The National Assembly of Vietnam officially passed the new Law on Credit Institutions, effective from July 1, 2024, except for certain provisions that will take effect from January 1, 2025. Below are some noteworthy points of the law available.
The provisions in the newly enacted Law on Credit Institutions 2024 address issues related to cross-ownership, control of banking organizations, early intervention for ill-operated banks, and secured asset realization.
Ownership Limitations at Credit Institutions
To enhance management capacity, transparency, and operational transparency of banking organizations, and to limit situations of manipulation and control by major shareholders in banking organizations, Law on Credit Institutions 2024 introduces new provisions regarding the ownership ratio of share limitations. This includes reducing the ownership limit for individual shareholders to a maximum of 5% of charter capital (unchanged), organizations to 10%, and groups of related shareholders to 15%. Large shareholders and related parties are prohibited from owning more than 5% of another banking organization.
New restrictions on credit limits will reduce credit limits for customers and related individuals, but these changes will be phased in over a 5-year period instead of immediate implementation.
Additionally, the law adds requirements for disclosure and publicization of information for shareholders owning 1% or more of the charter capital of credit institutions, managers, and executives of credit institutions. It also amends and ensures the rights of minority shareholders, revises and supplements regulations on the criteria and conditions for managers, enhances the independence and expertise of independent members of the board of directors, and increases the minimum number of members in the supervisory committee of commercial banks. There are also amendments and supplements to strengthen the role of cooperative banks in supporting people’s credit funds.
Licensing Simplification
The law adds provisions to consolidate the establishment and operation licenses of banking organizations and the Business Registration Certificate, aligning with the general direction of the Party and State in reducing administrative procedures to support businesses and citizens in production and business activities.
Restriction on Banking and Insurance Upselling
Law on Credit Institutions 2024 supplements provisions prohibiting banking organizations, managers, executives, and employees from combining the sale of non-mandatory insurance products with the provision of banking services.
Prompt Intervention for Troubled Banking Organizations
SCB scandal learned, based on international experience, the Law on Credit Institutions further provides that commercial banks and branches of foreign banks are obliged to develop contingency plans in the event of early intervention. This regulation aims to require commercial banks to have scenarios ready for cases of early intervention upon the occurrence of unexpected events, it can employ necessary and timely solutions. Thereby, the State Bank will send written instructions to carry out the requirements, and restrictions, update the remedial measures, and return to normal operations.
The law also supplements cases of early intervention compared to the existing law, such as the case of a credit institution with accumulated losses exceeding 15% of charter capital, allocated capital, and reserve funds. During the implementation of the recovery plan, the State Bank may consider adjusting the application of additional measures, extending or shortening the duration of applying restrictions to align with the situation of implementing the recovery plan.
Once such an ill-operated credit institution successfully implements the recovery plan and returns to normal operations, the application of restrictions and requirements imposed by the State Bank will lapse.
The law also adds clauses with respect to mass withdrawals (bank run), specifying measures to support liquidity and other measures for banking organizations when they face mass withdrawals, ensuring the safety of the system and protecting the rights of depositors.
Building on the current law, the new one regulates special control and restructuring plans for banking organizations, adjusting to handle difficulties and challenges that have arisen recently.
Unraveling Non-Performing Loans
One of the focal points is the right to transfer collateral to resolve non-performing loans.
Regarding collateral resolution (effective from January 1, 2025), banking organizations have the right to transfer part or all of the collateral, such as real estate projects, to recover debts.
This point is envisaged to assist banks in handling large projects with legal issues, thereby facilitating cash flow for real estate businesses and reducing bad debts for banks, especially listed banks with high real estate loan ratios.
However, the law passed this time does not address the right to repossess collateral of banking organizations, which may give rise to situations where borrowers do not coordinate in handing over collateral.
Additional Related Groups
The safety in the operations of banking organizations and the transparency in the ownership of shares by shareholders and related persons are ensured by setting out a broader scope of related persons: “Subsidiaries of subsidiaries of banking organizations; grandparents, great-grandparents, grandchildren, great-grandchildren, aunts, uncles, cousins, nephews, nieces, and vice versa.”. It further clarifies the individual subjects authorized to represent organizations and individuals who are individuals authorized to represent capital contributions for organizations and individuals.
The new law is considered relatively strict but necessary to help banking organizations build appropriate models in practice. In addition, the promulgation of regulations on the system’s safety aims to prevent the abuse of management, control, and the rights of major shareholders to manipulate the activities of banking organizations, to ensure that banking organizations operate healthily, safely, and instill confidence in depositors in the banking system.
