the Present Arrangements

Section C: Improvement Needs and Sought After Benefits

Section D: Implementation Strategy

Section E: Implementation Management Plan

Section F: Anticipated Costs / Benefits and Sources of Funding

Section G: Other Information (As Appropriate)

10. These documents will be updated by each participating bank and should be madeavailable through the Project Management Unit (PMU) within the State Bank of Viet Nam. ThePMU has been established recently and is responsible for coordinating all work related to theimprovement initiatives. In particular, the PMU will be responsible for making meetingarrangements and providing interpreters to support the work of the consultants during themission.

II. The mission should plan on spending 15 days to complete the field work and anadditional 8 days to prepare the mission deliverables. Mission support will be provided by twosuitably experienced consultants; a commercial banking consultant and a banking orientedcomputing and telecommunications consultant. Most of the work will be undertaken in Hanoi.However, it will be necessary to visit Ho Chi Minh City and Hai Phong to meet withrepresentatives of Eximbank and Maritimebank respectively.

60 Annex 3

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Draft Terms of Reference for External Audit and Diagnostic Review of aCommercial Bank

1. The Viet Nam Bank ....... seeks the service of an international public accountingfirm to audit the financial statements of the Viet Nam Bank . for the fiscal years endingDecember 31, 1994 and 1995. In addition, the selected firm will also (i) prepare a specialdiagnostic report; and (ii) prepare a comprehensive Management Letter summarizing the processof the audit and specifically commenting on the issues or concerns raised during the examinationof the financial statements and the preparation of the diagnostic study.

2. The audit and diagnostic review will be performed in accordance with generallyaccepted auditing standards, will consider all relevant International Accounting Standards andInternational Standards of Audit, and will comply with the recommendations of the InternationalFederation of Accountants. In instances where national standards, laws or regulations precludethe use of such standards, and the effect is judged to be material by the auditors, adequatefootnote disclosure should be made, including the impact of such departure on the financialstatements.

3. Where a bidding international accounting firm chooses to joint venture with alocal firm for this engagement, the international firm will be the prime bidder, and the auditreports must be signed in the name of the international firm which will be solely responsible forcarrying out this assignment.

4. The financial statements will cover the following:

(a) balance sheet;

(b) income statement;

(c) cash flow statement; and

(d) statement of past due, non-performing, and renegotiated loans and advances.

5. The special diagnostic report will cover:

(a) Administrative and financial systems of internal control, including:

(i) specific recommendations for improvements; and

(ii) the adequacy of existing accounting policies and procedures, includingany need for changes of further documentation.

61 Annex 3

(b) Management and financial information generated at field offices andheadquarters, with special attention given to the flow and adequacy ofinformation from field offices to headquarters.

(c) Accounting practices and standards currently in use by the Bank, and how theycompare with generally accepted practice and standards.

(d) Asset quality and the implied risk profile of the Bank. This assessment shouldcover no less than 75% of assets, and should include not only loans but all otherextensions of credit (on and off-balance sheet) and the Bank's investmentportfolio. This assessment should include consideration of:

* the level, distribution, and severity of classified assets;* the level and composition of non-accruing, non-performing, renegotiated,* rolled-over and reduced rate assets;* the adequacy of valuation reserves;* management's ability to administer and collect problem assets;* undue concentration of credit;* adequacy, effectiveness, and adherence to lending policies and credit* administration procedures;* the adequacy and effectiveness of the Bank's process for identifying;- monitoring initial and changing levels of risk associated with approved; and- credit exposure.

* Problem assets should be identified and placed in risk classifications according tospecific criteria for "substandard", "doubtful", and "loss" categories as per theattached classification and provisioning matrix. Assets should be categorized asperforming or nonperforming, and risk-classified irrespective of whether they areoverdue for payment, or whether guarantees and collateral are available. All creditto an individual borrower (or to a related group of borrowers) should be placed in thesame risk classification or different classifications should be specifically noted andjustified.

(e) Credit procedures and practices including consideration of:

* the standard loan process from the client's initial inquiry, or bank'smarketing efforts, to the final lending decision, and the credit decisionprocess;

* formalized credit policies and procedures, underwriting criteria andidentification of target markets;

* lending organization, concerned departments, management levels andstaffing;

* profile of chief lending officers, credit manager and officers, their lendingskills and that of all relevant staff;

* internal loan review process, internal risk categories, and procedures formanagement of problem loans;

* mechanism for legal recovery, foreclosure and repossession of collateral,and transmission of legal rights;

62 Annex 3

adequacy of financial information received from the borrower and analyzedby the Bank as the basis for extension of credit and periodic assessment ofthe changing risk inherent in the credit; and specific lending procedures andtechniques for project appraisal, approvals and legal finalization of projects,procurement and disbursement, follow-up and supervision.

(f) Adequacy of reserves for loan losses, and other valuation reserves, including:

* the amounts set aside as specific reserves and general reserves;* the extent of reliance on collateral for establishing the recommended* reserves; and* the circumstances under which specific reserves or general reserves are used,

e.g., specific reserves should be calculated and assigned in all instanceswhen the related problem assets exceed one-half of one percent of paid-upcapital and retained earnings.

(g) Capital adequacy giving consideration to risk-weighted assets and therecommendations of the Basel Committee on Bank Supervision;

(h) Quality of earnings including the assessment of the reliability and compositionof reported earnings of the Bank, with consideration given to:

* the extent to which accrued but uncollected interest is taken into income --especially with regard to loans classified in risk categories of substandard orworse;

* the extent to which collateral values (rather then operating cash flows) arethe basis for decisions to capitalize interest and/or roll-over extension ofcredit;

* capitalization of expenses; and* any other income recognition policies which distort earnings.

(i) Liquidity position of the Bank both in terms of its ability to manage its asset andliability positions and in terms of its ability to generate operating cash flowssufficient to cover its operating cash expenses, with consideration given to:

* the volatility of deposits;* the frequency and level of borrowing;* the reliance placed on interest-sensitive funds;* access to money markets or other ready sources of cash;* the capacity to meet unexpected deposit withdrawals and other demands for

payment;* the ability to readily satisfy reasonable credit demands;* the financial strength of clients related to off-balance sheet liabilities and the

prospects and timing for possible draws on guarantees and other off-balancesheet items;

* the overall adequacy, effectiveness, and compliance with liquidity, assetsand liability management policies; and

* the nature, volume, and anticipated usage of credit commitments, contingentliabilities, and guarantees.

63 Annex 3

6. The audit report, the accompanying financial statements, the management letter,and the special diagnostic report will be completed by ....

7. The proposals should include:

(a) an engagement letter for financial statement audit work including maximum feesto be charged for the audits broken down by year; and

(b) a work plan for special diagnostic study including CVs of key staff to beassigned, and maximum fees for diagnostic study.

8. The following criteria and weighting will be used in evaluating proposals:

Capability and experience in bank audits 35%Work plan for diagnostic review 15%Qualifications of key staff 20%Maximum fees proposed 30%

Total 100%

9. Proposals are due by close of business ...... Please send ..... copies to: Mr./Ms.

(a) Prior to submitting proposals, you are invited to visit the Bank. Please contactMr./Ms ... at the above address to make arrangements for the visit.

Appen(lix 1: Classiricalion - Provisioning and Interes( Suspension Scheme

CaALSXF / CRirFRIA PA niFVr TREND ANV) FUMRE POvT7ON OF FINANCIAI MANAGFIENr A SqARZJTrElXPFRIFNCF OF INDISTR Y EN1ErR)sEl coNDmoN GOVFRNANCE QUALIrr OUTLOOK

I MAXt * rPfad 0 Aererple * Abow SrecDr Awvege * Prefridble (ER)I * Cosble A Quooed * No risk os all

Il,gh Acroi0 Tx r r * Adeuame Drruf * 9 lirng Cartiiw PYItiOJn * Uiqh 0o * No Dool Rw riegrlky* EorrnirlP,rolotailiIy OK * Gaod Prodi & Market * SaqKielr CuhPlRow (CF) * Clar Srwregl Vsi.itn

Ginerie Pro,dsluw 11 * Libenrlizwd Ihultry * to- Leirage 07 * Very rAfeslcal* Nd Threar a Cffliviiu 6 71*w Rqeoymew Sorcei * Good ICS mud IMS

* C<lw u,eradAwhi

2 W rFK SrFCIALLY * Dbelays les tAhm A7 si * Sne Qrestionu Arise * Within Sfets Awroge .Pr4fkaIl.e . Cepable a galVfied * Wig Swe troblenu

MENTIONED * O reakil Orrrdr*J * Income Derreriag * Some Crapes dw Wetlness * Accejpuale LiWAdY * No Dr on Ireriegiy * Has Sireorh to erpe

* lligh Awrqge lL.Je * Clerhiru Irr rncreasing * Mokerare Levrage * Some Srregk Probklem * Onwers can sqyw s

* UerNI Tursue I Price C r. Grosin * le Rrepfyww Surrr * Ino.riq hJ ICSlMDS * Ne. Capital nil bk

sWlkd Provison * Miner Cortrs BreecAr * Operading Cois Grminjg * CF doe rer cwr ser. . Cosnited ONriMng. vssilade If nredrd

S to 1 % * New 1 Sqy.rtcd * Corrperhor Threat flrrdq and rfinesesnw * Aceelrle E,gIeesl Arrir * No ryoe lr Ihsse

J SUnSrANDARO * PosiDu > J17ri * VdrWile * Under Swos cAwraoge * NeIcrran Low to - Weat Low Cqwlry * Need Fu.wdRel Rryi

* kerecrce Ovrerdvtj * Weak Co.aa,dcr preisjue Definedi Cswqvevid * Shrt UiqLhry * Redwed Enptrience * D dbi Onr San-

* L Awrrow Trrer * Eariop Drre Dihflehie, * hligh Ivrage I t egrisy DoJ f J SW aril/ gto New O_sers

.rwiffc rovisIo 0 + l days is h hAreach er . Acw Drnp in Demfk * Cerlan Tedhnodoglcal * ODly I Rcpame Sore *No Sraey %4sion * Nerd Morkeding 0gs CJ

15% So .J S eawuet * cear Iheratton Risk Weakness * Very Thim Cash-Few * Weak ICS&IS * f Lart Fate Ris 4P

* enel Cowewi FIni 9 Wrrld R1. Mfirio * CF c Repoy.n ef q * CG ,,Vne Caeliet 9 Mi, Uloar Ercess

lseresl Sasni and Proat * Drwlia,n R;s Prinrc4af + lateresf * Lack o Ease,wl Ani 9 s rok 41tein R eidu

Rersia * No A_ Cem-VP .Adsdstered Price 0 *ntreaed Working Cq;id * Product A Mafrkt cmt. be

* WeAl Dacwuma e I(WC) hwid p.eofteu rerrrred

4 DOURTFN. * past dAw IE y 1W days * Fue * For from Secror Arage * Operawtonl Losses * Parn Agakn s r wsh W Pro Optrwlon

9 Peruww Owieqri * Earnings Nil/Negatiw * Serlou, Cmsyevi Probnem * hlr,iqd * lromrwen - hIng * A41rr Laer Ewess

wrv/.l ProM4iss J % so * + IW iayx I brerwh * AeWe Nrice Cohfoelule * Aewe Techndookd Feb. * Seling Astis so Snfre * Ul,covperwire/ I 51.lk * Nrre Lots Dek tReief

MPs * Renewal cqslaie ell or * lHigh Risk rf ibEradiztati * Urgc7 Majerndratin * CF < Ilerest Srn*e * DOS ons wel grt * Deep Pr,, Raeslnur.

IneresI aSspensin aim, pi/k real Inerci 9 IVorld Prke ReWing * Loss(iwsingh Markets * Ecessiwv Levrergf * Lcrk cf ICSJMS * Deep Proces Rerain.

Reverreal Very Pow Dermeoaie * Operitvwu' Rese ,rin * Fruduct s IIs TFrub . Pari,, "RoWm Swe 9 Owu rsp Problem * Ne Ful Coal 11rery

Needed * Oer-henslowrad * Incret,d WC hid * ODsrs u dswart cepid 0 Need lubusrial Resufing

* Polical Pritces opeenw sioses * No Ettern Ai 9

LOST 9 Psrt due > J60 dAys * . trowrds Fsinestion 0 Under Loesr Qartile * hligh Loint * Vesy PFor * No sqws for k

* AsAwce Iall/paliai * Sretural Weakness * Cannr Cote * Selling Assers at Lots * C_w be Trused 0 On Soiel End

.il,rrpic Presloe. 70o so proWisIoned 0 Whie (Sidel) Elcphan, * Obioaese Tecnology * Acwe CF A LV Problem * nrmipriew. Despte * wwd ht bLiquidaed

I0aS * New Unru ,o fijfe * ULirolizerlon- Esstieim * Produceas be jold * CF < Prnwutio Coit * OCra tf FFr_l * Sh If be Frag fewd

Interest sioprol s rperarwioed koses * Clietso Coairy Risk * No Repayme Source * No Irfo Re*liaily * LUA w ued Valu

an( rnvrsavl * No legal lorw,wis * Afrrgind RNoe 0. e lie Uqo;oln * No OCwe ef Go avirwe * No porewal Iweresis

gt

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Project Costs: State Bank of Viet Nam

Slate Bank of Vilet Nam _ _____|________t= _

11955 _ _ 1996 1,7 _ _ _ _1993 _ _ _ 1939 _ _ _ _ _ _ Total _ _ _ _

Foreign Local Total Foreign Local Total ForeIgn Local Totl Foreign Local Total Foreign Local Totl Foreign Local TotalCosts In USS thousandS _________|___ |____ _____ __ _ ____

Inter-bank Sysem 0 0 0 261! 373 2992 4208 158 4366 2844 138 2981 813 24 36 10483 691 11174Procurement and Managemenl Supporl 1t4 8 154 350 29 379 150 12 162 0 12 12 0 12 12 6.46 73 719

Du,ts and Taxes 0 120 120 0 68 68 0 52 52 0 14 14 0 2 2 0 256 256

Base Cost 1995pIrces) 146 128 274 2969 469 3437 4358 222 4560 2644 163 3007 113 38 851 11129 1020 12141

r hyscalContingey 15 13 27 29; 34 344 436 22 458 284 Is 301| 81 4 85 1113 102 1215

Price Eon.ngency 4 4 a It 27 199 384 20 403 338 19 358 122 6 128 1021 75 1096

Total Ploject Cost USS St000 165 145 10 3438 543 3980 5178 263 S441 3464 199 3665 1016 43 1064 13262 11S7 1440

Costs In Dong millions =

____ef ____ank __System___ 0 0 0 29329 4172 33501 47130 2764 48894 31850 1540 33390 9100 266 9366 117410 7742 12152Procurement and Managemenl Support 1635 92 1728 3920 319 4239 1680 134 ¶8t4 0 134 134 0 134 134 7235 815 6050

Duites nd Taxes 0 1344 1344 0 757 757 0 583 583 0 254 154 0 27 27 0 2864 2864

Base Cost (1595 prices) 1635 1436 3072 33249 5249 38457 46810 2481 51251 31150 1821 33673 S100 427 9527 124645 11421 13606C

i ysical Ctongnency 164 244 307 3325 525 3850 4881 248 5129 3185 183 3368 910 43 953 12464 1142 13607

Prr CCon,rn9en 126 1 1 237 408f 775 5683 10859 552 11411 9613 552 10165 351 165 3677 29019 2154 31172

Total Project Cost (D mlilIon) 1925 1691 3615 41433 6547 48030 $4550 3281 67332 44C43 2563 47211 13522 634 14157 166128 14717 13045

4.

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Project Costs: Agribank

19_5 19_._ Ills_9 Total__ _ _____Forelgn Local Total Foreign Local Total Forelgn Local Total Foreign Local Total Forelgn Local T otal Foreign Local Total

Costs in US1 Ihousancls____

__ntra __bank ___Sy___em o 5 5 1444 168 1612 2985 375 3360 2190 39 2229 563 22 585 7181 6D9 7790Procurement and Managenwnl Suppolt 15 3 18 75 7 82 30 32 0 0 0 o 0 0 120 12 132User Requirem nts 0 0 0 600 0 600 600 0 600 0 0 0 0 0 0 1200 1 1200

Dties and Taxes O

Base Cost 11995 prices) 15 8 23 2119 201 2320 3615 431 4045 2190 41 2231 $63 24 S86 3501 704 9205

Physical Contungenrcy 2 I 2 212 20 232 361 43 405 219 4 223 56 2 59 850 70 920

Pice Contingericy 0 0 t 123 12 134 318 38 356 265 265 85 4 68 787 58 845

Total Project Cost (USS 0001 17 _ 26 2454 233 2657 4254 511 4308 2669 41 2715 703 2!t 733 1013 *32 10970

Costs In aong millions

Intr_ _ bank Sysl_m_ 0 56 56 16173 1I82 18054 33426 4200 37626 24521 437 24965 6300 246 6546 80427 6821 87248Prorurement and Management Support 1681 30 198 840 77 917 336 27 363 0 0 0 0 0 0 1344 134 1476User Requirements 0 0 0 6720 0 6720 6720 0 6720 0 0 0 0 0 0 13440 0 13440

D tles and Taxes 0 6 6 0 293 293 0 595 59 0 17i 17 0 17 17 0 927 927

Base Cost (1'95 prIcesl 168 92 260 23733 2252 255 40482 422 45304 24521 454 24932 6300 263 6563 95211 7383 103094

Physical Contingenry 17 9 26 2373 225 2599 4048 482 4530 2453 45 2498 630 26 656 9521 788 10309

Price Contingenrcy 13 7 20 3503 332 383 9006 1073 10079 7403 137 7540 2431 102 2533 22357 165 24006

Total Project Cost (D million) 168 103 306 21610 2810 32420 535 3761 59914 343841 636 1 311 975 127090 10322 137411

93

i4t

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Project Coats: BIDV

EtlDV____________________________ -____ _ 1995 -19 6 1897 _1_9- 1993 |=-____ _ Total__osts___In __US$ __thousands ____ Foreign Local Total Foreign Local Total Foreign Local Total Foreign Local Total Foreign Local Total Foreign Local TotalCosts In US5 thousands ____ ____ ____ _ _______

Inhra-banhc System ~~ ~~0 4 4 1140 129 1269 2308 344 2651 1499 30 1529 -317 ii7 334 5263 523 5786Procuremenl and Management Suppon 10 3 13 60 4 64 30 2 32 0 0 0 0 0 0 100 9 109User Requirements 0 0 0 600 0 600 300 300 0 0 0 0 0 900 0 900Audd 0 0 0 200 0 200 150 0 IS0 0 0 0 0 0 0 350 0 350

Duties and Taxes 0 0 0 0 19 19 0 51 st 0 1 7 0 _ 1 0 72 72

B3ase Cost (11U5 prices) 10 7 17 2000 151 2151 278 397 31U4 1499 31 1530 317 1tt 335 5513 . t4 721t

Physical Crontingency I; 200 t S 215f 279 40 31l8 I X 3 153 32 2 33 661 60 722

Price Continbgency 0 0 0 116 9 125 245 35 280 178 4 182 48 3 50 588 50 638

Total Project Cost JUSS 000) 11 I II 2311( 175 2Ut1 3312 471 578l 1127 U0 118 S 9S 25 419 7862 715 8577

Costs In Dong millions = _

tntrbankc System O 42 49 M224 1439 14207 2 5 3347 23693 16796 39 1712f 3549 290 3739 58940 5856 64Procurement and Management suppon It27 30 142 672 44 716 336 27 365 0 0 0 0 78 1 169 1o 1221tJser Requirements - -0 6720 0 6720 3360 0 3360 C 0 I OOiX 0 I 0080

Auetit~~ ~ ~ ~ ~~~~~~ O O 7 240 -0 2240 16tt 0 GW 06l t- _ - O _ 3920 0 3920

Duties andt Taxes 0 A 4 0 210 210 0 570 570 C 13 13 0 12 t2 C t09 amO

Base Cost 11995 prices) 112 75 1iI 22400 1693 2409 1 512Z1 44 4 35665 1C781 351 17137 35,49 203 3752 740til 57S7 801835

Ph spl Coant- Ic 1l a 19 2240 169~ 2,405 3122 444 3567 1679 35 1714 355 20 -375 747 67 84

Price Conim1ec 15 6 I! 30 250 3557 6946 99 7935 X16_ 106 5173 1370 78 14 163 129 81X

Total Project Cost (D millonl 132 t0 222 27)47 2112 30058 4120 sIT? 4716 23531 4U 2424 5274 301 5575 1972 U72 107045

U

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Project Costs: Eximbank

Extmbank l _ t-_ I _-- _ _ I

________ _______ ________ _______ _______ 1995 __ __ _ 9 199? 7 1998 1999 TotalForeign Local Total Foreign Local Total Foreign Local Total Foreign Local Total For n Loal Total For Ign Local Total

Costs In USS thousands 9_=_o__ _

tntea-bank Istem 0 0 3 419 50 468 655 40 696 530 a 538 96 0 97 1703 98 lo0tProcurem.nt and lwanaqtmenSup.1. ___I 6 30 2 32 IS I 16 0 0 0 0 0 0 50 5 655yser Requirements 0 0 0 200 0 200 IClO 0 100 00 0 0 0 0 30 0I 0 300Au dit 0 0 100 100 50 50 0 0 ISO 0 150

Duties and Taxes 0 0 0 0 a 3 8 3 0 3 4 3 4 0 0 2 0 2 0 0 0 0 t1.9 11 9

Base Cost (1995 prices) 5 1 I 749 s0 809 124 868 530 a 538 96 1 9? 2203 115 2318

Physical tontngency I 0 75 6 81 82 4 87 53 I 54 10 0 10 220 1 t 232

___L _ Dont422ency 0 0 0 43 3 47 73 4 76 63 I 64 14 0 I3 193 9 202 ?1___ ___ ___ ~~~~~~~~~~~~~~~I00

Total Project Cost (USS 0001) 6 2 7 867 70 936 979 S3 1031 646 10 656 '120 1 121 2617 135 2751

Costs In Dong millions __

Intra-bank System 0 0 4687 558 5245 7371 446 7822 5936 67 6023 107 1 1082 19071 1102 20173Nrourement and Managemnent Support 56 IS5 7 1 336 22 358 168 1 3 181 0 0 0 0 0 0 560 50 610user Requirements 0 0 0 2240 _ _0 2240 1120 0 1120 0 0 0 0 0 0 3360 0 336A di 0 0 0 1120 0 1120 560 0 560 0 0 0 0 0 0 1680 0 1680|

Dutes and Taxes 0 0 0 0 93 93 0 38 38 0 2 2 0 0 0 133 133

ease Cost (1995 prices) 56 Is 71 8383 673 9056 9225 497 9722 5936 90 6026 1071 11 1082 24671 1286 27

PhysicalContmgency 6 2 7 838 6 906 92 972 99 9 603 107 1 t01 2467 129 2596

Pfice Contingency 4 I 5 1238 99 1337 2052 llt 2163 1792 27 189 4t3 4 4"18 5499 242 5742

Total Project Cos ID million) 66 1I U 10459 839 11296 1219t 658 12517 1321 126 8447 1SS1 17 1601 32637 1657 3424

UF

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Project Costs: Incombank

_ ncomnbank

|_____________ _ 1995 _ 19N6 _ _ 1997 1199Tota195 _ _ ITo

Costs____In __US ___thousands ___ Forelgn Local Total Foreign Local Total Foreign Local Total Foreign Local Totl Foreign Local Total Foreign Local TotalC osts In USS thousands ________ ___

lnhIa.bane~ystem 0 4 4 I ,s05 149 1253 2337 487 2823 1510 30 t1540 417 1 1 434 5368 686 6055Procurement and Management Support 10 3 13 60 2 62 30 2 32 0 0 0 0 0 100 8 t08Use rperqusremenls 0 0 0 450 0 450 450 0 450 0 0 0 0 0 ° 00 0 900

Dubes aniTaxes 0 0 0 0 22 22 0 52 52 0 I i 0 I t 0 77 77

Base Cost (1995 PrIceso 10 7 17 1615 173 1731 2317 541 3353 1510 31 1541 417 13 435 6368 770 7139

Physical Contingency I 2 161 1t7 179 232 54 336 151 3 154 42 2 44 637 77 714

Pnce Contingency 0 0 0 94 10 104 248 48 296 180 4 183 83 3 66 584 64 649

(otat Project Cost USI 000) 111 I 19 _ 16 201 2070 3347 42 399 1U41 33 1379 521 23 544 7589 912 3501

Costs In DonSt millions

intla-bank Syslem 0 42 42 12370 1663 14034 26173 5449 31622 16912 339 17251 4669 193 4862 60124 7686 67810Pro urement anpMangemenlSujpg 112 30 142 672 27 699 336 27 363 0 0 0 0 0 0 1120 84 1204User Requirements °0 0 0 5040 0 5040 5040 0 5040 0 0 0 C 0 0 IO0 0 1Ot0

Duties and Taxes 0 4 4 0 250 250 0 580 5 0 13 13 0 13 13 0 859 859

Btase Cost (1995 prices} 112 76 188 13032 1940 20023 31549 6055 37604 16912 3S5 1726i 4669 206 475 71324 3621 79954

Physical Contrgency I I 8 19 180 194 2002 3155 606 3760 1691 35 726 467 21 487 7132 663 7995

PrieContingency 9 6 I5 2669 286 2956| 7019 347 8366 5104 106 5211 1802 79 188t 16603 1825 16428

Total Project Cost (D million 132 90 222 22560 2421 24911 41723 8008 49731 23703 493 24200 6931 306 7244 5S060 11317 106377

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Project Costs: Maritimebank

Marltimebank _=_ __ _ _ _ __I _ ____

_________________________________ ~~1995 19 6 _ _ _ _1 9 _ _ _ 9 3 _ _ _ _ _ _ _ _ 118 _ _ __9o

CorsIgU$toualsTotal Foreign Local Total Forelgn Local Total Forelgn Local Total ForeIgn Local Total Forelgn Local TotalCosts In USS thousands _______ ___ ___ ___ ___ ___

tnlra.bankry _ 0 0 0 282 53 335 761 51 812 530 9 539 146 2 148 1719 ItS t834ProcuremenlandManagemenlSupport 5 ~ ~ ~~1 6 30 I 31 IS I 16 0 0 0 0 0 0 50 4 54

UserRequrrernenls ~~ ~~ ~~ ~~0 0 0 200 0 200 100 0 100 0 0 0000 300 30AudrI _n0 0 IOD I00 50 50 0 150 0 ISO

Outres and Taxes 0 0 0 0 8 0 6 _ 6 0 0 0 0 0 0 0 15 15

Base Co!!11I 95 pilecs - 1 6 612 1 63 674 926 s58 14 530 8 538 146 2 148 2219 133 2352

Physical Contmngency 0 I 61 6 67 93 6 98 53 1 54 15 0 15 222 13 235

PnlcoConlrngoncy 0 0 O 3O _4 39 82 5 87 63 I 64 22 - 0 22 202 10 217 O

Total Project Cott (US65 000) 6 2 7 708 13 7t81 1101 6 1170 646 11 557 18l 3 1g5 2643 157 2800

Costs In Dong millions

Intra-bank System 0 0 0 3156 597 3753 8527 572 9099 5936 97 6033 1631 22 1653 19250 1288 20538Procurement and Management Suppon 56 15 71 336 13 3o49 168 13 e11 0 0 0 0 0 0 560 42 602

User Requirements ~ ~ ~ ~~~~ 0 240 0 2240 1120 0 1120 0 0 0 0 00 3600 30Audit ~~ ~~ ~~ ~~~~~ ~~ ~~~0 0 0 112 0 1120 560 0 5600 00 0 0 0 1680 0 1680

Oulies and Taxes 0 I i 0 91 91 0 66 66 0 4 4 0 t 1 0 163 163

Base Cost j1595 prlces) 56 16 72 6152 702 7553 10375 651 11026 5936 101 6037 1631 24 1655 24850 1493 26343

Physical Contingency 6 2 7 685 70 755 1038 65 1103 594 10 604 163 2 165 2485 149 2634

Price Contingency 4 t 6 101l 104 1115 2308 145 2453 1792 31 1822 629 9 639 5745 289

Total Project Cost jD millionj 66 19 54 3541 875 9424 13721 861 14512 8321 142 5463 2424 35 245 33030 1532 35012

HI

VIET NAM

PAYMIENT SYSTEM AND BANK MODERNIZATION PROJECT

Project Costs: Vietcombank

_ V§etco-laizk _ ~~~~~~~~~~~~~~~~~~~~~~~~~~199 ;_197 __-1991 _ 1999___

Cori gn Local Total Forelo n oh Tdtatt Forelgn Local Total Foreign Local Total F70olgn Local Total Foreign Local T til

Inr -bank Sysern 3 3 727 6I 788 1330 130 1468 960 65 1025 IS 282 3 283 3566Procurement and Managens.nl Supporl | 3 13 45 i 49 1s 2 I7 0 0 0 0 a 0 70 10 80User Requirements 0 0 0 600 0 600 300 C0 300 0 0 0 0 0 0 900 0 900

Duies and Taxes 0 0 0 0 t 12 0 16 16 0 5 5 0 1 0 34 34

Base Cost (1995 prices) 10 5 1 1572 77 1637 1795 157 1936 60 70 1025 266 17 283 4604 326 4396

Physical Conlingerncy I i 2 1571 a8 165 S 80 16 t19S 9ti 7 tO3 27 2 C7 460 33 493

PrneConlingency 0 0 91 4 96 t58 14 172 tt4 8 122 40 3 43 404 29 433

Total Project Cost (US '000 _ 11 6 17 120 S0 13tt 2133 186 2303 1170 3s 1250 333 21 354 5463 337 5322

Costs In Dono millions

In~trfbnk System a 28 28 8 4S1 693 6826 i469 154f 16444 10752 726 1411 M32 179 3`161 36775 3164 39939Procure-ment and Management Support t t 30 142 5041 49 553 t68 27 195, c t o tl 7U4 tOf3 890Ltser Requiremrents O O 0 6720 0 67X0 3360 0 33O6O O O O O tODtt O tOtl80Audit 0 0 0 2240 0 2240 1680 C 16- C 0 °0 ° 0 3920 a 3s2

Duties and Taxes 0 3 3 C 133 133 0 t8t lei Co -So S 0 0 9 o 377 377

ease Cost 11555 prices) '1 1 17t 17tOI off 1t231 20107 Mill 21t79 10752 r7l 11480 25t82 III 3170 51555 32U7 54815

Pthys.cal CoJntingercy 11 6 t 7 1t761 a 8784 7 2011 t 1t75 21t86 tO 7 el 115 t 98t 31t71 51561 365 5521

Price Conting5enc 9 S 13 2599' t28 -27271 4473 390 41864 -3243 235 34t tS 7: I223 1t477 83C 12307

fo-ta1 Project Cost (D million) 132 72 201 2196U 1080 225t101 2tSS1 2320 21729 15072 1S1 C1! 4431 2S 4711 tU192r _4U3 T2t7

HF,

72 Annex 5

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Implementation Progress and Development Impact Indicators

Implementation Indicators

Item Expected RemarksSchedule

Finalize Bidding Document 12/1/95 technical specifications have alreadybeen finalized. Conservative estimateretained to take into account lack ofPMU experience

Contract Signature 11/15/96 conservative estimateBegin System Construction 11/26/96Implementing Agreements 1/31/96 required prior to effectivenessbetween SBV and CBsService Agreements between 12/31/96 required before "live" system operationsSBV/CBs and VNPTParticipation Criteria for 1/31/96 required prior to effectivenessCommercial BanksIBPS Operating Procedures 12/31/96 required before "live" operationsRegulation on Electronic 12/31/96 required before "live" operationsFunds TransferAudited Project Accounts 9/30 each year for preceding fiscal yearProgress Reports 3/1 and 9/1 for six month period Jan-Jun and Jul-Sep

each year respectively, beginning March 1, 1996Hiring of Resident Advisor Sept. 1996 required prior to contract negotiation

with vendorCB Audited Financial 9/30 each year for preceding fiscal yearStatementsHiring of Consultants for CB 6/30/96 for 1994 and 1995 fiscal years. TimingPortfolio Audits may vary by bankHiring of Consultants for CB 6/30/96 timing may vary by bankDiagnostic Reviews

73 Annex 5

Development Impact/System Performance Indicators

Item Target Range RemarksSystem Availability 99.5% of normal Monitoring of actual vs. target

business hours at availability to be provided in progresseach PPC and NSC reports

Number of Payment average growth of actual growth will depend on level ofMessages per Day (inter- 15% per annum economic activity in country,bank) perceived confidence in the banking

system, perceived convenience andreliability of new system and pace ofCB customer service improvements

Mean Time to Repair for no more than 8 monitoring of actual vs. target time toMajor Hardware Fault hours repair to be provided in progresswithin NSC and PPC reportsCost Recovery of Inter- full O&M and system revenues 70% by 2000, andbank Payment Service capital costs greater than or equal to total capital

I recovery by 2002 cost and O&M expenditures by 2002

VIET NAMPAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Project OvervicwID Taska199I 199s 1 1997 1993 1999ID Task Name Finish Olr? Otr3 Olt4 Grl Oatt Olr3 Olr4 Olr I Olar? 21Tir3 tr 4 1 Oirl OI Olr3 2 Or4 ar I Ot 1 Or 3

2 1. Preparation Phase

3

4 2. Legal and Regulalory Franework 12IB196 _

6 3. Procurcn- 11116 _

7

C 4. Constrction Phase 3111b97

10 _. ntial Plo Phase 7114/97

11 -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~46

12 6. Piblo Expansion Phase 6/2?99

14 7. Operations and Maintenance Phase 6&28/99

H

Task -_Summrary MO Rolled Up Ptogress_

Oate 10ot7n5 Progress Rolled Up Task

Milestone *Rolled UpMilestone ,

C r

V -4 aa -

*~~~~ C. C

2 -<> jZI

Zn

* 0 ~~~j .... .. Q0~~~~~~~~~~~~

'O E

.5 .5~ fpxauvS

VIET NAMPAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Dctailcd Procuremcnt Schcdulc

1995 1996 1997

ID TasktName Finish M J |JIAISIOINIDIJIFIMIAIMIJIJIAISION DI JIFIMIAIM J|JIAIS |O|N

I I. 1'reparatinPchase(Iidding )acunvmAtO\I.Y) 11596*

2 World Ilank Pre-Appraisal Mission Completed 5113195

3 ISuIc Gcewral & Speciric Procuirement Notice (no dates) 6iW0195

4 IFihalixe [lidding Docrument 121195 *

s Tccihnical specirication conmictcd 5 *22195

6 Finalize instrnsclion to bidden 11/lVf95

7 Imnalizc conditions ofcontifct 11/10195

1 Finalize evalua,iont methudology 11/ 1 0195

9 Collate and intcmal review of bidding document 1V/195

10 Scnd IJidding D)ocumeunt to World lank for Review 121195 .

11 World Ilaik Rcvicv of lidding l)ocunentation 12122195 .

12 lIlacc I id Invitation NXtice (including dates) 1_5/9

13 Iivitation Notice Appcars in %VII Iublications 1/596

14 Placc lIneal Advertisemcnt in Ncewspapcr 1/5/96

15

16 3. Prmouremcnt Ihase 11/15/96

17 llidding D)ocuments Issucd to Vendors | /96

18 Vcndon Prepare Stagc I Ilids /296

19 Receive and Answer Questions from Didden 2116V96

20 Con)duct llidders Confcrence 2119/96

21 Stage I lIids Received from Vcndors 3/29/96

22 Evaluate Stage I llids 5/10196 >

23 Conduict pre-qualification revicws 5)10/96

24 Coiduct connplianec reviews 5/1096 .t

Task Summary RolledoUp Progress

Date IO/17/95 Pfogfess Rolled Up Task _

Milestone *Rolled Up Milestone

VIET NAMPAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Dctailcd Procuremenl Schcdulc1995 11996 1997

ID Task Name Finish M J J A S O N D J F M A M J J A S O N D J F M A M J J A S o N25 Identify deficiciicics relating to each bid 5/10/96

26 Prepare Stage I Evaluation Rcporn 5124196 I27 Prcparc 3ddcdv urin to tcluucal specification 593196 U28 ()btain WII 'No Ohjcction -Stage 1 6/14/96

29 Ib lId ;irification incctinp with venidots 6/8t96 330 Issue addendininr arid inviie Stage 2 bids (incl' inancijls) 6/28/96

31 Vucillors 1'repare Stage 2 Ilids 7/19/96

32 Public Opcnitg of Siage 2 Ilids 7/19t96

33 Seind itsnalis f l'ulilic Opcning to World lhank 7/23/96

34 Evaihluate SNige 2 llids 9/13/96

35 ConductTleehnical !%Icri8 Revicw 8t30/96 -._

36 Coniduct F:air Value for Money Revicev /30/96

37 Conlbinc Rcvicws & 1repare Fornal llid Asacasments 9/13/96 338 1'rcpare Stage 2 Evaluation Repon 9/27/96

39 Oblain Wl 'No ()bjectiont -State 2 10/18t96 l

40 Tr.in Contract NegotialionTlearn. Agree Negotiation Strategy 10/18/96 I41 Announice Award. Invitc Winner to Negotiate 10/18/96

42 Negotiate tle Contract t I/lJ96 U43 Conitract Signed 11/15/96

Task Summary _ Rolled Up Ptogress

Date 10/17195 Progress Rolled Up TaskMilestone Rolled Up Mileslone ')

78 Annex 6

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Draft Terms of Reference for Resident Advisor

1. As part of the country s financial sector modernization strategy, the State Bankof Viet Nam wishes to improve payment services in the economy in order to reduce float, speedup circulation of funds and increase efficiency of funds transmission while providingconvenience and service to users. For this purpose, a program to improve inter- and intra-bankpayment services has been designed, with the assistance of external consultants, and thetechnical specifications of the required improvements have been defined. The Government ofViet Nam is seeking financial assistance from the International Development Agency toimplement the new arrangements.

2. A description of the project is contained in the Staff Appraisal Report of thePayment System and Bank Modernization Project. Background on the financial sector in VietNam is contained in a report entitled Financial Sector Review. Both reports are attached for yourinformation.

3. The project is being implemented by the State Bank of Viet Nam and sixparticipating commercial banks. The design, testing, implementation and initial operation of thesystem will be undertaken by a vendor selected through International Competitive Biddingprocedures in accordance with IDA guidelines. The selected vendor will provide the necessaryservices on a turn-key basis and will operate the system for a period of one year after successfulimplementation in the selected pilot sites. A Project Management Unit (PMU) has been set up atthe State Bank of Viet Nam to oversee project implementation, coordinate the various projectactivities and beneficiaries, and serve as the contact point for the vendor, IDA and otherinterested entities.

4. The State Bank of Viet Nam requires the services of a Resident TechnicalAdvisor to advise the PMU on technical, project management and vendor contract matters. Thesuccessful candidate will serve as a source of independent, technical expertise during the systemconstruction and pilot operation phases. He/she will be expected to evaluate the validity andusefulness of vendor proposed change orders and system design modifications, and providerecommendations on the same to the PMU. He/she will work closely with all beneficiaryinstitutions to define desired modifications to the system design and implementation schedulecontained in the technical specifications, and will assist the PMU in negotiating these with theselected vendor.

5. He/she will assist the PMU in setting up the appropriate systems for projectimplementation and financial monitoring and reporting. In addition, he/she will act as a resourceperson for technical and project management advice to the commercial banks.

6. The Resident Advisor should have a broad understanding of the projectmanagement aspects of large scale complex software development projects covering: (a)

79 Annex 6

application software design and development; (b) computer hardware and operating systemsoftware; (c) transport networking; and (d) physical network equipment.

7. He/she should have at least fifteen (15) years in the Information System (IS)industry. His/her most recent five (5) years of industry experience should have been in a projectmanagerial capacity in which he/she managed directly or indirectly at least fifteen (15)subordinate staff. In addition, he/she must have specific experience in working with vendorsemployed on a contract basis. He/she should have specific experience gained through themanagement of at least one significant project which involved the development, implementation,operation and support of integrated solutions covering multiple sites, a large application systemsoftware development and its integration with application independent communication networkservices.

8. In addition to the above, he/she should demonstrate enthusiasm about thespecific opportunity to work on this very important project in Viet Nam.

80 Annex 7

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Procurement Procedures

Inter- and Intra-bank Systems

I . A turn-key contract for the inter- and intra-bank payment systems improvementswill be let on the basis of International Competitive Bidding. The Bank's Sample BiddingDocuments for computer systems will be used. Bids will be evaluated according to a two-stageprocedure.

2. After Bank review and "no-objection" of the finalized bidding documents, andafter the requisite Bid Invitation Notices and local advertisement, the bidding documents will bereleased to vendors. Vendors will be given 60 days to prepare their Stage I bids. A Bidders'Conference will be held during this period to respond to questions and to provide any requestedclarifications to all interested vendors.

3. The Stage I review of the bids will consist of an assessment to identify whichbids satisfy the specified qualifications criteria. These criteria are both general (standardrequirements as specified in the sample bidding documents) as well as specific to the project.The general criteria include: information on the supplier, the company's financial strength, theproposed use of sub-contractors, relevant experience, key personnel, key qualifications todevelop and implement the project, and other documentation specified in the bidding documents,such as performance guarantees. Project-specific qualification criteria include the following:

(a) the Bidder must have supplied software development services and relevantintegration and operation services covering software, hardware andcommunication network equipment for at least five (5) years worldwide, and theaverage annual turnover (total sales) in this regard over the last five (5) yearsmust have been in excess of 50 million US dollars worldwide.

(b) the working capital for the fiscal year ending in 1994 of the Bidder must havebeen in excess of 8 million US dollars.

(c) the Bidder must have successfully implemented at least two (2) contractsworldwide for a total value (per project) in excess of 15 million US dollarswithin the last five (5) years for on-line transaction processing systems withinthe banking industry using modern communication network systems, having hadturn-key management responsibility.

(d) the Bidder must have on its current staff, at least one key person in each of thefollowing specialist areas involved in the project:

* Application software design and development

81 Annex 7

* Computer hardware and operating system software

* Transport networking

* Physical network equipment

Each key person must meet the following minimum requirements:

(a) fifteen (15) years in the Inforrnation System (IS) industry, with the last ten (10)years in the particular specialist area.

(b) the last seven (7) years of industry experience in a managerial capacity with atleast fifteen (15) subordinate staff.

(c) the overall Project Manager nominated by the Bidder must have at least twenty(20) years relevant industry experience, the last ten (10) of which have been in aproject manager staff over extended periods which involved the development,implementation, operation and support of integrated solutions covering multiplesites, a large application system software development and its integration withapplication independent communication network services.

4. A sufficiently detailed contract compliance evaluation of those bids that meetthe above qualification criteria will also be undertaken in Stage I to identify those bids that aredeemed to be substantially compliant with the technical specifications. Deficiencies relating toeach bid will be identified and documented.

5. At the end of Stage 1, a Stage I Evaluation Report will be produced and sent tothe Bank for review and "no objection". Desired modifications to the requirements will bedocumented in an addendum for issue to Stage 2 bidders during pre-Stage 2 clarificationmeetings. Vendors will be given 3 weeks in which to submit the Stage 2 bids. There will be apublic opening of Stage 2 bids, with the results being communicated to the Bank.

6. The Stage 2 evaluation will consist of two components: a detailed technicalevaluation wherein each bid is scored for technical merit; and a detailed financial evaluationwherein each bid is assessed on "value for money". A Stage 2 Evaluation Report will beprepared, combining the results of both the above analyses, and providing a recommendation forthe bid award. Following the Bank's review and "no objection", the successful vendor will beinvited to negotiate a contract.

7. Further details on the evaluation process, including the technical meritweightings and detailed evaluation procedure and methodology, are contained in the ProjectManagement Plan.

Commercial Bank Diagnostic Reviews of Modernization Needs

8. Terms of reference for each of the six diagnostic reviews (one for eachparticipating commercial bank) will be prepared by consultants hired through the PHRD grantaccording to the requirements laid out in Annex 2. The resulting terms of reference and scope ofwork will be finalized by each commercial bank concerned, and communicated to the Bank forreview and "no objection". Consultants to undertake these studies will be hired on the basis of

82 Annex 7

the Bank's guidelines: a Letter of Invitation will be sent to a short-list of consulting firms,inviting proposals in regard to the terms of reference, and setting out the criteria against whichthe proposals will be evaluated. Once the proposals are received, they will be evaluated inaccordance with these criteria, and an Evaluation Report, together with recommendations on theaward, will be sent to the Bank for review and "no objection", following which the commercialbank concerned will sign a contract with the winning firm.

Commercial Bank Audits

9. Terms of reference for the portfolio reviews and audits will be finalized by eachof the four banks involved on the basis of the draft contained in Annex 3. The procurementprocedures will be as for the Diagnostic Reviews. However, the procurement procedures of theGovernment of the Netherlands will apply if it provides bilateral funding for these audits.

Project Management Support

10. Miscellaneous equipment for the Project Management Unit (PMU) consists ofthree vehicles, office furniture and three computers and related peripherals, for a total value ofUS$ 110,000 equivalent including all contingencies. All items will be procured throughInternational or Local Shopping on the basis of at least three quotations. After sales service andavailability of spare parts and maintenance will be important criteria in the selection of thevendors for the vehicles and for the computer equipment.

11. Terms of reference for consulting support for the procurement phase shouldinclude the following:

Finalize Bidding Documents (to be undertaken by PMU/NPC/CBs): Finalizing of draftbidding documents, in particular the post qualification requirements, the methodology to beadopted for the- two-stage bid evaluation, and the interfacing of technical requirementspecifications with the general terms and conditions of the contract as described in the modelWorld Bank document describing the Two-Stage Bidding process for procuring complexcomputer based systems and related services.

Prepare for and Conduct Bidders Conference: The NPC has an interest in ensuring that eachpotential bidder has a clear understanding of all aspects of the procurement process in regard toboth content and procedure. In addition, potential bidders are likely to submit questions,especially technical ones, about the content of the bidding document. Consultant support forthese activities is required to support the PMU in preparing for and conducting a biddersconference. This will include the analysis of bidders questions and the preparation of appropriateanswers. Answers will be formally given to potential bidders during a bidders conference inHanoi. In addition, the bidders conference should be used as an opportunity to provide vendorswith up to date information, if appropriate.

Stage 1 Support: The following consultant support is required: (a) support to the PMU / BidEvaluation Organization in their review of the Stage 1 technical proposals. This review willconsist of two components: (i) a preliminary assessment to identify those bids that satisfy themandatory pre-qualification requirements; and (ii) a sufficiently detailed evaluation of qualifiedbids to identify those that are deemed to be substantially compliant with the specifications andpost qualification requirements for the first stage evaluation. The supervision and the preparation

83 Annex 7

of formal evaluation reports will include a statement of deficiencies relating to each qualifiedbid. Careful attention should be paid to those bids that are deemed to befQnt substantiallycompliant. In addition, assist in identifying the need for any modifications to the statements oftechnical requirement specifications to bring all substantially compliant bids to a comparabletechnical level. Modifications to the requirements will be documented in a Memorandum forissue to qualified bidders during pre Stage 2 clarification meetings; and (b) prepare anAddendum to technical specifications, if necessary, to provide all qualifying bidders with a listof desired modifications and/or upgrades to the statement of technical requirementsspecifications.

In undertaking this support, the consultants will be required to read and assess all vendorresponses. PMU / Bid Organization Structure personnel should also read and analyze all vendorresponses. The consultants should ensure that the resulting decisions are defensible and agreedwith appropriate Vietnamese personnel. A Stage I evaluation report should be prepared andcommunicated to the Bank together with the Addendum to Technical Specifications.

Preparation for Stage 2 Bidding: Following receipt of the World Bank's "No Objection" letter,the consultants should support the PMU in conducting clarification meetings with eachsubstantially responsive vendor. The objective of these meetings is twofold: (a) to assist thatvendor address technical deviations as outlined in the Memorandum; and (b) to explain thecontent of the Stage 2 Addendum to ensure that all qualified bidders have an identicalunderstanding of the Stage 2 requirements. Following such meetings, assist the PMU in issuingthe Addendum and inviting Stage 2 bids.

Stage 2 Support: This stage requires the detailed analysis of the technical content of eachvendor response. In particular, it requires the assessment of vendor responses to each numberedrequirement and sub-requirement referenced in the bidding document and the allocation of anappropriate weighted points score. The consultants will act in an advisory capacity to theVietnamese evaluation teams. In addition, they will undertake detailed evaluations of each Stage2 bid and facilitate the development of a final ranking of bids through comparison of consultantand Vietnamese team results. Consultant input will vary with the actual number of vendorresponses to be evaluated.

Following Stage 2 bid openings, the consultants will: support the PMU / Bid EvaluationOrganization in their review of the final technical and commercial proposals to ensure that thereviews are conducted in accordance with the methodology specified in the bidding documents;and supervise the preparation of draft evaluation reports, which will include a detailed statementof deficiencies relating to each qualified bid, and a ranking of bidders on the basis of thecombined technical and price scores.

The consultants will be required to undertake detailed evaluations of each bid and facilitate aconsensus prior to the preparation of the draft evaluation report package.

12. As an integral part of the previous step, assist the appropriate decision makingorganization (NPC, etc.) to both understand the outcomes of the evaluation process and preparefinal versions of the evaluation reports for submission to the World Bank.

Contract Negotiation Support : Following receipt of the World bank's "No Objection" letter;support the PMU and other appropriate participants in preparing for and conducting the formal

84 Annex 7

contract negotiations with the winning vendor(s). Care should be taken to identify and protect theowner from scope, schedule and cost risks.

13. The above activities will require some 34 staff weeks of consultant support. Inthe interest of maintaining continuity of the technical approach, and in order to best assess theresponsiveness of the various bids, the design consultants responsible for producing the technicalspecifications will be hired to provide the above support during the procurement phase. A draftcontract, together with the finalized terms of reference , will be sent to the Bank for review and"no objection".

14. The Resident Advisor will be an individual appointment. Here, the key factorfor success is not only the technical competence and experience of the individual, but, equallyimportantly, his/her inter-personal skills and ability to assimilate and adapt to the situation asexists in Viet Nam. Thus, a variety of sources will be tapped to obtain the names of suitableindividuals, including word of mouth and the professional network. Given the lack of experiencein this area on the part of the PMU, the Bank may be asked to assist in identifying suitableindividuals.

85 Annex 8

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Estimated Credit Disbursement

IDA Fiscal Year Semester Disbursement Cumulative Profile % a/Ending

1996 31 -Dec-95 0.00 0.00 030-Jun-96 1.47 1.47 3

1997 31 -Dec-96 7.35 8.82 1830-Jun-97 9.80 18.62 38

1998 31-Dec-97 11.76 30.38 5230-Jun-98 7.84 38.22 78

1999 31 -Dec-98 5.88 44.10 9030-Jun-99 2.94 47.04 96

2000 31-Dec-99 0.98 48.02 9830-Jun-00 0.98 49.00 100

a/ A subsector profile for this type of operation is not available. The profile used is acomposite of the experience of similar projects in the region and the expected projectimplementation schedule in light of the advanced stage of project preparation.

86 Annex 9

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Project Supervision Plan

IDA's Supervision Inputs into Key Activities

1. - The staff inputs indicated in the table below are in addition to the regular supervisionneeds at headquarters for review of progress reports, procurement actions, correspondence, etc. IDAsupervision over the life of the project is estimated at 70 staff weeks, of which 51 staff weeks wouldbe in the field and 19 staff weeks at headquarters. An indicative supervision plan is shown in Table 1.

Table 1: Indicative Supervision Plan

Approximate Date Activity Expected Skill Requirement StaffInput

December 1995 Start-up workshop Task Manager 8Procurement Progess Payment System SpecialistFinalize TORs for studies Institution SpecialistInstitutional Progress Procurement Specialist

July 1996 Implementation Progress Task Manager 4Payment System Specialist

October 1996 Implementation Progress Task Manager 6Organizational Payment System SpecialistArrangements Institution Specialist

December 1996 Implementation Progress Task Manager 5Payment System Specialist

April 1997 Implementation Progress Task Manager 6Diagnostic Reviews and Payment System SpecialistFollow-up Commercial Banker

July 1997 Implementation Progress Task Manager 3Diagnostic Review Follow- Payment System Specialistup Commercial Banker

November 1997 Implementation Progress Payment System Specialist 2June 1998 Overall Progress Task Manager 3

Payment System SpecialistDecember 1998 Overall Progress Task Manager 4

Payment System SpecialistApril 1999 Overall Progress Task Manager 5

Payment System SpecialistSeptember 1999 Overall Progress Task Manager 5

ICR Payment System Specialist

Borrower's Contribution to Supervision

2. All project actions will be coordinated by the PMU. Regular progress reports will beprovided, as will Part 2 of the Implementation Completion Review. Provisional project financialatetements will be provided on a semi-annual basis, and audited statements will be provided annually.Audited commercial bank financial statements will be provided annually.

87 Annex 10

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Profiles of Participating Commercial Banks

A. Viet Nam Bank for Agriculture (Agribank)

Introduction

I. Background. The Viet Nam Bank for Agriculture (Agribank) is the dominant ruralcredit institution in Viet Nam. It was separated from the Rural Credit Department of the SBV onNovember 14, 1990, pursuant to Decree No. 400/CT by the Prime Minister. The Charter for Agribankwas enacted on November II, 1992.

2. Business Activity. While Agribank has traditionally performed the role of a ruralfinancial institution, it currently provides a wide range of banking services. Agribank has the authorityto operate in the areas of fund mobilization, trust operations, lending, international banking, leasing,precious metals and gem dealing, and a number of other areas, including participation in joint-ventureswith foreign financial institutions. Agribank lends to some 2,500 SOEs and 40 stock companies, as wellas to more than 10 million production households. Agribank is also the executing agent for trust servicesfor a variety of international bilateral aid organizations and NGOs. Agribank recently provided US$4million from the ADB to develop the sugar industry, and another US$23 from the ADB to improve thedairy sector. It is also expected to extend credit to poorer individuals and poorer provinces and to thevictims of natural disasters.

3. Agribank plays a critical role as the provider of rural finance, given its extensive ruralbranch banking system. It acts primarily as a direct lender, but also lends indirectly through cooperativesand rural shareholding banks. Agribank is developing greater operational efficiency and outreachthrough rationalizing its rural network and by engaging in innovative rural lending practices. Agribankhas begun to experiment with extending banking services to rural areas by establishing subdistricttransactions offices and by forming mobile banking teams that make frequent village visits.

4. Agribank has established specialized branches active in the silk and rubber industries. Ithas also established four subsidiaries active in leasing, precious metals and gems, brokering, andinvestment consulting. Agribank also owns a 50% stake in Vinasian Bank, a joint-stock bank it beganwith the Siam Commercial Bank of Thailand. Agribank is actively exploring other investmentopportunities, a recent example being its discussions with Smith New Court to establish an investmentcompany.

5. Agribank's loan portfolio is dominated by short-term loans, but Agribank has shifted itslending focus away from SOEs and towards financing rural households and small businesses. Thisreorientation is apparent from the growth in new loan volume to those private borrowers from about D355 billion in outstanding loans at the end of 1991 to about D 4,630 billion. By comparison, loans toSOEs barely increased, rising from D 2,219 billion in 1991 to D 2,409 billion in 1994.

6. Rough estimates of the distribution of credit through Agribank indicate that new loanfunds were distributed broadly. Outstanding loans at the end of 1994 had the following breakdown:agriculture 53%, forestry 16%, aquaculture 20%, and other sectors 11%. Alternatively, the

88 Annex 10

categorization of loans by Agribank suggests that the proportion of production and farm input supplyloans was 25% in 1991 and 23% in 1992. Food marketing loans also reportedly declined from 31% in1991 to 25% in 1992. Given recent changes in how Agribank reports loans by use, and the potential formisinterpretation, no clear pattern of loan distribution can be discerned. There is some variation in theinterest rates for short-term rates, but there is no apparent variation in regards medium-term loans.

7. Foreign Assistance. To enhance its operations and further its development, Agribankhas received support from the World Bank, International Development Agency, training and technicalassistance funded by the Swedish and French governments, as well as assistance from domestic andforeign information and telecommunications institutions. It has recently received SDR 69.4 million aspart of the Agriculture Rehabilitation Credit from IDA, an US$80 million loan from ADB and DM 7million for a project in the central provinces.

Institutional Aspects

8. Branch Network. Agribank is headquartered in Hanoi and has an extensive nationwidebranch network. It has a southern representative office in Ho Chi Minh City and a central representativeoffice in Quy Nhon City, five regional branches, 53 provincial and city branches, and 416 districtbranches. In addition, there are nearly 2,400 transaction offices at entities such as agencies, shops andsavings desks mobilizing funds for Agribank. Agribank is aiming to increase its branch network in ruralareas, where it sees significant opportunities to increase its funds mobilization capabilities. Thisexpansion strategy focuses on increasing Agribank's transaction office network, which serves VietNam's 7,000 villages. Agribank would eventually like to have one transaction office in operation forevery one or two villages in the country.

9. Strategy and Planning. With the assistance of outside donors, Agribank is in the processof developing a comprehensive institutional development plan. This plan constitutes the heart ofAgribank's strategy to transform itself into a genuine commercial bank that is capable of satisfying thebanking needs of the agricultural and industrial sectors, fully competitive in the region, and integratedinto the international community. This plan will be fully implemented by the year 2000 and proposesthat Agribank: (i) perform an external audit; (ii) increase equity capital to US$300 million; (iii) delineateprecise job qualifications at headquarters and branch levels; (iv) prepare a comprehensive trainingprogram based on an accurate staffing plan; (v) improve credit processes and procedures; and (vi)develop a computerized management information system. Regarding progress on the plan'simplementation, Agribank is currently undergoing an external audit, and it has retained outside expertisein management information systems and human resources development.

10. The Board of Management prepares an annual business plan, which is then approved bythe Board of Directors. This business plan covers a broad range of activities and specifies details onextending credit, mobilizing funds, using funds, and estimating revenues, expenditures, and taxes. Theprimary objective of the plan is to balance the projected sources and uses of funds. It also details plansconcerning human resources development, training and technology improvement.

11. Organizational Structure. Agribank is governed by a Board of Directors, who areappointed with the approval of the SBV. The Board chooses Agribank's senior management, includingthe Director General, who must also be approved by the SBV. The Director General is the seniorexecutive officer of the bank. He has general oversight of all of Agribank's major divisions: the GeneralInspection Department, the General Director's Office, Domestic and Overseas Representative Offices,Business Strategy Section, Business Techniques Section, Financial Management Section, LogisticsSection, Non-banking Companies, Universal Banking Regional Branches, and Specialized Operations

89 Annex 10

Branches. The senior management of Agribank is represented by the Board of Management, whichcompmses the General Director and six Deputy General Directors.

12. Staffing and Training. As of June 30, 1994, Agribank had 20,728 employees, 330 ofwhom worked at the headquarters office. Since 1994, Agribank has adopted a recruitment criteriafocusing on qualified college graduates knowledgeable in foreign languages and informatics. A recentbreakdown of staff educational levels is as follows: 17 post-graduates (<1%), 5,456 graduates (26%),11,363 high school graduates (54%), and 2,729 vocational graduates (13%). In order to retain qualifiedstaff in an environment in which the MOF establishes a common base salary for SOCBs, Agribank hasintroduced a performance based compensation system that allows top performers to qualify for bonusesof up to three times their base salaries. Agribank also stresses job security in its efforts to compete withthe higher salaries paid by private sector financial institutions. It also gives grants to promisinguniversity students with the intention that they will join Agribank upon graduation. Agribank is notcuffeRtly expanding its staffing levels, and is hiring personnel only to replace retirees.

13. During 1995, Agribank expects to have 6,000 attend training of some kind. Most ofthese staff will receive training at one of Agribank's five training centers. This training will primarilycomprise project design, appraisal, and evaluation; international banking operations; informnationtechnology; and foreign languages. In addition, 200 Agribank staff will receive external training, muchof it funded by the Bank and ADB.

Operations

14. Credit Polic. Agribank has established policies for granting short-term loans, and iscurrently preparing guidelines for medium- and long-tern loans, with the assistance of ADB. Whenmaking a loan, Agribank analyzes both the technical and financial viability of the proposed activity.While Agribank has the authority to lend up to 50% of borrower assets and 100% of expected income, inpractice, it limits short-term loans to 70% of the proposed investment and 50% of medium-terminvestments due to credit rationing. Credit officers at the village level have the authority to make loansof up to D 20 million, those at the provincial level can makes loans of up to D 20 billion, and those at theprovincial level have a limit of D 100 billion. Loans exceeding D 100 billion are reviewed by a creditcommittee at the central level and require the approval of the General Director. However, these limitsare not always strictly adhered to. Smaller sized loans have a simplified approval process which isdecided by a joint liability group. Larger loans require collateralization and are subject to much greaterscrutiny zmd analysis. The credit officer is responsible for tracking a portfolio of loans and Agribank hasa number of remedial measures for dealing with poorly performing loans. As part of the external auditwhich Agribank is currently undergoing, a thorough review is being conducted on its loan portfolio.

15. The flow of credit remains subject to the vestiges of a planned credit allocation scheme,as Agribank channels funds to particular agricultural subsectors and geographical areas. Based on theannual availability of funds, Agribank's provincial directors determine the allocation of lending fundsacross their banking districts. It is believed that the factors affecting such decisions include the existenceof designated economic enterprises zones, priority borrower populations such as ethnic minorities, anddistrict loan collection performance. Agribank onlends at rates derived from the reference rates set bythe SBV. In principle, Agribank has latitude to adjust rates based on variations in operating costs andcredit risks.

16. Resource Mobilization. Agribank views its rural expansion program as an importanttool for resource mobilization as it hopes to attract individual savings. Interest rates paid by Agribank ondemand and savings deposits generally follow SBV guidelines. However, Agribank has becomeincreasingly dependent on project-linked "deposit substitutes" offering higher rates in a bid to attract

90 Annex 10

savings. These substitute funding arrangements take various forms, including bonds and promissorynotes. Agribank increased its dependence on deposit substitutes from 0.1% of total nonequity funds atthe end of 1991, to 4.7% at the end of 1992, and to 19% at end of September 1994, representing 41% oftotal deposit substitutes of all the deposit-taking banks in Viet Nam. Agribank recently began marketingbonds at 19.5% to mobilize small savers, which it views as a stable source of finance. Agribank is alsointerested in raising capital in foreign markets.

17. Auditing. For internal audit purposes, Agribank has a General Inspection Departmentthat operates on the district and provincial level. There are typically one supervisor at the district leveland six to seven at the provincial level. These personnel produce monthly and quarterly reports for bankmanagement. The internal auditing system is currently being converted to a computerized operation.Regarding external auditing, Agribank is currently undergoing an extensive audit by an Australianaccounting firm. The final audit report is being finalized and should be available by June-July 1995. Inaddition, SBV and MOF perform supervisory audits of Agribank activities.

Financial Structure and Performance

18. Structure. For the period 1990 to 1994, the total assets of Agribank increased 306.9%, rising fromD 2,627.7 billion to D 10,691.8 billion, averaging an annual growth rate of 42.3%. During the same period, totalliabilities grew 291.4%, rising from D 2,522.5 billion to D 9,872.8 billion. By comparison, total equity grew muchfaster, rising from D 105.4 billion to D 819.0 billion, or 677.1%. Despite this dramatic rise in equity, the proportionof equity in Agribank's capital structure remains small; in 1994, the debt to equity ratio was 92:8.

19. Lending by Agribank has increased rapidly, rising from D 1,551.8 billion in 1990 to D7,023.2 billion in 1994, an increase of 352.6%. Deposit growth has been much slower, rising from D1,104 billion in 1990 to D 2,485.2 billion in 1994, an increase of 125.1%. Consequently, the loans todeposit ratio for Agribank rose from 140.6% in 1990 to 282.6% in 1994.

20. Profitability. Agribank has returned to profitability after losing D 80.6 billion in 1991and D 42.8 billion in 1992. Agribank reported net income of D 6.0 billion in 1993 and D 12.7 billion in1994. Agribank generates almost all of its revenues from interest income, which accounted for nearly99% of total revenue in 1994. Earnings have been pressured since total expenses have been increasingfaster than total income. Interest income increased by 1,070.6% from D 199.8 billion in 1990 to D2,338.8 billion in 1994; by comparison, interest expenses increased by 1,748.8% from D 90.5 billion toD 1,673.1 billion. However, while the ratio of interest expenses to interest income stood at 84.5% in1991, it has been declining steadily, and was 71.5% in 1994. Non-interest expenses have also beencontributing to poor profitability. While salaries as a percentage of total assets had been declining for anumber of years, they rose in 1994, reaching 3.7% of average assets. In 1994, net income measured interms of average assets was just 0.1%, and it was likewise small when measured in terms of averageequity, at 1.9%. Agribank is subject to a 2% tax on financial margin, a 45% profit tax on net income,and a 6% tax on capital use. As with other SOCBs, there are few incentives to maximize profit, since thedisposition of surplus is regulated by the state.

91 Annex 10

Agribank: Historical Balance Sheets (1990-1994)(Dong billion)

1990 1991 1992 1993 1994Assets

Liquid 1,060.1 480.5 647.9 789.1 1,275.8Short-term Loans 1,445.4 2,702.8 3,294.4 5,390.5 4,960.2Medium-term Loans 106.4 132.6 123.6 521.2 2,063.0Loans in Arrears 87.2Govt Trust Fund Loans a) 562.6 542.8Other Trust Service Loans 49.9 132.7Fixed Assets b) 15.8 -2.1 198.6 237.9 300.0Other Assets 3.9 306.0 94.3 2,092.7

Total 2,627.7 3,404.9 5,183.0 7,708.5 10,691.8

LiabilitiesDeposits 1,104.0 1,447.9 2,089.2 2,106.9 2,485.2Other Mobilization 1,283.5 2,290.3 363.6 1,622.7 1,736.8Current Balances Payable 199.4 203.4 1,314.0Borrowings from SBV 1,451.7 2,461.5 2,723.2Other Borrowings 135.0 140.4 0.3 20.8 234.3Govt Funds 78.8 641.7 645.8 794.1Other Institutions 14.6 1.7 138.4 585.4

Total 2,522.5 3,972.0 4,747.6 7,199.5 9,872.8

EquityStatutory Capital 40.0 40.6 200.0 200.0 455.1Equity Funds & Other c) 65.4 41.5 235.4 308.9 364,0

Total 105.4 -537.0 435.4 508.9 819.0

Total Liabilities & Equity 2,627.9 3,405.0 5,183.0 7,708.4 10,691.8

a) Government Trust Fund loans represent loans to state enterprises and are largely nonperformingb) Net fixed assets for 1990 and 1991c) Equity capital was adjusted for losses in 1991 of D 649.1 billion

Agribank: Historical Income Statements (1990-1994)(Dong billion)

1990 1991 1992 1993 1994

Interest Income 199.8 368.2 944.9 1,260.8 2,338.8Interest Expense 90.5 311.2 771.6 945.9 1,673.1

Financial Margin 109.3 57.0 173.3 314.9 665.7Provision for Loan Loss 0.0 0.0 0.0 10.1 52.0

Net Financial Margin 109.3 57.0 173.3 304.8 613.7

Non-Interest Income 17.6 8.1 15.6 33.5 32.8

Non-Interest ExpensesSalaries and Social Cost 21.7 70.8 87.3 117.0 342.5Depreciation 9.4 12.1 16.8 14.0 97.2Other 36.8 47.7 90.8 160.1 183.6

Income before Taxes 59.0 -65.5 -6.0 47.2 23.1Taxes 20.4 15.1 36.8 41.2 10.4Net Income 38.6 -80.6 -42.8 6.0 12.7

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Agribank: Historical Financial Indicators (1990-1994)(Dong billion)

GROWTH 1991 1992 1993 1994

Assets 29.6%/ 52.2% 48.7% 38.7%Liabilities 57.5% 19.5% 51.6% 37.1%Equity -609.5% -181.1% 16.9% 60.9%Capital 1.5% 392.6% 0.0% 127.5%Loans 91.4% 60.3% 86.5% 59.4%Deposits 31.2% 44.3% 0.8% 18.0%

Net Incomne -211.0% -90.8% -886.7% -51.00/oInterest Income 84.3% 156.6% 33.4% 85.5%Interest Expenses 243.9% 147.9/o 22.6% 76.9%/Non-interest Income -54.0% 92.6% 114.7% -2.1%Non-lntucsg Expenses 96.2% 74.6% 74.7% 107.1%Financial Margin -47.8% 204.0% 75.9% 101.3%

RATIOS 1990 1991 1992 1993 1994

Total Equity/Assets 4.0% -15.8% 8.4% 6.6% 7.7%Total Equity/Liabilities 4.2% -13.5% 9.2% 7.1% 8.3%Liabilities/Assets 96.0% 116.7% 91.6% 93.4% 92.3%Loans/Deposits 140.6% 195.8% 163.6% 280.6% 282.6%Liquid Assets/Deposits 96.0% 33.2% 31.0% 37.5% 51.3%

Int Expenses/Int Income 45.3% 84.5% 81.7% 75.0% 71.5%Financial Margin/Avg Assets -2.7% -1.0% 0.1% 0.1%Net Income/Avg Assets -2.7% -1.0% 0.1% 0.1%Net Income/Avg Equity 37.3% 84.3% 1.3% 1.9%Net Income/Avg Capital -200.0% -35.6% 3.00/o 3.90/oSalaries/Avg Assets 2.3% 2.0% 1.8% 3.7%Admin Expenses/Avg Assets 1.6% 2.1% 2.5% 2.0%

Agribank: Projected Income Statements (1995-2000)(Dong billion)

=_________________________ 1995 1996 1997 1998 1999 2000

Interest Income 2,279.3 2,318.8 2,356.2 2,568.8 2,652.0 2,700.0Interest Expense 1,796.3 1,852.4 1,907.9 2,102.6 2,261.5 2,429.2

Financial Margin 483.0 466.4 448.3 466.1 390.5 270.8Provision for Loan Loss 48.7 56.5 83.3 87.5 104.0 108.0

Net Financial Margin 434.4 409.9 365.0 378.6 286.5 162.8

Non-interest Income 41.7 122.0 261.8 318.8 468.0 675.0

Non-interest ExpensesSalaries and Social Cost 172.7 183.1 202.3 212.5 234.0 243.0Depreciation 90.8 97.2 107.1 118.8 136.5 148.5Other 185.4 213.6 261.8 302.5 306.8 345.6

Income before Taxes 27.2 38.1 55.6 63.6 77.2 100.7Taxes 12.2 17.1 25.0 28.6 34.7 45.3Net Income 15.0 21.0 30.6 35.0 42.4 55.4

Notes: These projections were prepared based on data supplied by Agribank. Agribank data were adjusted to reflect price increases as follows:1995 (7%), 1996-98 (6%), 1999-00 (5%). Interest expenses include expected costs associated with the proposed IDA credit assessed asfollows: 1995 (D 0.007 bil), 1996, (D 1.452 bil) 1997 (D 3.877 bil), 1998 (D 6.375 bil), 1999 (D 7.328 bil) and 2000 (D 7.289 bil), and sorepresent a relatively small portion of total interest expenses. These numbers were converted to from Dong to USS based on an exchange rateof D 11,200 = USSI.

AGRIBANK ORGANIZATIONAL CHART

Board of Directors

I Director General

General Director's Gneral Inpection Domestic & Specialized Universal Banking Non-bankingOffice IDepartment Overeas Rep. Operations Regional Branches Companies

Offices ~ ~ ~ Banhe

Business FinaBusiness Strategy Techniques Management Logistics SectionSection Section Section

Economic Planning FinanAdminiton& Resources Large Enterprises Accounting

CreditInternational Payment Vehicles Fleet

Relations _ _ _ _ _ _ _ _

Small EnterprisesPersonnel & Credit Treasury Welfare Assets

Training _ _ _ _ _ _ _ _ _

Information & InfonnationMarketing Credit & Investment Technology Center

ServicesLegal

a3Ht

0

94 Annex 10

B. Bank for Investment and Development of Viet Nam (BIDV)

Introduction

21. Background. The Bank for Investment and Development of Viet Nam (BIDV) currentlyoperates as an SOCB. From the period 1957 to 1987, it functioned under the Ministry of Finance as theBank for Reconstruction and allocated funds from the state budget to promote the assembly andconstruction sectors. From 1987 to 1990, it was known as the Bank for Investment and Construction ofViet Nam and was administered by the SBV. During this period, it allocated funds from the state budget,provided working capital to the assembly and construction sectors, and provided preferential loans forinvestment and development. It has been known by its current name ever since November 1990.

22. Business Actiyity. BIDV is the sole bank in Viet Nam specializing investment anddevelopment. It also conducts a number of other banking activities, including offering term credit toenterprises for development, granting working capital loans to assembly enterprises, providing domesticand international settlement, acting as an agent for trust lending, and mobilizing long-tern funds fromboth domestic and international sources. Since the beginning of 1995, BIDV has begun a number of newactivities, including mobilizing short-term funds and offering loans to economic sectors of the economy,as well as a host of other commercial banking activities. Until December 1994, BIDV had also allocatedfunds from the state budget for development purposes, but this activity has been turned over to the MOF.

23. BIDV plays an important developmental role in the Vietnamese economy. It is asignificant source of term financing, and 70% of its loans are medium- and long-term. These loans aremainly used to finance construction and materials supply. BIDV has recently begun to offer exportfinance credit, which grew from nothing in 1993 to US$150 million in 1994. It views this activity asvital to the country's development, given the need to import high-value capital goods. It has alsohandled bilateral funding from France, Gernany and Japan. BIDV currently has 525,000 customers and654,000 accounts.

24. BIDV is actively pursuing investment opportunities. It has a 50% stake in VID PublicBank which it set up with a Malaysian bank. It also has a 10% share in housing banks in Hanoi and HoChi Minh City. BIDV is also currently seeking approval from the GOV to establish two joint-ventureleasing companies, one with a Japanese partner and the other with a Korean partner. BIDV would have a50% share in these enterprises and would have to put up US$5 million in capital for each one. BIDValso recently received approval to establish a leasing company and an investment company for buildinghouses. As the privatization process proceeds in Viet Nam, BIDV has expressed its interest inpurchasing the shares of newly privatized companies. It would also like to begin investment bankingoperations once a stock market is in full operation.

Institutional Aspects

25. Branch Network. BIDV has a nationwide branch network and an active presence in allof the country's provinces. It has a headquarters and transaction office in Hanoi and a representativeoffice in Ho Chi Minh City, where it is also planning to open another transaction office. In addition,BIDV has 54 provincial branches, and five transaction offices and 40 sub-branches at the district level.There are 18 departments at headquarters. The five largest branches have eight to ten departments each,while the smaller ones have four. BIDV is currently upgrading the services in its sub-branches andtransaction offices so that they can offer more banking services. It sees the primary function of itsbranch network as funds mobilization. BIDV has established over 100 correspondent bankingrelationships.

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26. Strategy and Planning. BIDV's primary strategic objective is to diversify its activities,particularly with regard to capital sources. Previously, BIDV was limited to providing funds for SOEs,but its client base and product range have grown substantially. BIDV produces an annual plan withdetailed targets covering a range of areas, including funds mobilization, loans outstanding, profit, andwages. When devising these targets and objectives, planners carefully examine BIDV's financialoperations, capital structure, and recent performance.

27. Organizational Structure. The highest body at BIDV is the Board of Govemors. TheBoard of Govemors chooses the Board of Management, which comprises the bank's senior managers.There are many functional departments in the bank, including intemational banking, intemationalsettlement, risk information and prevention, appraisal-consultancy, guarantee-services, credit,communication-propaganda, capital and resources-marketing, financing and accounting, informatics,personnel, wages and emulation, human resources development, legislative, and administration.

28. Staffing and Training. BIDV currently has 3,135 staff and will increase to 3,200 in1995. BIDV has indicated that it faces serious shortfalls of experienced people, and has asked many ofits directors to stay on since many are due to retire this year. BIDV recruits new staff who are collegegraduates, proficient in English, and computer literate. At the end of 1994, the educational breakdown ofBIDV's work force was as follows: post graduate (<1%), university graduate (45%), secondaryeducation (36%), and elementary education (10%).

29. About 90% of staff at BIDV work with computers, but their technical expertise and jobrequirements vary considerably. Consequently, BIDV has designed its computer training program alongthe following lines: (i) intensive training for experienced users; (ii) training to allow application users tobetter understand applications programming; and (iii) specialized training in database management andsystems analysis. This program would be accomplished by administering spot training; by attendance atone of the three training centers located in the northem, central, and southem regions of the country; orby longer-term informatics training for software engineers either domestically or intemationally.

Operations

30. Credit. BIDV offers short-, medium-, and long-term credit, and so is flexible in meetingthe banking needs of a particular project or borrower. When determining credit allocation, BIDVconsiders the ability of the borrower to repay the loan and the amount of time it will take to receive thisrepayment. Priority is acorded those projects which expand existing production and which promoteexports. BIDV has a number of policies to protect against credit risk. BIDV requires collateral fromnon-SOEs up to 60% of the value of the credit. For SOEs, BIDV looks closely at the capital structure ofthe SOE and at the contract between the SOE and its counterparty. For long-term loans to SOEs, BIDVrequires the borrower to pledge the property to be financed and, in some cases, may require a guaranteefrom the line ministry. For traditional borrowers, BIDV does not require deposits, but deposits may berequired from new customers if conditions warrant. Credit authority rests with different levelsdepending on the size and term of the loan. Branch directors may approve short-term loans of up to D 5billion per borrower; however, the head office must approve larger short-term loans, and for all medium-and long-term loans. BIDV has a single borrower limit equivalent to 10% of legal capital.

31. BIDV reports that is having little trouble with the quality of its loan portfolio and furtherreport that, for some years, it did not register any overdue payments. It attributes this success to anumber of factors: lending has concentrated on financing equipment rather than on trading, which is lessrisky policy since physical goods can be used as collateral and auctioned off; good relationships with itsborrowers, which helps in the determination of credit worthiness; a deep understanding of the customer,which aids in appraisal; a centralized approval system, which ensures consistency; and a comprehensive

96 Annex 10

monitoring process, which covers the entire length of the repayments period. BIDV believes that itsmonitoring capabilities would be further enhanced with the implementation of a centralized paymentssystem, which the proposed Bank project would support. BIDV assumed US$3.5 million in bad loansupon the dismantling of the monobank system. These loans have been frozen and are no longerclassified as loans on the balance sheet. They are accounted for in the "Other Assets" line item with anoffsetting entry in "Borrowings from SBV".

32. Audifing. BIDV's Annual Report is audited by he SBV. In 1994, BIDV hired aVietnamese accounting firm, VACO, to audit its branches in Ho Chi Minh City and Binh Dinh. BIDVrecognizes the need to undergo an external audit but, like the other SOCBs, it does not believe that localauditing capabilities have sufficiently developed to perform such an exercise. In recognition of this fact,BIDV has approached the World Bank about identifying the resources to allow an internationalaccounting firm to perform a comprehensive audit of BIDV's finances and operations.

Financial Structure and Performance

33. Structure. BIDV's total assets increased from D 1,929.0 billion in 1991 to D 8,662.1billion in 1994, representing a 349.0% increase. Total liabilities grew much faster during the sameperiod, rising from D 739.6 billion to D 5,247.6 billion, a 609.5% increase. On the other hand, totalequity increased by only 187.1%, going from D 1,189.4 billion to D 3,414.5 billion. Between 1993 and1994, total assets rose by 63.7%, total liabilities by 150.0%, and total equity by 7.1%. Given the rapidgrowth in liabilities, BIDV's capital structure has changed radically and the ratio of debt to equity rosefrom 38:62 in 1991 to 61:39 in 1994.

34. Total loans increased from D 1,433.8 billion in 1991 to D 5,298.5 billion in 1994,representing an increase of 269.5% By contrast, total deposits are much smaller than total loans, buthave been going at a faster rate. In 1991, total deposits amounted to D 291.7 billion, and rose to D1,230.0 in 1994, a 321.6% increase. Consequently, the loans to deposits ratio for 1994 was 430.8%.Between 1993 and 1994, total loans grew by 42.2% and total deposits grew by 22.4%.

35. Profitability. BIDV has consistently reported profits. From 1991 to 1994, net incomeincreased 146.7%, rising from D 26.9 billion to D 66.3 billion, an annual average rate of 41.0%. From1993 to 1994, net income increased by 9.8%. BIDV earns most of its revenues from interest income,which accounted for 93.3% of total revenues in 1994. During the period 1991 to 1994, interest incomerose from D 216.4 billion to D 478.4 billion, and interest expenses from D 138.7 billion to D 223.9billion. Lending expenses accounted for two-thirds of all interest expenses in 1994, with borrowingexpenses making up the balance. The ratio of interest expenses to interest income decreased from 64. 1%in 1991 to 46.8% in 1994. Despite these positive developments, other profitability measures have beeneroding, largely reflecting growth of non-interest expenses. The ratio of net income to average totalassets was 2.2% in 1992, 1.4% in 1993 and 0.9% in 1994. At the same time, net income to average totalequity decreased from 3.3% in 1992, to 2.3% in 1993, and to 2.0% in 1994. BIDV is subject to a profittax of 45%, a turnover tax of 15% assessed on interest rate spread, and a capital use tax of 6% assessedon capital provided by the GOV.

97 Annex 10

BIDV: Historical Balance Sheets (1991-1994)(Dong billion)

1991 1992 1993 1994Assets

Reserves 419.2 738.4 1,420.3 1,089.8Deposit in SBV 410.7 715.5 713.4 687.6

Treasury Bonds 2.1 2.1 7.0Loans 1,433.8 2,024.7 3,725.3 5,298.5Trust lending, development finance 1,077.9Joint Ventures 2.6 57.5 57.8 58.6Other Assets 73.4 229.2 86.4 1,130.3

Total 1,929.0 3,051.9 5,291.8 8,662.1

LiabilitiesDeposits 291.7 533.6 1,004.6 1,230.0Foreign loans for development 618.5 1,159.8Trust fund, development finance 1,138.4Bonds Issued 24.1 8.5 151.4Borrowings from SBV 174.1 134.5 115.5 913.0Other Liabilities 273.8 254.3 355.5 655.0

Total 739.6 946.6 2,102.7 5,247.6

EquityCapital and Funds 1,189.4 2,105.4 3,189.2 3,414.5

Funds for Development Credit 900.0 1,540.0 2,605.8 2,605.8Total 1,189.4 2,105.4 3,189.2 3,414.5

Total Liabilities & Equity 1,929.0 3,051.9 5,291.8 8,662.1

BIDV: Historical Income Statements (1991-1994)(Dong billion)

1991 1992 1993 1994

Interest Income 216.3 254.8 347.0 478.4

Interest ExpensesBorrowing 4.9 8.3 13.5 73.7Lending 133.9 72.6 132.5 150.2

Total 138.7 80.8 146.1 223.9

Financial Margin 77.6 174.0 201.0 254.4

Non-interest Income 2.4 3.3 10.1 34.6

Non-interest ExpensesDepreciation 1.3 5.0 11.5 20.2Other 18.5 42.0 58.3 111.0

Total 19.8 47.0 69.9 131.2

Income before Tax 60.2 130.3 129.2 157.9Tax 33.3 76.0 80.8 91.6Net Income 26.9 54.3 60.4 66.3

98 Annex 10

BWV: Historical Financial Indicators (1992-1994)(Dong billion)

GROWTH 1992 1993 1994

Assets 58.2% 73.4% 63.7%Liabilities 28.0% 122.1% 149.6%Equity 77.0% 51.5% 7.1%Loans 41.2% 84.0% 42.2%Deposits 82.9% 88.3% 22.4%

Net Income 102.1% 11.2% 9.8%Interest Income 17.8% 36.2% 37.8%Interest Expenses -41.8% 80.7% 53.3%Non-Interest Income 38.0% 205.0% 243.4%Non-Interest ExpensCs 137.1% 48.7% 87.8%Financial Margin 124.2% 15.5% 26.6%

RATIOS 1991 1992 1993 1994

Total Equity/Assets 61.7% 69.0% 60.3% 39.4%Total Equity/Liabilities 160.8% 222.4% 151.7% 65.1%Liabilities/Assets 38.3% 31.0% 39.7% 60.6%Loans/Deposits 491.5% 379.4% 370.8% 430.8%Liquid Assets/Deposits 143.7% 138.4% 141.4% 88.6%

Int Expenses/nt Income 64.1% 31.7% 42.1% 46.8%Financial Margin/Avg Assets 7.0% 4.8% 3.6%Net Income/Avg Assets 2.2% 1.4% 0.9%Net Income/Avg Equity _ 3.3%1 2.3% 2.0%

BIDV: Projected Financial Statements (1995-2000)(Dong billion)

1995 1996 1997 1998 1999 2000

Interest Income 562.1 651.9 753.9 869.6 993.2 1,132.6

Interest ExpensesBorrowing 86.6 101.7 119.4 139.1 158.8 180.3Lending 176.5 204.7 236.7 273.1 311.9 355.7Total 263.1 306.4 356.2 412.2 470.7 536.0

Financial Margin 299.0 .345.5 397.7 457.4 522.5 596.7

Non-interest Income 40.7 47.2 54.6 63.0 71.9 82.0

Non-Interest ExpensesDepreciation 23.7 27.5 31.8 36.7 41.9 47.8Other 130.4 151.2 174.9 201.7 230.4 262.8

Total 154.1 178.8 206.7 238.5 272.4 310.6

Income before Tax 185.5 213.9 245.6 281.9 322.0 368.1Tax 107.6 124.8 144.4 166.5 190.2 216.9Net Income 77.9 89.1 101.2 115.4 131.8 151.2

Note: These projections were prepared based financial data for 1995 supplied by BIDV. These data were then extrapolated by an annualgrowth rate of 9.S%, which equates to the average annual growth rate of net income from 1993-94. as growth has begun to slow. The resultswere then adjusted upward to reflect price increases as follows: 1995 (7%/6), 1996-98 (6%), 1990-00 (5%). Interest expenses include expectedcosts associated with the proposed IDA credit assessed as follows: 1995 (D 0.228 bil), 1996 (D 2.065 bil), 1997 (D 4.226 bil), 1998 (D 5.622bil), 1999 (6.093 bil), 2000 (D 5.687 bil). These costs were converted from US dollars to. Dong based on a convcrsion rate of D 11,200 = USSI.

99 Annex 10

BIDV ORGANIZATIONAL CHART

Board of Directors

Board of Management

International Banking Dept. Caita & R - M Det

International Settlements Dept. Finance & Accounting Dept.

Risk Info. & Prevention Dept. Informatics Dept.

Appraisal - Consultancy Dept. Personnel Dept.

Guarantee - Services Dept. Wages & Emulation Dept.

| Credit I Dept.

Credit 11 Dept. -

Communications - Propaganda Dept. -Administration Office

Transaction Office Ho Chi Minh City Rep. Ofce

l < ~~~~~~~~Companies

ACreditB& Servicesr|

Fund Raising & Housing Loans

Accounting & Cash & Tellers

100 Annex 10

C. Viet Nam Export Import Bank (Eximbank)

Introduction

36. Background. The Viet Nam Export Import Bank (Eximbank) is one of the first jointstock banks established in the country after the 1988 banking sector reforms. Decision No. 140/CT ofthe Chairman of the Council of Ministers dated May 24, 1989 authorizes the establishment of Eximbankwith the stated purpose of promoting export development programs and investment for export orientedproduction and processing. Article I of the Decision establishes the bank as a "limited joint stock bank,with its own legal status, autonomous accounting and self-determination in monetary and credit businessand banking services...". Article 2 of the same Decision states that Eximbank is "organized and managedin accordance with the Charter adopted by the General Meeting of Shareholders' Delegates and ratifiedby the Director General of the State Bank of Vietnam." Eximbank's Charter was adopted on November15, 1989, and ratified on January 17, 1990. Eximbank thus formally began operations as of that date.

37. Eximbank has 125,000 outstanding shares. Its shareholding structure is as follows: 68%shares held by 191 state-owned enterprises; 24% shares held by 18 private economic organizations; and8% shares held by 1,348 individual shareholders. The largest shareholders are the Saigon JeweleryCompany, an SOE owned by the local People's Committee (12.2%), Generalimex, a general tradingcompany in Hanoi owned by the Ministry of Trade (11.0%), Generalexim, a general trading company inHo Chi Minh City owned by the Ministry of Trade (11.0%), Asian Commercial Bank, a joint-stock bankin Ho Chi Minh City (8.0%), and Saigon Tourist Company, also in Ho Chi Minh City (1.6%).Authorized legal capital at founding was D 100 billion, which was subsequently increased to D 125billion by Decision No. 198/QD-NH5 issued by the Governor of the SBV on October 10, 1993. Paid-upcapital as of December31, 1994 was D 125 billion.

38. Business Activty. Eximbank focuses on providing banking services for exporting andimporting activities. Similar activities are carried out at headquarters and in the three branches. Thebulk of the bank's business is short-term lending. However, Eximbank recent extended a five-year loanfor the construction of a new hotel. Eximbank is also involved in foreign exchange trading and export-import settlements. Eximbank's client base is primarily trading companies. It has not targeted industrialborrowers since its capital base is relatively small. Eximbank maintains extensive correspondentbanking relationships with 424 foreign bank branches in close to 50 countries. Eximbank has notestablished any subsidiaries and is not active in any joint-ventures. Eximbank counts amongst itscompetitive advantages its good knowledge of the SBV and local Vietnamese banks, as well as of thecountry's development strategy and potential.

39. The total value of export reimbursement through Eximbank was US$301 million in1993, or 10% of the total turnover of national exports. The total value of settlements for imports wasUS$339 million in 1993, also accounting for 10% of the total turnover of national import settlement. Thetotal value of usance L/Cs opened in 1994 was US$300 million.

Institutional Aspects

40. Branch Network. Eximbank is headquartered in Ho Chi Minh City, and has threebranches: one in Hanoi, inaugurated on November 27, 1992; one in Danang, opened on January 28,1994; and the third which recently opened in 1995 in Can Tho. Eximbank's initial strategy was toestablish a present in major commercial centers involved in foreign trade. Eximbank now expects strongbanking demand in rural areas, and so is exploring a strategy aimed at expanding its branch network inrural areas in the northern and southern regions of the country where it expects significant growth.

101 Annex 10

41. Strategy and Planning. Eximbank's major business objective is to support exportdevelopment through: (a) financing trade; (b) financing export-oriented production, sub-contracting andmanufacturing; and (c) taking equity participations in export-oriented ventures. Operational objectivesare to: (a) mobilize funds in Vietnamese dong and foreign currencies through direct borrowings anddeposit mobilization; (b) undertake foreign currency operations through trading and transfers fromoverseas Vietnamese; (c) provide international payment services; (d) provide bank guarantees to localenterprises for local and foreign borrowing; (e) grant dong and foreign currency loans for export-orientedactivities; and (f) provide other services related to cash operations, gold imports and consulting advice.

42. Management prepares a five year plan which is discussed at the general shareholders'meeting. It provides direction and does not contain many quantitative objectives. The current five yearplan aims to: (a) pursue a policy of rural expansion; (b) diversify operations by offering with newactivities and products; (c) increase capital to D 500 billion by 1999; (d) increase sources of funds to D7,000 billion by 1999; (e) expand the ATM network; and (f) introduce new credit card and Smartcardinstruments.

43. The aims laid out in the five year plan as well as careful analysis of data provided byeach branch, provide the basis for the preparation of Eximbank's annual business plan. This plan sets outvery specific financial, operational and institutional targets source of funds, use of funds, export-importfinancing, asset management, criteria for treasury management, organizational development, businessefficiency, technology development, human resource development.

44. Resource Mobilization. Eximbank intends to increase its deposit mobilization efforts tomeet the increasing needs for loan funds. In addition to offering different deposit products, increasingcustomer confidence in the bank is key to achieving this objective. Eximbank is therefore desirous ofimproving its payment services. Eximbank recently received SFR 24 million as part of a SFR 40 millionloan by the Swiss govemment to finance exports of Swiss goods into Viet Nam. Eximbank borrowed thefunds at 1% and can on-lend at a rate of 5% to 6%. In order to expand its activities, Eximbank has askedfor approval from the SBV to double its capital from the present D125 billion to D250 billion, of which30% would be reserved for foreign participants.

45. Organization Structure. Eximbank's chief executive body is the General Meeting ofShareholders' Delegates, whose members are chosen on the basis of each 250 shares of stock. Under thisbody is a Board of Directors, whose members are elected by the General Meeting every four years andwho serve a four year terms. The Managing Director General is chosen by the Board of Directors for anopen ended term, but may be removed six months after his appointment at the discretion of the Board.The selection of the Managing Director General and the members of the Board of Directors is subject tothe approval of the SBV. The Board consists of a Chairman, who is the Director General of the SaigonJewelry Company; two Deputy Chairmen, one from Generalexim; one from Generalimex; and eightmembers drawn from various state enterprises and the People's Committee of Quang Nam in DanangProvince. Eximbank's two Comptrollers, drawn from Saigon Finance Company and Tenimex reportdirectly to the General Meeting of Shareholder's Delegates.

46. The Deputy Director General oversees functional departments at headquarters and thebank's two branches. Activities at headquarters are organized in seven departments: IntemationalRelations; Intemational Settlements; Credit and Investment; Cash; Planning and Foreign Exchange;General Accounts; and Administration. Both branches have five divisions each: Intemational Relationsand Settlements; Credit and Investment; Cash; Accounting; and Administration.

47. Staffing and Training. Eximbank is growing rapidly and currently employs 250 staff,compared to 215 in 1994 and 145 in 1993. Hiring levels depend on workload activity. Eximbankrecruits college graduates from colleges specializing in economics, banking and foreign languages.Recruits undergo a foreign language examination and have a three to six month probation period at the

102 Annex 10

bank. Bank management reports that it has difficulties retaining qualified staff due to the relatively lowpay structure imposed by the MOF. Eximbank has attempted to supplement basic salaries with bonusestied to bank profitability and individual performnance, but the compensation package is still below whatforeign banks can afford to pay. As an example, the average compensation for a new employee atEximbank is D 850,000 per month, while the average package for a new employee at a foreign bank is D3,000,000 per month.

48. Eximbank wishes to create a well-trained cadre of professional staff. Most of the staffare recent college graduates. However, the amount of external training is restricted by resourceconstraints. Training is also achieved through rotational assignments in the bank's branches. Many staffalso attend classes in foreign languages after regular work hours. Bank managers complain that manystaff leave the bank once it has committed considerable resources training them, and Eximbank nowrequires compensation for training by the those employees leaving the bank to work elsewhere.Eximbank has a five-year staff development and training plan in order to bring the skills of its staff tointernational standards. Eximbank has availed itself of the training programs offered by variousbilateral, multilateral and private agencies in Viet Nam, including the Bank-executed, SIDA-financedBanking Sector Training Project. Some staff have been sent abroad for month-long training courses inforeign banks. Eximbank's correspondent banks send specialists to provide training on specific topics toEximbank staff.

Operations

49. Credit. Eximbank has standard written credit policies and procedures which areavailable to all credit officers. Eximbank thoroughly appraises the loan and examines the creditworthiness of potential borrowers. It requires collateral, but admits this requirement is somewhatproblematical when dealing with SOEs. The Hanoi branch has the authority to approve loans underUS$5 million, and the Da Nang branch has a lower threshold.

50. Turnover of "investment" loans and other advances was D3,784 billion in 1993. Annuallending tumover for the first II months in 1994 is reported as D828 billion in local currency and US$143million in foreign currency. The bulk of this (84%) was in foreign currency. Prescribed lending rates indong are considerably higher than those in dollars, and since the dong/dollar exchange rate has beenreasonably stable over the past 2-3 years, companies prefer to borrow in dollars.

51. Eximbank extends considerable effort to ensure the quality of its loan portfolio. At theappraisal stage it conducts a vigorous analysis of the loan and the credit worthiness of the borrower. Ittypically requires collateral. In the case of letters of credit, Eximbank has them drawn up in the name ofthe bank. Loan payments are then constantly monitored and remedial actions are enacted as soon asproblems arise. As a result, problem loans constitute a relatively low 3% of Eximbank's portfolio.

52. Resource Mobilization. Eximbank mobilizes resources both domestically and fromabroad. Domestic resources include customer deposits in both dong and foreign currency. Total turnoverof deposits in 1993 was D6,896 billion in local currency and US$2,090 million in foreign currency,almost all demand deposits. Eximbank's savings deposit turnover in the same year was D130 billion inlocal currency and US$4.3 million in foreign currency. The Government-prescribed term deposit ratesare lower than the rates obtained on Treasury bonds, as a result of which Eximbank's deposit basecontracted in 1993. Eximbank maintained over 7,000 accounts in 1993 (4,026 in foreign currencies and3,009 in local currency), of which 1,673 accounts were held by non-residents.

53. Total turnover of Eximbank's borrowings were D345 billion in 1993, of which US$22million in foreign currency. These were all short-term loans with terms ranging from 1-3 months,obtained from domestic and foreign banks as well as the SBV. Eximbank has recently signed some

103 Annex 10

framework agrzaents with German banks on long-term credit facilities for financing up to 85% of thecontract value of Vietnamese imports from Gerrnany.

54. Eximbank is currently seeking approval from the SBV to double its shares outstandingfrom 125,000 to 250,000. As the price of one share is currently D 1,000,000, this increase wouldsubstantially raise Eximbank's available capital. Its shareholders have already registered for thisincrease so the issue is fully subscribed. Further equity issues will set aside 30% of shares for foreigninvestors.

55. Auditing Policies. Eximbank has a Comptroller appointed by the Board of Directors thatis responsible for ensuring compliance with the bank's internal control procedures. The Comptroller andhis staff review branch activities each month and will make inspections as warranted. Eximbank doesnot currently have external audits conducted. The SBV conducts off-site inspections of Eximbank on aregular basis. In addition, Eximbank's financial statements are certified by the SBV.

Financial Structure and Performance

56. Structure. For the period 1991 to 1994, the total assets of Eximbank grew 139.1%, risingfrom D 773.9 billion to D 1,850.3 billion. During the same period, total liabilities grew 149.5%, risingfrom D 679.5 billion to D 1,695.1 billion. Total equity grew at a slower pace, rising from D 94.4 billionin 1991 to D 155.3 billion in 1995, an increase of 64.5%. Between 1993 and 1994, total assets rose by77.5%, total liabilities by 88.9%, and total equity by 6.9%. As a result, the ratio of debt to equityincreased from 88:12 in 1991 to 92:8 in 1994.

57. The loan portfolio of Eximbank has undergone significant growth, increasing from D291.1 billion in 1991 to D 943.5 billion in 1994, a rise of 224.1%. Deposits have grown at less than halfthis rate, increasing from D 552.1 billion in 1991 to D 1,093.3 billion in 1994, a rise of 98.0%. Duringthis period, the loans to deposits ratio has varied considerably, rising from a low of 52.7% in 1991, to ahigh of 132.6% in 1993, and stood at 86.3% in 1994.

58. Profitability. Eximbank has consistently reported after tax profits. Net income hasgrown steadily, from D 0.9 billion in 1991, to D 5.8 billion in 1992, to D 11.5 billion in 1993, and to D19.8 billion in 1994. While non-interest income has increased in each of the last four years, interestincome actually fell in 1993, but stood at a high of D 47.2 billion in 1994. Eximbank increased financialmargin in each succeeding year during the period 1991 to 1994. Beginning with a negative margin of D6.3 billion in 1991, it achieved a margin of D 16.2 billion in 1994. Eximbank stands out among theSOCBs since non-interest income makes up nearly one-half of its total income revenues; moreover, non-interest income has been increasing faster than non-interest expenses over the period 1991 to 1994,further aiding bank profitability. The ratio of net income to average total assets rose from 0.6% in 1992,to 1.1% in 1993, and 1.4% in 1994. In addition, the ratio of net income to total equity increased from4.8% in 1992, to 7.9% in 1993, and to 13.2% in 1994.

59. Eximbank is subject to a turnover tax assessed on the spread between income andexpenses and ranging from 6% to 25%, depending on the particular lending activity. In addition, it paysa profit tax of 45% on net income. Over Eximbank's five-year existence, it has paid a total of D 48billion in taxes to the Government. The ratios of dividends to share face value have been:

Yea Dividend Ratio1990 62.5%1991 47.2%1993 34.8%1994 43.5%1995 24.0%

104 Annex 10

Eximbank: Historical Balance Sheets (1991-1994)(Dong billion)

1991 1992 1993 1994Assets

Cash & Due from Banks 37.9 115.3 102.7 43.6Due from Banks 336.5 458.6 214.4 674.4Loans 291.1 497.6 609.0 943.5Other Assets 108.4 65.3 116.5 188.9

Total 773.9 1,136.8 1,042.6 1,850.3

LiabilitiesDeposits 552.1 398.8 459.3 1,093.3Due to Banks/non-banks 114.8 73.9 84.2 274.0Other Liabilities 12.6 516.7 353.8 327.7

Total 679.5 989.4 897.4 1,695.1

Equity 94.4 147.5 145.2 155.3

Total Liabilities & Equity 773.9 1,136.8 1,042.6 1,850.3

Eximbank: Historical Income Statements (1991-1994)(Dong billion)

1991 1992 1993 1994Interest Income

Lending 17.4 33.1 30.4 42.1Deposits at SBV 5.7 11.2 4.9 5.1Capital Contributions 0.0 0.0 0.0 0.0

Total 23.2 44.4 35.3 47.2

Interest ExpensesMobilized Capital 24.5 32.4 19.8 24.5Borrowings 5.0 4.4 5.0 6.4

Total 29.5 36.9 24.9 30.9

Financial Margin -6.3 7.5 10.4 16.2

Non-interest IncomeCharges, Fees & Commissions 18.6 16.7 22.5 31.1Other Income 0.1 9.6 7.3 10.6

Total 18.6 26.2 29.8 41.7

Non-Interest ExpensesOperating expenses 5.8 12.0 3.3 3.7Salaries & Social Costs 0.2 0.4 0.7 1.3Depreciation, repair, purchasing 0.7 0.8 1.0 1.5Other expenses 1.1 1.9 2.2 5.3Currency depreciation guarantee 2.7 7.0 5.7 6.3

Total 10.5 22.1 13.0 18.1

Income before Tax 1.8 11.6 27.2 39.8Tax 0.9 5.8 15.7 20.1Net Income 0.9 5.8 11.5 19.8

105 Annex 10

Fjnbank: Historical Financial Indicators (1991-1994)(Dong billion)

GROWTH 1992 1993 1994

Assets 46.9Y -8.3% 77.5%Liabilifs 45.6% -9.3% 88.9YEquity 56.2% -1.5% 6.9%Loans 71.0% 22.4% 54.9%Deposits -27.8% 15.2% 138.0Y

Net Income 533.3% 98.9X 71.3%lnterest Incotne 91.6% .20.5% 33.7%Interest Expenses 25.0%/ -32.6% 24.3%Non-interest Income 41.0/. 13.5% 40.0YNon-interest Expenses 111.7% 41.4% 39.5%Financial Margin -218.4%1 38.8% 56.1%

RATIOS 1i991 1992 1993 1994

Total Equity/Assets 12.2% 13.0/ 13.9N% 8.4%Total Equity/Liabilities 13.9%9 14.90/ 16.2% 9.2%Liabilities/Assets 87.8% 87.0Y. 86.1% 91.6%Loans/Deposits 52.7% 124.8% 132.6% 86.3%Liquid Assets/Deposits 6.9ff. 28.9% 22.4% 4.0%

Int Expenses/int Income 127.3% 73.1% 56.3% 51.9%Financial Margir/Avg Assets 0.8% 1.0Y 1.1%Net Income/Avg Assets 0.6% 1.1% 1.4%Net Income/Avg Equity 4.8% 7.90/o 13.2%Salaries/Avg Assets 0 0.0% 0.1% 0.1%

Eximbank: Projected Income Statements (1995-2000)(Dong billion)

1995 1996 1997 1998 1999 2000Interest Income

Lending 70.5 108.0 170.5 272.6 433.5 688.5Deposits at SBV 5.4 6.8 8.3 10.0 11.7 13.5Capital Contributions 0.0 5.7 11.9 18.8 26.0 33.8

Totra 75.9 120.5 I90.S 3013 471.2 735.8Intemst Expeases

Mobilized Capital 38.5 59.6 92.2 142.1 217.0 330.8Bonrowings 10.2 16.3 25.8 40.1 60.9 92.4

Total 48.6 76.0 118.0 182.2 277.9 423.1Financial Nargin 27.2 44.5 72.8 119.1 1933 312.6Noo-tnterest home

Charges, Fees, Commissions 46.5 68.5 100.7 147.6 214.3 310.5Other Income 15.5 22.6 32.7 47.2 67.6 96.5

Total 62.0 91.1 133.4 194.9 281.8 407.0Non-luterest Expenses

Operating expenses 5.1 7.1 9.7 13.3 18.0 24.3Salaries & Social Costs 2.0 2.9 4.1 6.0 8.5 12.2Depr. , epaitr, pultlS 2.2 3.2 4.7 6.7 9.5 13.5Other expenses 4.8 4.3 3.9 3.5 3.1 2.7Currency depr guamitee 10.7 18.1 30.5 51.2 85.3 141.8

Tota 24.9 35.6 52.8 80.6 124.4 194.5Income before Tax 64.4 100.0 153.3 233.4 350.8 525.2Tax 32.2 50.0 76.7 116.7 175.4 262.6Net lcowe 32.2 50.0 76.7 116.7 175.4 262.6

Note: These projections were prepared based on tinancial data for 2000 estimated by Eximbank. Data for the preceding years were thencalculated, for the most part, assuming a constant compound annual growth between 1994 and 2000 The results were then adjusted upward toreflect price incrcases as follows: 1995 (7%), 1996-98 (6%f.), 1990-00 (5%). Interest expenses include expected costs associated with theproposed IDA creditare assessed as follows 1995 (D0.003 bil), 1996 (D0.466 bil), I997 (D 1.131 bil), 1998 (D 1.716 bil), 1990(D 1.951 bil),2000 D (1.944 bil). These costs were convened from US dollars to Dong based on a conversion rate of 11,200 = USSI.

EXIMBANK ORGANIZATIONAL CHART

|Genral 11btng ofShareholdem 'Celegate-|-I| Cmtol

Board of Dlrectors

I _Managing Director General

Deputy Director General

|fHeadOfice Hanoi Branch L Da Nang Branch Can Tho Branch o

Intl. Relations Dept Int Relations DeptL Intl. Relations DeptL Intl. Relations Dept.

IntlU Settlements Dept Intl. Settlements Dept. intl. SetUtements Dept Intl. Relations Dept

Credit and Investment Dept. Credit and Investment Dept. Credit and Investment Dept. Credit and Investment Dept.

Planning and Forex Dept| Planning end Forex DeptL Planning and Forex DeptL Planning and Forex DeptL

General AccountsDepts General Accounts Dept. GeneralAccounts Dept. Genral Accounts Dept.

Cash Dept|

Secretariat and Admin. Dept_

107 Annex 10

D. Industrial and Commercial Bank of Viet Nam (Incombank)

Introduction

60. Background. Industrial and Commercial Bank of Viet Nam (Incombank) beganoperations as an SOCB in 1988. It was created from the industry departments within the SBV.

61. Business Activity. Incombank has traditionally been involved in providing credit toindustry and commerce. However, it is active in all fields of banking, particularly handling monetary,credit and banking services for all types of economic entities, especially for the industrial, transportation,post, trading and service sectors. These activities include receiving deposits; issuing time-bonds;receiving funds from foreign and domestic banks; providing short- and medium-term financing indomestic and foreign currencies for domestic economic organizations and individuals; foreign exchangetransactions; intemational banking; precious metals and gem trading; handling foreign and domesticpayment transactions; issuing bank guarantees; mortgages; leasing; real estate; participating in joint-ventures and partnerships; and providing consulting and other services on banking and investmentactivities. Incombank intends to maintain industrial and commercial lending as its core activities.However, it is looking to expand its activities in precious metals and gem trading, and to engage insecurities trading when the market develops sufficiently. Incombank has 50,000 customers andmaintains 60,000 accounts. Incombank has correspondent relationships with 385 foreign banks based in40 countries.

62. Incombank is actively pursuing joint-ventures with both domestic and foreign partners.It is currently involved in 10 joint-ventures, owning between 10% to 50% of the shares outstanding.Incombank also owns 10% of Saigon Income Bank, a joint-stock bank in Ho Chi Minh City. In addition,it owns 50% of a joint-venture Indovina between Viet Nam and Indonesia.

63. For 1994, the sectoral breakdown of Incombank's loan portfolio was as follows:commerce (27.0%), industry (26.8%), other (20.9%), agriculture (14.9%), construction (6.4%),transportation (3.9%), and forestry (0.9%). The term structure of Incombank's current loans outstandingis predominantly short-term. Medium- and long-term loans outstanding presently account for 15% of theloan portfolio; however, Incombank plans to boost this share to 25% in 1995. This reallocation isdisadvantageous to Incombank given the inverted structure of interest rates, but is necessary to complywith SBV dictates. In addition, the SBV requires Incombank to make concessional loans to students andveterans.

64. Foreign Assistance. Incombank has begun to access foreign capital. In 1993, itimplemented the German-Vietnamese lending program for DEM 7 million, the Taiwanese program forUS$2.3 million and the EC program for the amount of US$8 million. Although the amount of fundsborrowed were small, they enabled Incombank to strengthen its relations with international financialinstitutions, paving the way for the development of future foreign banking relationships.

Institutional Aspects

65. Branch Network. Incombank is headquartered in Hanoi. It has an extensive network of92 branches operating in all the important industrial and commercial centers in Viet Nam. In addition,Incombank maintains 150 transaction offices and 300 savings offices. The headquarters manages andoperates the entire branch system and serves as the point of contact in international transactions. Branchoffices offer a full range of banking services and are staffed by 150 employees while transaction officesprovide a more limited range of services and typically employ from 10 to 15 staff. Savings offices are

108 Annex 10

smaller still and seek to mobilize funds on the village and precinct level. Incombank is currentlyimplementing a strategy to upgrade its network of transaction offices into full-fledged branches. Itsmarket research has discovered that customers prefer to bank at branches rather than transaction offices,and so it is using this expansion strategy to expand its customer base and to increase funds mobilization.Incombank plans to transform one-third of its transaction offices into branches by 1997 and theremainder by the year 2000. This effort will entail significant staff increases.

66. Strategy and Planning. Incombank is in the process of preparing a comprehensiveinstitutional strategy governing its overall operations until the year 2000. The philosophicalunderpinning of this strategy is to enhance the economic prosperity of the economy. The majorobjectives of this new strategy will be to: (i) increase assets; (ii) increase asset quality; (iii) enhancecredit risk management; (iv) increase domestic funds mobilization; (v) promote staff training; (vi)modernize bank facilities; and (vii) increase international banking operations.

67. The General Director leads a team that includes representatives from several keydepartments in drafting an annual business plan. This plan details specific operational, institutional andfinancial targets and is subjected to internal review before being presented to the Board of Directors.The Board of Directors holds substantive discussions of this plan in its Bi-annual Review Meeting and itsAnnual Review Meeting before approving it.

68. Organizational Structure. A Board of Directors presides over Incombank and acts as anadvisor to the Board of Management. The Board of Directors exercises advisory and decision makingpower and coordinates both Incombank's internal and external relations. The chief executive officer ofIncombank is the General Manager, who is appointed by the Prime Minister upon the recommendation ofthe Governor of the SBV. The General Manager also chairs the Board of Directors, which furtherincludes the First Deputy Director, two representatives from the branches, a representative from theSBV, and one from another government agency. The Board of Management includes the GeneralDirector and five Deputy General Directors.

69. Staffing and Training. Staff levels at Incombank have remained fairly steady. Theystood at 11,009 in 1991, 10,656 in 1992, 10,495 in 1993, and 10,620 in 1994. Incombank is upgradingits staff resources by recruiting more qualified personnel. New recruits must now pass an examinationadministered by Incombank and must also possess a foreign language capability (preferably English).Regarding education credentials, Incombank will target graduates from the economics university, othergraduates specializing in banking, and graduates from the banking colleges. In an effort to retainqualified staff, Incombank offers salary increases related to performance to supplement base pay levels.It is also pressing the GOV to raise the base salary scale, which governs the pay levels at all the SOCBs,in order to remain competitive with the private banks which are not restricted by these government-mandated restricted.

70. Incombank has trained 3,352 staff, overwhelmingly in domestic programs. Of this total,1,093 received operational training, 86 received computer training, 1,303 received English training, and80 received legal training. Incombank has indicated that it will concentrate its training efforts on Englishtraining and operational knowledge. Incombank is also enhancing its training programs. It has set uptwo new training centers in Hanoi and Ho Chi Minh City. These will focus on providing technical andprofessional training of a short-term nature, for both high and low level staff. Incombank is currently inthe process of retraining its staff in view of the migration of the banking sector away from centralplanning into a more market oriented environment. Professional and technical training will be tailored toindividual needs and will be supplemented with annual refresher courses. Training in new services willbe provided as warranted. Staff managing the computer networks at the branch level will receivespecialized training, and technical staff at the central level will attend short-term technical refresher

109 Annex 10

courses. Overseas training and refresher courses will also be provided to management personnel.Managers needing training in the provision of new services will be eligible for overseas training of oneyear and upwards. Incombank has sent 30 staff for overseas training.

Operations

71. Credit. Incombank has developed manuals for bank officers covering areas such asguarantees, short-term loans, medium- and long-term loans, and funds mobilization. These are amendedannually to keep them current with changing business environments. Branch managers at majorbranches have the authority to make loans up to D 30 billion for individual clients, while the limit atsmaller branches is D 15 billion. Credits of less than D 10 billion are then monitored by the individualbranches, while those exceeding D 10 billion are monitored by headquarters. Incombank reduces its riskexposure by lending in proportion to the value of collateral secured. Each branch is allocated a certainamount of funds each year based upon the quality of the branch loan portfolio, the ratio of overdue debt,and the capabilities of the branch in an effort to further mitigate risk. Incombank is obliged to makeloans at concessional rates to students and veterans.

72. With the dismantling of the monobank system, Incombank inherited bad debts of D 500billion of the SOEs. These frozen debts are no longer accounted for as loans and are handled on thebalance sheet on the asset side as D 500 billion under "Other Assets" and D 500 billion under "Due fromSBV", with a corresponding D 1,000 billion under "Borrowings". In order to address problem loans, theSBV allows that Incombank set aside 10% of its net income. Incombank reports that its loan portfolio isin relatively good shape, and that only 0.15% of total loans outstanding are problem loans.

73. Audit Policy. Incombank currently conducts only internal audits. The auditing functionis performed by the Accounting and Finance Department and by the chief accountant. It establishesaccounting procedures and produces monthly, quarter and yearly reports to the Board of Management.In addition, the SBV and MOF jointly supervise Incombank's accounts and activities. However,Incombank will undergo an external audit of its accounts in 1995, financed by Swedish bilateralassistance under a program supported by the Structural Adjustment Credit. Loans below D 10 billion aremonitored at the branch level., while larger loans are monitored by headquarters.

Financial Structure and Performance

74. Structure. For the period 1991 to 1994, the total assets of Incombank roughly doubled,rising from D 5,080.4 to D 10,178.8. During the same period, total liabilities increased at a slightlyslower rate, rising from D 5,017.4 billion to D 9,537.1 billion. By contrast, total equity increased by only46.8%, growing from D 325.2 billion to 477.5 billion. Between 1993 and 1994, total assets increased by28.2%, and total liabilities by 31.2%, while total equity decreased by 13.8%. Incombank has a smallcapital base; the debt to equity ratio was 94:6 in 1991 and 96:4 in 1994.

75. Incombank's total loans outstanding rose 121.7% between 1991 and 1994, growing fromD 3,013.2 billion to D 6,681.0. Deposits grew even faster, rising from 2,680.5 billion in 1991 to D7,563.5 billion in 1994, an increase of 182.2%. Recent growth in time deposit accounts form most of therise in deposits. As a result, the loans to deposits ratio for 1994 stood at 88.3%. Between 1993 and1994, loans increased by 8.6% and deposits by 73.6%.

76. Profitability. Incombank has been steadily increasing its profitability. Net income rosefrom D 40.0 billion in 1991, to D 45.3 billion in 1992, D 80.5 billion in 1993, and to D 106.0 billion in1994. These increases represent annual average increases of 40.8%. Between 1991 and 1994, interestincome grew from D 417.0 billion to D 1,858.0 billion, or an increase of 345.5%. During the same

110 Annex 10

period, interest expenses rose from D 298.6 billion to D 1,270.4 billion, or an increase of 325.4%. As aresult, the ratio of interest expenses to interest income declined slightly from 71.6% to 68.4%; however,this ratio was as low as 59.6% in 1993. In 1994, interest income represented 97.5% of total revenues.Also in that year, interest from loans accounted for over three-quarters of interest income, with interestfrom deposits making up most of the rest. Non-interest expenses have been rising rapidly, but have noteroded earnings. Salary expenses have been rising, growing from 0.6% of average total assets in 1991 to1.7% in 1994. However, net income to average total assets increased from 0.8% in 1992, to 1.1% in1993, and remained steady at 1.1% in 1994. By contrast, net income to average equity increased from10.7% in 1992, to 15.0% in 1993, and to 20.6% in 1994. Incombank is subject to a 6% capital usecharge levied on capital allocated by the GOV, a 15% turnover tax on financial margin, and a 45% profittax on net income.

Incombank: Historical Balance Sheets (1991-1994)(Dong billion)

1991 1992 1993 1994

AssetsCash 111.0 122.3 112.8 204.0Due from SBV 206.1 634.2 520.7 1,538.3Due from Banks 233.4 458.8 233.8 708.0Precious Metals 6.1 9.6 7.8Loans 3,013.2 4,216.8 6,166.9 6,681.0Joint-venture Investment 57.0 100.6 82.0 72.0Land Premises and Equipment 89.0 157.5 191.0 217.0Other Assets 1,689.9 793.5 994.8 1,236.0

Total Assets 5,405.6 6,493.2 8,309.9 10,656.3

Liabilities & EquityDemand Deposits 1,299.4 2,019.0 2,995.8 2,403.0Time Deposits 1,381.1 1,893.8 1,360.1 5,160.5Due to Banks 51.7 194.7 112.4Borrowings 1,250.9 1,269.6 1,376.1 641.7

of which from SBV 1,220.6 953.1 1,082.7 641.7Promissory Notes 0.0 10.8 1.065.7 855.6Other Liabilities 1,097.4 584.2 846.2 1,118.0

Total Liabilities 5,080.4 5,972.2 7,756.3 10,178.8

Capital 223.3 384.3 377.7 477.5Special Reserves 10.8 12.8 14.8Pre-Tax Income 91.0 123.9 161.1

Total Equity 325.2 521.0 553.6 477.5

Total Liabilities & Equity 5,405.6 6,493.2 8,309.9 10,656.3

III Annex 10

Incombank: Historical Income Statements (1991-1994)(Dong billion)

1991 1992 1993 1994Interest Income

Loans and Deposits 417.0 1,019.6 1,095.0 1,852.7Share-eaming 4.2 5.3

Total 417.0 1,019.6 1,099.2 1,858.0Interest Expenses

Deposits 239.5 661.7 542.4 1,123.8Borrowings 59.1 185.6 113.1 146.6

Total 298.6 847.3 655.5 1,270.4Financial MUargin 118.4 172.3 443.7 587.6Non-Interest Income

Service Commissions 5.3 3.8 11.6 15.0Forex & Gold 25.9 54.3 12.4 16.7Other 5.4 5.6 140.9 15.3

Total 36.6 63.7 164.9 47.0Non-interest Expenses

Salaries & Pensions 22.2 33.6 80.4 158.1Premises & Equipment 10.6 16.3Service Commissions 2.4 3.9Operational Expenses 11.8 18.1Foreign Business Expenses 9.3 26.3Other Expenses 7.7 14.0 367.0 283.5

Total 64.0 112.2 447.5 441.6

Income Before Taxes 91.0 123.9 161.1 193.0Taxes 51.0 78.5 80.5 87.0Net Profit 40.0 45.3 80.5 106.0

Incombank: Historical Financial Indicators (1991-1994)(Dong billion)

GROWTH 1992 1993 1994Assets 20.1% 28.0% 28.2%Liabilities 17.8% 29.9% 31.2%Equity 60.2% 6.3% -13.8%Capital 72.1% -1.7% 26.4%Loans 39.9No 46.2% 8.3%Deposits 46.0% 11.3% 73.6%Net Income 13.2% 77.7% 31.6%Interest Income 144.5% 7.8% 69.0%Interest Expcnscs 183.7% -22.6% 93.8%Non-Interest Income 74.1% 158.9% -71.5%Non-Interest Expenses 75.3% 299.0% -1.3%Financial Margin 45.5% 157.5% 32.5%

RATIOS 199 1992 1993 1994

Capital/Assets 4.1% 5.9% 4.5% 4.5%Capital/Liabilities 4.4% 6.4% 4.90/o 4.7%Total Equtiy/Assets 6.0% 8.0% 6.7% 4.5%Total Equity/Liabilities 6.4% 8.7% 7.1% 4.7%Liabilities/Assets 94.0% 92.0% 93.3% 95.5%Loans/Deposits 112.4% 107.8% 141.6% 88.3%Liquid Assets/Deposits 20.8% 31.3% 20.1% 32.4%Int Expenses/nt Income 71.6% 83.1% 59.6% 68.4%Financial Margin/Avg Assets 2.9% 6.0% 6.2%Net Income/Avg Assets 0.8% 1.1% 1.1%Net Income/Avg Equity 10.7% 15.0% 20.6%Net Income/Avg Capitar 14.9% 21.1% 24.8%Salaries/Avg Assets 0.6% 1.1% 1.7%

112 Annex 10

Incombank: Projected Income Statements (1995-2000)(Dong billions)

1995 1996 1997 1998 1999 2000Interest Income

Loans 2,033.8 2.341.1 2.687.2 3.076.7 3,487.7 3.947.7Deposits 543.3 625.4 717.9 822.0 931.8 1,054.7Share-earming 7.4 8.5 9.7 11.1 12.6 14.3

Total 2,584.5 2,975.0 3,414.9 3,909.8 4,432.1 5,016.6

Interest ExpensesDeposits 1.563.2 1,799.4 2,065.4 2,364.8 2,680.6 3,034.2Borrowings 204.0 235.9 272.4 313.4 355.2 401.3

Total 1,767.1 2,035.2 2,337.9 2,678.1 3,035.9 3,435.5

Financial Margin 817.4 939.8 1,077.0 1,231.7 1,396.2 1,581.1

Non-interest IncomeForex 18.7 21.6 24.8 28.3 32.1 36.4Trading of gold 4.5 5.2 6.0 6.9 7.8 8.813anking Commission 20.9 24.0 27.6 31.5 35.8 40.5Other 21.2 24.4 28.0 32.1 36.4 41.2

Total 65.4 75.2 86.4 98.9 112.1 126.9

Non-Interest ExpensesForex and gold 1.2 1.4 1.6 1.8 2.1 2.3Salaries & Pensions 219.9 253.2 290.6 332.7 377.2 426.9Other Expenses 393.1 452.5 519.4 594.7 674.2 763.1

Total 614.3 707.1 811.6 929.3 1,053.4 1,192.3

Income Before Taxes 268.5 307.9 351.7 401.3 454.9 515.6Taxes 120.8 138.6 158.3 180.6 204.7 232.0Net Profit 147.4 169.4 193.5 220.7 250.2 283.6

Note: These projections were prepared based on financial data for 2000 estimated by Incombank. Data for the preceding years were thencalculated assuming a compound annual growth rate of 9%. The results were then adjusted upward to reflect price increases as tbllows: 1995(7%), 1996-98 (6%), 1990-00 (5%). Interest expenses include expected costs associated with the proposed IDA credit are assessed as follows1995 (D 0.005 bil), 1996 (D 1.098 bil), 1997 (D 2.975 bil). 1998 (D 4.842 bil), 1999 (D 5.501 bil), 2000 (D 5.472). The costs were thenconverted from US dollars to Dong based on a conversion rate of 11.200 = US$ I.

INCOMBANK ORGANIZATIONAL CHART

Board of Directors Board of Management

Transaction Office Banking Executive General Director's] Transaction Office | Department F Office

92 Sub-Branches and Branches inprovinces, cities and districts

Transaction Units Jewelry & Mortgage Shops Savings Desks(195) (99) (350)

;C

114 Annex 10

E. Viet Nam Maritime Commercial Stock Bank (Maritimebank)

Introduction

77. Background. The Viet Nam Maritime Commercial Stock Bank (Maritimebank) is ajoint-stock bank and was licensed to operate by Working Permit No. 0001/NH-GP, granted on June 8,1991, by the Governor of the SBV, soon after the legislation on financial institutions and banking cameinto effect. One July 12, 1991, the headquarters of Maritimebank opened in Haiphong. Besides beingthe first joint-stock bank to receive a permit to begin operations, Maritimebank was also the first one topublish its balance sheet in the newspapers.

73. Maritimebank currently has 52 shareholders, comprising both institutions andindividuals. Most shareholding institutions are active in the maritime and telecommunications sectors.At the end of 1994, the largest shareholders were the Viet Nam Directorate General of Post andTelecommunications (10.7% of total shares outstanding), Viet Nam Shipping Company (9.2%), CivilAdministration of Viet Nam (8.4%), Viet Nam Ocean Shipping Company (7.4%), and Viet NamNational Maritime Bureau (7.0%).

79. Business Actiyity. Maritimebank offers banking and financial services to serve thebusiness needs of its shareholders, and to contribute to the development of the economic sectors in whichthey are active. Modeled as a bank of economic groups, Maritimebank closely links its activities withthe business of major economic enterprises which are, on the one hand, its shareholders and, on the otherhand, its customers. It has been active in an ADB-funded project to upgrade the county's ports and hasexpressed interest in participating in a Bank-funded project to upgrade Highway 5.

80. Maritimebank's principal financial products are letters of credits and lending. However,it also handles domestic and foreign transactions by means of documentary credit, collection, andremittances; participates in foreign exchange trading; mobilizes domestic and foreign currency reserves;collects investment funds; handles remittances from overseas Vietnamese; and trades gold and otherprecious metals and gems. Maritimebank has expressed an interest in moving into areas such as leasing,credit cards and government securities.

81. Maritimebank has a small investment portfolio. In partnership with the Ministry ofTrade, it has invested D 2.0 billion in Vicocimex, an export/import company in Ho Chi Minh City. It hasinvested another D 2.0 billion in an insurance company, also in Ho Chi Minh City, and is also involvedin a garment company in Ho Chi Minh City.

Institutional Aspects

82. Branch Network. Maritimebank is headquartered in Haiphong and has five branches inCan Tho, Da Nang, Hanoi, Ho Chi Minh City, and Quang Ninh. Maritimebank plans to expand itsoperations into every major commercial and economic area of the country, with a particular focus onports, and to enhance its inter-provincial network. As part of its expansion strategy, Maritimebank plansto open three sub-branches in Ho Chi Minh City and another in Hanoi by the end of 1995, and to opennew branches in Qui Nuon and Vung Tau soon thereafter. Maritimebank has correspondent bankingrelationships with 155 banks.

83. Strategy and Planning. The Board of Directors develops the general strategy guidingMaritimebank's operations in consultation with the Board of Management for presentation to theMeeting of Shareholders. Maritimebank's current strategy is to expand its branch network and to

115 Annex 10

increase its capital resources; it hopes to increase its share capital to D 600 billion by the year 2000. TheBoard of Management is responsible for producing an annual business plan. The business plan isdeveloped in the context of Maritimebank's strategic objectives, and contains detailed financial,operational and institutional targets. These are of both a qualitative and quantitative nature. This plan isdiscussed each June at the Meeting of Shareholders. Maritimebank has been in the fortunate position ofexceeding its targeted performance each year. Some major targets for the 1995 business plan are to raiselegal capital to D 200 billion, increase customer deposits to D 600 to D 700 billion, and raise US$20million in foreign borrowings.

84. Maritimebank is currently implementing an ambitious project to modernize itsaccounting and reporting systems so that it will be able to produce balance sheet, income statement, andcash flow statements that conform to internationally accepted principles. Maritimebank expects toproduce these new financial statements for its accounts in 1995. Despite these changes, Maritimebankwill retain the capability of reporting financial information to SBV as required. The management ofMaritimebank has recognized that it most adopt international accounting standards to attract internationalinvestors, to better conduct business with overseas businesses, and to aid in share price determination.Maritimebank also expects that these steps will also enhance the bank's management information systemby providing managers with more useful data.

85. Organizational Structure. A Meeting of Shareholders convenes annually. One of itsprimary functions is to select members of the Board of Governors to represent shareholder interests.Members on the Board serve for five years and their selection requires the approval of the SBV. TheBoard meets every two to three months to discuss important bank affairs. It also selects the fourmembers of the Board of Management, which comprises Maritimebank's senior managers, including theManaging Director, who is the bank's top officer. The head office in Haiphong is composed of aManaging Director's Office (which has a credit section, and international banking section, and amarketing section), and Accounting-Statistics Department, and Administration-Personnel Department,and an electronics data processing center. Depending on the nature of the activity, the branches report tofunctional departments at the bank's headquarters in Haiphong.

86. Staffing and Training. Maritimebank plans to increase its staffing in 1995 from 200employees to 261 in support of its expansion efforts. Maritimebank currently recruits universitygraduates with a background in banking and finance, skills in computer technology, and proficiency inEnglish. These candidates then undergo one month of training by Maritimebank, after which they arerequired to pass a formal examination. Maritimebank has plans to recruit promising candidates wshilethey are still in college and has successfully piloted such a program at a secondary school in Haiphong.

87. The salary structure of Maritimebank is approved by its Board of Directors and is notsubject to the dictates of the GOV. The salaries to Maritimebank employees are therefore quite highrelative to SOCB employees, and are further supplemented by a bonus package. These bonuses are notdirectly linked to individual performance, but are instead determined by overall bank profitability andstaff level. While staff turnover is not a serious issue at Maritimebank, senior managers voiced concernthat they could not match the salaries offered by foreign industrial concerns.

88. Maritimebank is committed to training and retraining to its staff to enhance theircapabilities. While conceding the importance of training, bank managers noted that the associated costswere very expensive to the bank in terms of both budgetary and staff resources. Foreign languagetraining is part of the training regimen. Regarding external training, Maritimebank is planning to send30 staff for overseas training this year. It has reached an agreement with ANZ Bank to train some of itsemployees in Australia, and has also approached some banks in its correspondent network aboutproviding training courses for Maritimebank personnel.

116 Annex 10

Operations

89. Credit Policy. Maritimebank conducts its credit decisions in full compliance with SBVregulations and internal bank policies. It acts with due care to mitigate credit risk and conducts rigorousloan appraisals. Maritimebank requires its borrowers to make deposits and to extend collateral as part ofits risk reduction strategy. Approval limits are governed by loan and branch size. The larger branches inHanoi, Haiphong, and Ho Chi Minh City may approve loans of up to D 1.5 billion per transaction, whilesmaller branches may approve loans of up to D 1.0 billion. Loans of greater value require the approvalof the Managing Director. It is anticipated that the credit limits stipulated above will be raised during1995. In any case, all loans need to be reviewed by the Risk Prevention Bureau. The Risk PreventionBureau devises credit risk regulations and policies and is represented in each of the bank's branches. Forapproval, loans currently require the signatures of four bank officers: the branch manager (or ManagingDirector), the chief accountant, the credit risk officer, and the head credit risk officer. Maritimebank iscurrently looking to streamline its loan approval process. Maritimebank imposes a single borrower limitof 10% of legal capital.

90. Maritimebank has developed policies and procedures in order to assess the credit risk ofits client base. When drafting a letter of credit, Maritimebank may require a deposit of up to 100% of thecredit for new customers. For established customers, Maritimebank typically segregates borrowers intothree categories depending on their credit worthiness, with the most credit worthy required to makedeposits equivalent to 10% of the value of the credit, and the least credit worthy are required to put upbetween 20% and 30%. When making a loan, Maritimebank reduces risk by requiring collateral. It willtypically make a loan up to 70% of the value of collateral for physical goods such as ships, inventories,or imported and exported goods, and 50% for most other classes. Maritimebank makes few medium-and long-term loans. Most of its short-term lending is for self-liquidating transactions. Maritimebankhas reported that 3% of the loans in its portfolio are currently experiencing problems. Credit officersmonitor borrower repayments, and Maritimebank has a number of policies in place to mitigate potentialproblems with loan repayments. Responsibility for collections shifts to the Overdue Department forloans more than seven days overdue.

91. Resource Mobilization. Savings mobilization has doubled in each year of operations.Maritimebank increased its share capital from D 40 billion to D 60 billion in 1993. It is seeking tofurther increase its share capital to D 200 billion, and hopes to receive approval in late 1995 or early1996. It will offer 30% of these new shares to foreign investors.

92. Auditing. Maritimebank has a Board of Supervision which performs an internal auditfunction. It reports to the Board of Directors and has a representative in each of Maritimebank'sbranches. The accounts of Maritimebank are not reviewed by an external auditor on a regular basis.However, in 1992, an international auditing firm based in Hong Kong performed an audit ofMaritimebank in connection with the establishment of a country fund for Viet Nam. The SBV exercisesa supervisory control of Maritimebank to ensure it is compliance with Vietnamese banking regulations.

Financial Structure and Performance

93. Structure. For the period 1991 to 1994, the total assets of Maritimebank have grownmore than four fold, rising from D 136.7 billion in 1991 to D 733.4 billion in 1994. During the sameperiod, total liabilifies grew 664.6%, rising from D 84.3 billion to D 644.8 billion, while total equitygrew 69.2%, from D 52.3 billion to D 88.6 billion. Between 1993 and 1994, total assets rose by 40.2%,total liabilities by 44.8% and total equity by 13.7%. Because liabilities have been increasing faster thanequity, Maritimebank's debt to equity ratio increased from 62:38 in 1991 to 88:12 in 1994.

117 Annex 10

94. Maritimebank's loan portfolio has undergone significant growth, rising from D 34.1billion in 1991 to D 435.5 billion in 1994, an annual average growth rate of 148.3%. Deposits also grewdramatically, if somewhat less so, increasing from D 82.8 billion in 1991 to D 440.8 billion in 1994,representing an annual average growth rate of 83.4%. Consequently, the loans to deposits ratio for 1994stood at 98.8%. Between 1993 and 1994, loans increased by 42.0% while deposits increased by only12.4%

95. Profitability. Between 1991 to 1994, net income has increased at an annual average rateof 133.2%, rising from D 1.5 billion to D 16.9 billion. During the same period, interest income rosefrom D 3.2 billion to D 53.4 billion, and interest expenses from D 0.7 billion to D 15.3 billion. As aresult, the ratio of interest expenses to interest income rose from 22.1% in 1991 to 28.8% in 1994.Maritimebank earns virtually all of its interest income from its loans; furthermore, interest incomeaccounted for 86.3% of total revenues in 1994. Maritimebank has been containing its costs. Whencompared to average total assets, salaries increased from 0.5% in 1992 to 0.6% in 1993, butadministrative expenses declined from 1.3% to 0.9%. Maritimebank has consistently reported after-taxprofits. The ratio of net income to average total assets was 2.5% in 1992, 2.2% in 1993 and 2.7% in1994. At the same time, net income to average total equity rose from 8.9% in 1992, to 12.6% in 1993,and to 20.4% in 1994. Maritimebank pays a standard 45% profit tax. In addition, it pays a revenue taxwhich varies from 6% to 15% depending on the type of income. In 1994, Maritimebank paid profit taxesof D 13.9 billion and a turnover taxes of D 6.6 billion.

Maritimebank: Historical Balance Sheets (1991-1994)(Dong billion)

1991 1992 1993 1994Assets

Cash & Due from Banks 94.7 129.8 144.6 206.0Reserve at SBV 5.4 6.6 25.7 22.8

Loans 34.1 92.2 306.7 435.5Receivables 1.9 8.3 36.2 32.1Investment 4.1 4.1Premises & Equipment 4.0 5.9 11.4 16.4Other Assets 1.9 6.0 20.2 39.2

Total 136.7 242.2 523.2 733.4

LiabilitiesDeposits 82.4 164.8 392.0 440.8Borrowings 0.0 10.5 0.0 71.8Payables 0.7 5.1 35.9 102.4Other Liabilities 1.2 6.0 17.4 29.9

Total 84.3 186.5 445.3 644.8

EquityPaid-in Capital 49.7 47.8 62.8 64.9Legal reserves and others 1.8 5.6 9.6 6.4Profit of prior year 0.0 0.0 0.0 0.3Net income this year 0.8 2.4 5.4 16.9

Total 52.3 55.8 77.9 88.6

Total Liabilities & Equity 136.7 242.2 523.2 733.4

118 Annex 10

Maritimebank: Historical Income Statements (1991-1994)(Dong billions)

1991 1992 1993 1994Interest Income

Interest on loans 1.8 11.0 22.0 50.6Interest on due from banks 1.4 2.2 2.5 2.8

Total 3.2 13.2 24.5 53.4

Interest Expenses 0.7 3.2 5.6 15.3

Financial Margin 2.5 10.0 18.9 38.0

Non-interest IncomeForex Transactions 1.3 2.4 2.4 1.6Fees and Commissions 0.2 1.9 4.2 6.2Other income 0.0 0.2 0.2 0.8

Total 1.5 4.4 6.8 8.7

Non-Interest ExpensesRevenue Tax 0.4 1.4 3.1 6.6Personnel 0.1 1.0 1.9 3.6Administrative Expenses 0.5 2.4 4.4 5.7

Total 1.1 4.8 9.4 15.9

Income before Tax 3.0 9.6 16.4 30.8Tax 1.5 4.8 7.9 13.9Net Income 1.5 4.8 8.5 16.9

Maritime: Historical Financial Indicators (1991-1994)(Dong billions)

GROWTH 1992 1993 1994

Assets 77.3% 116.0% 40.2%Liabilities 121.1% 138.8% 44.8%Equity 6.6% 39.7% 13.7%Capital -3.8% 31.4% 3.3%Loans 343.6% 333.6% -11.3%Deposits 99.9% 137.8% 12.4%Net Income 223.5% 75.7% 100.5%Interest Income 305.8% 85.6% 118. 1%Interest Expenses 345.7% 74.1% 175.8%Non-Interest Income 195.9% 53.9% 26.7%Non-Interest Expenses 354.8% 95.0% 69.3%Financial Margin 294.5% 89.3% 101.1%'

RATIOS 1991 1992 1993 1994

Capital/Assets 36.4% 19.7% 12.0% 8.9%Capital/Liabilities 58.9% 25.6% 14.1% 10.1%Total Equity/Assets 38.3% 23.0% 14.9%/a 12.1%Total Equity/Liabilities 62.1% 29.9% 17.5% 13.7%Liabilities/Assets 61.7% 77.0% 85.1% 87.9%

Loans/Deposits 41.4% 56.0% 78.2% 98.8%Liquid Assets/Deposits 114.9% 78.7% 36.9% 46.7%Special Reserves/Loans 5.2% 6.1% 3.1% 1.5%

Int Expenses/lnt Income 22.1% 24.2% 22.7% 28.8%Financial Margin/Avg Assets 5.3% 4.9% 6.1%Net Income/Avg Assets 2.5% 2.2% 2.7%Net Income/Avg Equity 8.9% 12.6% 20.4%Net Income/Avg Capital 9.90/0 15.3% 26.5%Salaries/Avg Assets 0.5% 0.5% 0.6%Admin Expenses/Avg Assets 1.3% I 1°% 0 91/.

119 Annex 10

Maritimebank: Projected Income Statements (1995-2000)(Dong billion)

. 1995 1996 1997 1998 1999 2000Interest Income

Interest on loans 82.4 110.7 142.8 181.3 221.0 256.5Interest on due from banks 6.4 13.6 30.9 42.5 58.5 67.5

Total 88.8 124.3 173.7 223.8 279.5 324.0

Interest Expenses 27.8 42.2 58.2 64.2 72.1 77.5

Interest Margin 61.0 82.1 115.6 159.6 207.4 246.5

Non-interest IncomeForex Transactions 3.2 5.7 7.1 12.5 19.5 24.3Fees and Commissions 13.4 24.9 34.5 63.8 84.5 121.5Other income 1.6 3.4 10.7 12.5 19.5 29.7

Total 18.2 33.9 52.4 88.8 123.5 175.5

Non-Interest ExpensesRevenue Tax 11.8 18.1 26.2 35.0 41.6 48.6Personnel 5.4 7.9 9.5 11.3 13.0 16.2Other Managerial 8.6 11.3 14.3 16.3 18.2 21.6

Total 25.7 37.3 50.0 62.5 72.8 86.4

Income before Tax 53.5 78.7 118.0 185.8 258.1 335.6Tax 22.5 31.5 45.0 67.5 90.0 112.5Net Income 31.0 47.2 73.0 118.3 168.1 223.1

Note: These projections were prepared based on data supplied by Maritimebank. These data were then adjusted upward to reflect priceincreases as follows: 1995 (7%/6), 1996-98 (6%), 1999-00 (5%). Interest expenses include expected costs associated with the proposed IDAcredit are assessed as follows: 1995 (D 0.003 bil), 1996 (D 0.403 bil), 1997 (D 1.049 bil), 1998 (D 1.677 bil), 1999 (D 1.906 bil), 2000 (D1.896 bil). These costs were converted from US dollars to Dong based on a conversion rate of 11,200 = USSI.

MARITIMEBANK ORGANIZATIONAL CHART

General Meeting of Shareholders j

Board of Directors |

| Board of Managing Directors l

Head Office Hanoi Ho Chi Minh ~ Da Nang Quang Ninh Can Tho

_

o

- 1 s 1Administration Banking Accounting ClIBT Haiphong s i13 Personept Buiess Statistic Centre Opeontr

Fill~Dpt Det Dept ntre

121 Annex 10

F. Bank for Foreign Trade of Viet Nam (Vietcombank)

Introduction

96. Backgzround. The Bank for Foreign Trade of Viet Nam (Vietcombank) was establishedin 1963 to handle trade finance and management of foreign exchange for the country. The latter functionhas been gradually transferred to SBV after the creation of a two-tier banking system.

97. Business Activity. The core business activity of Vietcombank is the provision of tradefinancing. However, Vietcombank is active in a number of other areas, including: short-, medium- andlong-term loan facilities; funds transfer; deposit taking; documentary credits; guarantees; foreignexchange; credit cards; spot, forward and swap transactions; and consultancy services. Vietcombank iskae on enhancing funds mobilization and expanding its investment activities, especially as regards theprivate sector. The current loan portfolio is concentrated in the trade sectors (46%), industry (22%) andagriculture (12%). It is moving into retail banking in order to more easily mobilize savings and toexpand its client base of individuals. Vietcombank is using its trade expertise and its strong relationshipswith its corporate clients to expand into areas such as merchant banking. It is focusing its lendingactivities on a range of industrial sectors it finds attractive, including oil, light and heavy industry,cement, construction materials, textiles, and agricultural products. In light of these activities,Vietcombank believes that its chief competitors will be Eximbank and Incombank.

98. Vietcombank has established several subsidiaries involved in leasing, general trade,hotels, consulting and financing, the latter in Hong Kong. It is further looking to set up a subsidiary inreal estate development and a finance company subsidiary in Moscow. Vietcombank has been active inseeking out investment opportunities. It is involved in several joint-stock companies, with a 10% sharein Ziadinh, a bank in Ho Chi Minh City, a 5% share in the Military Bank, a 4% share in Eximbank, and asmall interest in a hotel. In 1993, Vietcombank established Firstvina Bank, a joint-venture in which ithas a 50% stake with Korea First Bank. Vietcombank also has a 50% share in a shipping concern knownas Vietfrachd. Vietcombank is investigating the establishment of other joint-ventures and is currentlyplanning a joint-venture consulting outfit with Paribas and a joint-venture property company with Keppelof Singapore. While Vietcombank has a direct interest in ensuring the financial success of itsinvestments, it is aware of the dangers involved extending loans to support these activities.Consequently, it does not envisage substantial lending after an initial start-up period which it estimates tobe about six months.

Institutional Aspects

99. Branch Network. Vietcombank is headquartered in Hanoi (with 480 staff), and operates 17branches and 10 sub-branches. The branch in Ho Chi Minh City is the largest and employs around 300people, while the smaller branches are run by 40 to 50 staff. Vietcombank has no immediate plans toopen new branches, but plans to expand its sub-branch network in 1995 by opening three to four sub-branches in Hanoi and one to two in Ho Chi Minh City. Its current plans for expansion focus on buildingup its sub-branch network over the next few years in Da Nang, Haiphong, Hanoi, Ho Chi Minh City,Quay Ninh, and Vung Tau, in an effort to support its drive into retail banking. Vietcombank is alsointerested in expanding into export processing zones and other specialized industrial zones.Vietcombank maintains overseas offices in France, Hong Kong and Sweden.

100. Strategy and Planning. As part of annual planning, each branch provides detailedoperational and financial information to the General Affairs Department at headquarters. Headquartersthen consolidates this information and delivers it to the Board of Directors in October or November. TheBoard of Directors discusses this information and produces a business plan early in the year. This plan

122 Annex 10

typically specifies the funds each branch is expected to mobilize, informs them of the total credit theycan lend, and the total amount they can borrow from headquarters. The Board also sets the overallstrategy for the bank and continually monitors management progress in meeting its objectives. TheBoard meets twice a year and formalizes the targets and objectives to be achieved over the next sixmonths or over the next year. Based on such factors as past performance, market conditions, andliquidity constraints, the Board adjusts these targets and the methods needed to reach them. The Boardalso makes decisions concerning new products and services. Vietcombank sends its business plans toSBV and MOF to aid them in their policy decisions.

101. Organizational Structure. A Board of Governors oversees bank activities. It is entirelyan internal unit; 11 of its members are senior bank officers, and it is chaired by the Director General ofVietcombank. Directly under the Board of Governors is the Board of Management, which is headed bythe Director General and includes all top headquarters and branch managers. Four Deputy DirectorsGeneral report to the Director General, who also administers the Personnel Department. The Board ofManagement meets regularly and deals with any activity that senior management deems important. Italso sets bank-wide policies and procedures. Under the Board of Management are the individualbranches, an Operations Center at headquarters (comprising Planning and Dealing, Payment Center,Credit Security, Export Settlement, Import Settlement, Remittance Section, Cash Section, AccountingSection, Card Payment Section, and Saving Section), and a further nine departments, also at headquarters(comprising General Affairs, International Relations, Personnel, Consulting, Investment Guarantee,Treasury-Accounting, Over-Due Debt Management, Electronic Data Processing, and Administration).

102. Staffing and Training. Vietcombank currently employs about 1,700 staff. Over 60% ofits staff have college educations. Vietcombank recruits qualified university graduates with a backgroundin banking and finance, who have attained proficiency in a foreign language, and who have received acertificate in computer operations. Potential recruits are required to sit for an examination administeredby Vietcombank and to undergo foreign language testing. Vietcombank ties its hiring levels to expectedgrowth, which has been significant in recent years. Still, competition is very keen to work atVietcombank; as an example, 150 applicants recently applied for 10 positions. The policies governingpromotion have recently been revamped. Promotion decisions are now made by a group of seniormanagement where previously they had been made by an employee's immediate supervisor, often withinterference from the Party, trade unions, etc. It was believed that the old system favored personalrelationships at the expense of professional competency.

103. As with other SOCBs, the base salary rate is subject to yearly decisions negotiated withthe MOF, SBV and the Ministry of Labor. In an effort to retain qualified staff, Vietcombank alsonegotiates a bonus structure that allows employees to increase their pay in a manner commensurate withtheir performance. This is accomplished by a bonus system which is paid on a quarterly basis.Nevertheless, the compensation system remains highly administered and well below the levels of foreignand private banks.

104. The management of Vietcombank views training as an area critical to the bank's success.Orientation training is provided to all new recruits. Vietcombank has established an internal trainingcenter in Ho Chi Minh City and also sends staff to a foreign language college. Vietcombank alsosupports external training, and actively uses its correspondent network to provide training expertise andto fund the bank's external training efforts. In 1994, Vietcombank sent 30 managers abroad for training,mostly to attend short-term courses.

123 Annex 10

Operations

105. Credit. The individual branches have a great deal of latitude in making credit allocationdecisions. (Further evidence of this autonomy is the fact that branches have their own balance sheets.)All branches are given a lending allocation each year which they may not exceed. The current level forthe Ho Chi Minh Branch is US$100 million. The branches may then allocate credit as they see fit, butheadquarters approval is required for medium-term loans exceeding US$1.0 million in Ho Chi MinhCity, and US$0.5 million in all other branches. At headquarters, such loan approvals are handled by theInvestment Department and require the approval of either the Director General or the Deputy DirectorGeneral. There is no such approval limit for short-term loans.

106. Vietcombank considers project appraisal to be the crucial element in making creditdecisions. Since financial statements in Viet Nam are of dubious value, the credit manual thatVietcombank has compiled is little more than simple list of procedures. Given that credit risk is veryhigh, Vietcombank exercises great prudence in making credit decisions. There are no credit committeesand so branch directors make the final decisions on loans subject to the policies deiineated above. Oncea credit decision has been made, all follow-up on monitoring the credit is manual. Branches currentlymake weekly, monthly and quarterly reports to headquarters covering a variety of information on creditoutstanding, total assets and funds mobilization. Vietcombank intends to computerize its creditmonitoring operations pending the upgrading of its computer network.

107. In order to deal with problem loans, Vietcombank is only allowed to set aside 5% of itsequity in a special reserve account, but there are no regulations governing how these funds are to beutilized to deal with loan problems. To mitigate potential losses, Vietcombank requires privateborrowers to put up collateral which it could then auction off to recover its money. Recovering moneyfrom SOEs is more problematic since Vietcombank would need to obtain their willingness and capacityto repay in the event of default.

108. Resource Mobilization. In a bid to increase resource mobilization, Vietcombank hasexpanded into retail banking and increased its branch network. It has also expanded its range of servicesby offering savings accounts and certificates of deposits with maturities of one, two and three years.Vietcombank has also raised money through bilateral credit agreements with its correspondent banks andthrough pre-export loans. Vietcombank has also expressed an interest in raising funds on the Eurobondmarket in the future.

109. Auditing. Vietcombank's financial statements meet the requirements of the SBV, butare not prepared according to internationally accepted accounting practices. Vietcombank's financialstatements are not currently examined by an external auditor. The internal audit function is performedby the Comptroller Department which supervises compliance of both headquarters and branch activities.This Department functions as an independent unit. It is staffed by five personnel at headquarters, and issupplemented by additional staff from other departments as necessary. In theory, the ComptrollerDepartment is responsible for auditing the full scope of Vietcombank's internal financial accounts andcontrols and procedures but, in practice, it confines itself merely to the checking accuracy of financialinformation. Vietcombank is developing a plan to enhance its information technology and managementinformation systems.

Financial Structure and Performance

110. Structure. Total assets for Vietcombank increased 35.8% from 1991 to 1994, rising fromD 12,315.7 billion in 1991, to D 14,421.8 billion in 1992, before dropping to D 13,399.1 billion in 1993,and rising again in 1994 to D 16,727.1 billion. Total liabilities followed a similar trend, rising from D

124 Annex 10

12,231.8 billion in 1991, to D 13,939.4 billion in 1992, and falling to D 12,877.1 billion in 1993, andrising to D 16,201.6 billion in 1994. Total equity, on the other hand, rose in each year, increasing fromD 337.5 billion in 1991 to D 525.6 billion in 1994, an increase of 527.0%. As a result, while the ratio ofdebt to equity is high, it has been falling, and dropped from 99:1 in 1991 to 97:3 in 1994.

Ill. The loan portfolio for Vietcombank has been growing consistently, rising from D2,784.4 billion in 1991, to D 7,134.5 billion in 1994, an increase of 156.2%. Deposits grew dramaticallyfrom 1991 to 1992, rising from D 6,926.3 billion to D 10,391.2, but rose to only D 11,921.1 billion in1994. As a result, the ratio of loans to deposits decreased from 40.2% in 1991 to 36.1% in 1992, but

jumped to 55.7% in 1993, and stood at 59.8% in 1994.

112. Profitability. Vietcombank appears to be a highly profitable bank. It recorded a netincome of D 166.0 billion on total revenues of D 593.2 billion in 1994. While interest income has beenrising, this growth has been coming from loan income, as deposit income has dropped slightly over thelast two years. While the financial margin of Vietcombank increased from D 497.6 billion in 1993 to D512.9 billion in 1994, the ratio of interest expenses to interest income increased from 30.2% to 46.3% inthose years. Vietcombank has a low cost structure. In 1994, non-interest expenses (net of taxes) were D135.4 billion, and salaries were just D 15.3 billion.

113. Vietcombank has an unusually high tax burden. It is subject to a 45% profit, a 2%capital use tax, and a turnover tax ranging from 6% to 30%. Vietcombank must allocate its net incomeamong three different funds: a bonus fund, a welfare fund, and a business promotion fund. However, themaximum annual contributions to these funds are determined by the Government, and any profit aftersuch allocations reverts to the Government.

Vietcombank: Historical Balance Sheets (1991-1994)(Dong billion)

1991 1992 1993 1994Assets

Cash and valuable papers 233.8 403.8 324.9 329.0Due from banks 9,147.9 9,574.2 6,314.4 5,304.5Loans 2,784.4 3,754.5 5.860.4 7,134.5Equity participation 48.5 228.4 238.2 143.2Fixed Assets 12.0 28.8 55.2 98.8Moveable Assets 4.7 9.9 14.3 13.3Advances 83.3 90.9 120.3 3,556.9OtherAssets 1.2 331.3 471.3 147.1

Total Assets 12,315.7 14,421.8 13,399.1 16,727.1

LiabilitiesDeposits 6,926.3 10,391.2 10,514.3 11,921.1Borrowings 187.1 129.7 131.2 412.1Payables 4,842.8 2,843.4 1,612.1 3,026.0Profit before tax 197.3 327.9 364.0 347.6Other Liabilities 78.4 247.1 255.5 494.8

Total Liabilities 12,231.8 13,939.4 12,877.1 16,201.6

EquityRegistered Capital 32.0 198.0 213.3 271.6Equity on turned earnings 51.8 284.4 308.7 254.0

Total Equity 83.8 482.4 522.0 525.6

Total Liabilities & Equity 12,315.7 14,421.8 13,399.1 16,727.1

125 Annex 10

Vietcombank: Historical Income Statements (1991-1994)(Dong billion)

1991 1992 1993 1994

Interest IncomeDeposits 12.2 371.5 364.6 349.0Loans 125-3 396.7 348.2 605.5Total 137.5 768.1 712.8 954.5

Interest Expenses 70.0 426.3 215.2 441.6

Financial Margin 67.5 341.8 497.6 512.9

Non-Interest IncomeService Commissions 5.4 108.5 101.8 106.8Other 454.6 27.2 30.1 44.8

Total 459.9 135.7 132.0 151.6

Non-interest ExpensesOperations 278.7 64.2 159.9 96.1Salaries 1.5 3.4 4.8 15.3Insurance 0.2 0.0 0.8 I SPTemises & furniture 1.9 4.2 11.8 22.5Taxes 47.8 77.7 88.2 181.6

Total 330.2 149.6 265.6 316.9

Income before Taxes 197.3 327.9 364.0 347.6Profit Taxes 88 8 147.6 163.8 156.4Net Income 149.5 250.2 275.8 166.0

Vietcombank: Historical Financial Indicators (1991-1994)(Dong billion)

GROWTH 1992 1993 1994

Assets 17.1% -7.1% 24.8%Liabilities 14.0% -7.6% 25.8%Equity 475.5% 8.2% 0.7%Loans 34.8% 56.1% 21.7%Deposits 50.00/. 12% 13.4%

Net Income 67.4% 10.2% -39.8%

Interest Income 458.4% -7.2% 33.9%Interest Expenses 49.5% 105.2% 530.8%Non-Interest Income -70.5% -2.8% 14.9%

Non-interest Expenses -54.7% 77.6% 19.3%Financial Margin 406.0% 45.6%° 3.1%/

RATIOS 1991 1992 1993 1994

Capital/Assets 0 3% 1.4% 1.6% 1.6%Capital/Liabilities 0.3% 1.4% 1.7% 1.7%Total Equtiy/Assets 0.7% 3.3% 3.9% 3.1%Total Equity/Liabilities 0.7% 3.5% 4.1% 3.2%Liabilities/Assets 99.3% 96.7% 96.1% 96.90%

Loans/Deposits 40.2% 36.1% 55.7% 59.8%Liquid Assets/Deposits 135.5% 96.0% 63.1% 47.3%

Int Expenses/Ins Income 50.90/. 55.5% 30.2% 46.3%Financial Margin/Avg Assets 2.6% 3.6% 3.4%Net Income/Avg Assets 1.9% 2.00/% 1.1%Net Income/Avg Equity 88.4% 54.9% 31.7%Net Income/Avg Capital 217.5% 134.1% 68.5%Salaries/Avg Assets 0.0% 0 0% 0.1%Operations Exp/ Avg Assets 0.5% 1.1% 0.6%1

126 Annex 10

Vietcombank: Projected Income Statements (1995-2000)(Dong billions)

1995 1996 1997 1998 1999 2000Interest Income

Deposits 420.5 500.1 593.0 701.5 821.5 960.7Loans 729.6 867.7 1,029.0 1.217.1 1.425.4 1,666.9Total 1,150.1 1,367.8 1,622.0 1,918.6 2,247.0 2,627.6

Interest Expenses 532.1 633.7 752.7 891.1 1,043.4 1,219.5

Financial Margin 618.0 734.0 869.3 1,027.5 1,203.5 1,408.1

Non-Interest IncomeService Commissions 128.7 153.0 181.5 214.7 251.4 294.0Other 54.0 64.2 76.1 90.0 105.4 123.3

Total 182.6 217.2 257.6 304.7 356.8 417.2

Non-Interest ExpensesOperations 115.8 137.7 163.4 193.2 226.3 264.6Salaries 18.4 21.9 25.9 30.7 35.9 42.0Insurance 1.8 2.1 2.5 2.9 3.4 4.0Premises & furniture 27.1 32.2 38.2 45.2 52.9 61.9Taxes 218.8 260.2 308.6 365.0 427.4 499.8Total 381.8 454.1 538.5 637.0 746.0 872.4

Income before Taxes 418.8 497.1 588.3 695.2 814.3 952.9Profit Taxes 188.5 223.7 264.7 312.8 366.4 428.8Net Income 230.4 273.4 323.6 382.3 447.9 524.1

Note: These projections are based on projected across the board annual growth rates of 11.6%, which represents the average annual growth ratefor net income for the period 1991-94. The data were then adjusted upward to reflect price increases as follows: 1995 (7%), 1996-98 (6%),1999-00 (5%/6). Interest expenses include expected costs associated with the proposed IDA credit assess as follows: 1995 (D 0.005 bil), 1996 (D0.960 bil), 1997 (D 2.367 bil), 1998 (D 3.537 bil), 1999 (D 3.952 bil), 2000 (D 3.933 bil). These numbers were converted from Dong to USSbased on the assumption of D 11,200 = USS I.

127 Annex 10

VIETCOMBANK ORGANIZATIONAL CHART

Board of Directors

Board of Management General Controller

Operation Center General Affairs Dept. Domestic Branches

Planning & Dealing - International Relations Dept. Overseas Offices

Payment Center Personnel Dept.

Credit Section Consulting Dept.

Export Settlement investment Guarantee Dept.

Import Settlement Treasury - Accounting Dept.

Remittance Section Administration Dept.

Electronic DataCash Section Processing Dept.

Overdue Debt_ Accounting Section _ Management Dept.

rl Card Payment Section |

Saving Section

128 Annex 11

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Cost Recovery of the Inter-bank Payment System

1. It is envisaged that the SBV will operate the inter-bank clearing and settlement systems(IBPS and SAPS), incurring one-off start-up costs and on-going operating costs. These costs will berecovered by charging direct participants (settlement banks).

2. A simple model has been constructed to assist the SBV in the estimation of break-evenprices on the basis of projected volumes and estimated costs. The components of the model aredescribed below.

Projected Volumes

3. We have projected total annual volumes for the period 1995-2003 on a range ofassumptions regarding the rate of growth of inter-bank payments. These projections recognize the twomajor influences on the rate of growth of non-cash payment volumes:

(a) the rate of economic growth;

(b) the rate of migration from cash to non-cash payments, driven by the level of confidencein the banking system and the technical quality and cost efficiency of payment services(including intra-bank payment systems).

4. The baseline for projections is provided by the quarter 4 1994 inter-bank paymentvolumes provided by the six banks included within the scope of this project. Details regarding theinformation requested and supplied are set out in Appendix 3 of the Statement of User Requirements (inproject files).

5. Total inter-bank payment volumes for Q4 1994 have been estimated using the followingformula:

* 0.9*sum of all reported inter-bank payments (out and in)/2.

[0.9* reduces the total number of reported payments by 10% - an estimate of theproportion involving a bank not within the scope the project

/2 allows for the fact that all payments between the reporting banks will have beenreported twice].

* Where a bank did not report a quarterly total, it was estimated as follows:

* 78*(highest daily total+lowest daily total)/2

[78 is the number of business days in the quarter].

129 Annex 11

This approach yields a Q4 1994 total approachiniLg 300.000 - the starting point for projections.

The model includes four scenarios for payment growth for the period 1995-2003:

(i) 10% growth per annum to 1997; 15% growth after the first expansion ofnew systems

(ii) 10% growth per annum to 1997; 30% growth thereafter

(iii) 20% growth per annum to 1997; 30% growth thereafter

(iv) 20% growth per annum to 1997; 60% growth thereafiter.

It is assumed that new settlement banks will join the system after 1998, but that this will not result in anincrease in inter-bank payment volumes: payments will be captured directly from new participants,instead of via other banks acting as their agents.

NB These volume projections provide only a rough guide, since current estimates areunreliable and current and future growth rates uncertain.

Estimated Costs

6. Base costs incurred during 1995-99 are not volume-dependent and are derived from theproject cost estimates. The one-off, start-up costs (covering hardware, project management, acceptancetesting, training and documentation) incurred by new joiners will include SBV charges set to recover infull the cost of implementation services that it provides. Given this policy of full cost recovery, newjoiner costs are not included in these cost estimates. Annual maintenance costs are estimated at 15% ofhardware and software cost from 1999 onwards.

7. IT operations will be locally resourced from 1999, at an average annual employment costper full-time staff member (in 1995 prices) of US$2,500, with an initial staffing level of 5. IT operationswill include a technical help desk facility. A sum (initially US$5,000 in 1995 prices) is included to coverthe cost of transport, materials and voice communications. It is assumed that staffing and otherrequirements will increase at an annual rate of 20% as transaction volumes, the number of participants,and the real-time gross settlement component of the system increase.

8. Business operations will be locally resourced from 1997, at an average annualemployment cost per full-time staff member (in 1995 prices) of US$3,000, with an initial staffing levelof 5. A sum (initially US$10,000 in 1995 prices) is included to cover the cost of transport, materials andvoice communications. It is assumed that staffing and other requirements will increase at an annual rateof 20% as transaction volumes, the number of participants, and the real-time gross settlement componentof the system increase. Estimates for both business and IT operations assume the availability ofappropriately skilled local resources going forward.

130 Annex 11

Telecommunications Costs

9. The main on-going operating costs are data communications costs relating to thetransmission of payments across the VNPT/VDC network from 1997. These costs must be estimatedwith reference to projected volumes and an indicative unit message cost. Pending negotiations withVNPT/VDC to establish these message unit costs, telecommunications costs have not been taken intoaccount in determining the break-even prices. However, the model has been designed to incorporatethese costs as and when they become available.

Action - Indicative Data Communications Charge

SBV should obtain from VNPT/VDC an estimate of a 'bundled' charge, reflecting

the number and type (X.25/X.28) of lines used

the number of payment messages across the VDC X.25 network

network management services.

This charge should take into account all payments trafric (intra-bank as well as inter-bank). Inter-bank volumes should be multiplied by 4 (reflecting a 1:4 inter-bank:intra-bank ratio) to provide arough estimate of all trafric.

The line requirements set out in part 6 of the Statement of User Requirements (Tables 6.1 and 6.2) allowfor total payment volumes of up to about 300,000 payments per day (see project files).

Break-Even Prices

10. For a given year and a given volume scenario, there is a break-even price at which thestream of revenues is equal to the stream of costs. The break-even price for a given year Y is calculatedas follows:

sum of total annual costs incurred (1995-Y)/sum of projected volumes (1997-Y)

The sum of costs includes an estimate of the sum of commitment fees and service charges incurred onthe IDA credit. The actual break-even point will be determined by actual volumes (hence revenues) andactual costs, as well as by price.

NB This is the break-even price for inter-bank clearing and settlement - not a price for end-to-end processing of inter-bank payments. Further, this is an average break-even price, and actualcosts will vary around this average for individual transactions.

I l. Additional operating costs (mainly in the business operations category) will be incurredby the commercial banks in processing payments up to the point at which they enter IBPS as anelectronic payment instruction, and on receipt of electronic instructions from IBPS. These costs areconsidered to be part of the normal operating costs of the commercial banks in the provision of the newpayment services.

12. The table below shows the result of the break-even analysis under the four volumegrowth scenarios. The prices do not include telecommunications costs, which can be expected to add

131 Annex 11

between US$0.10-0.60 to the per message costs. The break-even prices for a given year Y and a givenvolume scenario indicate the price that must be charged from the very beginning of system operation toachieve full cost-recovery in that year. As can be expected, the earlier full cost recovery is desired, thehigher the price that must be charged, and vice versa.

Table 1: Break-even Prices for Inter-bank Clearing and Settlement (US$)

Demand Growth Scenario Price to Reach Break-Even in Year1997 1998 1999 2000 2001 2002 2003

10% to 1997; 15% thereafter 13.05 5046 3.46 2.42 1.84 1.47 1.2110% to 1997; 30% thereafter 13.05 5.01 2.94 1.91 1.34 0.99 0.7520% to 1997; 30% thereafter 10.47 3.80 2.13 1.32 0.88 0.61 0.4420% to 1997; 60% thereafter 10.47 3.44 1.77 0.99 0.60 0.38 0.24

Prices

13. Charges for inter-bank clearing and settlement should be set to recover both start-up andoperating costs. The tariff structure should differentiate between different types of transactions and levelsof service, and prices should be set so as to achieve full cost recovery in an acceptable time frame (say,by 2000). This implies that there will be an initial subsidy to encourage use, but that this will berecovered within the first few years of live operation of the system. After break-even (when revenuesexceed costs), a surplus will be available for further development of inter-bank payment systems. TheNPC will decide on actual pricing policy. It should avoid cross subsidization between different types ofpayment: item charges should reflect differences in the cost of different items, such as real-time grosssettlement compared with net settlement. The charging policy may combine fixed membership fees withper item charges - one way of giving discounts to high volume users.

132 Annex 12

VIET NAM

PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Selected Documents Available in Project Files

1. Statement of User Requirements, Stage 2 Report, PA Consulting Group, March 1995

2. Project Management Plan, Draft September 1995

3. Selected Legal and Regulatory Documents

* Decree-Law on the State Bank of Viet Nam (May 23, 1990)* Decree-Law on Banks, Credit Cooperatives, and Finance Companies (May 23, 1990)* Regulations on Electronic Funds Transfers (third draft, unofficial translation, November

16, 1994* Rating Approach applied in the Vietnamese Banking System (SBV proposal, January 25,

1995)* Decision by the Governor of the State Bank of Viet Nam to Promulgate the "Regulation

on Preparing and Auditing Vouchers and Maintaining Accounting Documents in theBanking Sector" (draft, unofficial translation, undated 1994)

* Decision of State Bank Governor on Promulgation of "Regulations on Organization andTechnical Procedures for Inter-bank Clearing and Settlement Operations" (Decision181/NH-QD, October 10, 1991, unofficial translation)

* Guidelines for Implementing Decision 181/NH-QD, October 28, 1991 (unofficialtranslation)G Governor of State Bank Decision on Promulgation of "Regulations on Instruments formaking Non-Cash Payments" (Decision 22/QD/NH1, February 21, 1994, unofficialtranslation)

- Circular: Guidelines for Implementing the Non-Cash Settlement Regulations (Circular08/TT-NH2, June 2, 1994, unofficial translation)

- Prescribed List of Codes for Types of Foreign Currency (draft, undated 1994)* Viet Nam Law on Checks (draft, unofficial translation, undated)* Decision by the Governor of the State Bank on the Establishment of the Banking Project

Management Unit, September 1995

4. Detailed Project Cost Tables

5. Minute of Agreement between State Bank of Viet Nam and the Department General ofPost and Telecommunication, September 1995

CHART 1: STATE BANK OF VIET NAM ORGANIZATIONAL CHART

Governor's Office Governor Personnel andTraining Dept.

Deputy Deputy Deputy Deputy DeputyGovernor Governor Governor Governor Governor

Banking Control Training Credit Government

Implement. Dept. Foreign Exchange Research Dept. Operations

Supervising Dept. Foreign Relations Enterprise Control Accounting and Governor's OfficeDept. Dept. Finance Dept.

Legal Economic Administration Transaction Administration

Dept. Research Dept. Dept. Center Dept.

Financial Capital Market Treasury andInstitutions Dept. Development Issuing Dept.

BoardSupervision and Informatics

Guidance CenterPeople's Credit

FundInfornationand News

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