The 2024 Law on Credit Institutions in Vietnam

Analysts predict that the 2024 Law on Credit Institutions will enhance the safety of Vietnam's credit institutions by implementing stronger measures to prevent risks, increasing supervision of credit entities, and discouraging cross-ownership and undue influence within the industry.

The draft 2024 Law on Credit Institutions was officially approved by the Government of Vietnam and the National Assembly on January 18, 2024, during the fifth extraordinary session of the 15th National Assembly.

Nguyen Thi Hong, the Governor of the State Bank of Vietnam (SBV), stated that the SBV had worked with relevant ministries and government agencies to develop the draft 2024 Law on Credit Institutions. The new law is expected to replace the 2010 Law on Credit Institutions and come into effect on July 1, 2024.

This article will explore the impact of additions and changes in the new law, notable differences from the 2010 version, and the forthcoming guidelines for the 2024 Law on Credit Institutions.

Overview

The 2024 Law on Credit Institutions retains several regulations from the 2010 version, covering areas such as establishment, operations, special control, restructuring, and bankruptcy of credit institutions. It also includes rules for establishing and operating foreign bank branches, representative offices of foreign credit institutions, and other foreign entities involved in banking activities.

In addition, the new law introduces provisions for managing non-performing loans and secured assets, with a focus on state-owned entities responsible for acquiring and managing debts. These changes are essential for strengthening Vietnam’s legal framework governing financial and credit operations, thus improving the effectiveness and stability of the banking sector.

Structurally, the 2024 Law on Credit Institutions consists of 21 Articles spread across 15 Chapters, which is an increase of four Chapters compared to the 2010 version.

The main regulations outlined in the 2024 Law on Credit Institutions

Policy banks

The Law on Credit Institutions 2024 contains comprehensive regulations on policy banks, dedicating an entire chapter to the matter, a significant increase from just one article in the existing law.

According to Article 16 and Article 17 of the Law on Credit Institutions 2024, a policy bank in Vietnam is established by the Prime Minister to serve non-profit purposes in implementing the state’s socio-economic policies. The government oversees the activities of these banks, and state management functions are carried out by the Prime Minister and relevant ministries. The Board of Directors of the policy bank acts as the direct representative of the state owner, carrying out tasks and powers as per government regulations.

Article 19 of the Law on Credit Institutions 2024 outlines the management and organizational structure of policy banks. These banks are structured to include the Board of Directors, the Control Board, the General Director, and other management structures, all in accordance with government regulations.

Furthermore, policy banks are authorized to establish branches, transaction offices, and other affiliated units as prescribed by law. This provision allows for the expansion and outreach of policy banks within the financial system, facilitating their role in implementing socio-economic policies and serving the needs of the state.

Types of non-banking credit institutions

Moreover, the new law categorizes non-banking credit institutions into two types: specialized finance companies and general finance companies. With this categorization, the new law provides detailed guidance on the operation of non-banking credit institutions, aiming for more transparency.

The legislators anticipate that these changes will streamline the operations of policy banks and non-banking credit institutions, promoting the sustainable development of Vietnam’s financial industry.

A "specialized finance company" refers to a non-bank credit institution primarily engaged in factoring, buyer credit, or finance lease as specified in the regulations of this Law.

A "general finance company" refers to a non-bank credit institution conducting activities as outlined in Section 3 Chapter V of this Law.

Interventions at an early stage

The new legislation gives significant attention to early intervention measures, with an entire chapter, Chapter IX, dedicated to this crucial issue. According to these provisions, the State Bank will take early action in a credit institution or foreign bank branch in various circumstances:

1. When the accumulated losses of the credit institution or foreign bank branch exceed 15 percent of its charter capital, provided capital, and reserves, and violations against regulations on capital adequacy ratio in the law occur.

2. When the credit institution or foreign bank branch is ranked below average according to SBV governor’s regulations.

3. When the credit institution or foreign bank branch fails to meet the minimum solvency ratio for 30 consecutive days.

4. When the credit institution or foreign bank branch fails to maintain the minimum capital adequacy ratio specified for six consecutive months.

5. When a bank run occurs, and the credit institution or foreign bank branch notifies the SBV.

In response to these situations, the SBV will impose requirements and restrictions on credit institutions or foreign bank branches subject to early intervention.

This chapter on early interventions not only helps credit institutions and foreign bank branches in reducing risks but also establishes a legal framework for the SBV to intervene and prevent further impacts on the banking system and the stability of the economy.

Panic withdrawal

Under the new law, a "bank run" or "mass withdrawal" occurs when a large number of depositors withdraw their funds from a credit institution at the same time, leading to the institution facing insolvency as per the regulations set by the Governor of the State Bank.

In the event of a bank run, the credit institution must inform the SBV and take the following steps:

- Stop paying dividends in cash.

- Suspend or limit credit extensions and other activities using the institution's funds.

- Implement alternative measures for deposit repayment.

- Follow the measures outlined in the remedial plan if a bank run occurs.

- Revise and adjust the plan as necessary based on ongoing assessments.

Additionally, the credit institution must continually assess the situation to develop, modify, and execute the remedial plan in line with the new law. At the same time, the SBV will offer assistance measures for the affected institution.

Furthermore, the new law sets up a mechanism for the SBV to regulate and approve interest-bearing and secured extraordinary loans, providing more flexibility compared to current regulations. Unlike the previous requirement for Prime Ministerial approval for the terms of any extraordinary loans, the new law gives this authority to the SBV. However, Prime Ministerial approval is still required for any extraordinary loans that are interest-free or unsecured.

Extended the range of "related parties"

The new legislation expands the definition of related parties to include connections between an organization and its sub-subsidiaries, the sub-subsidiaries of the same parent company, and any shareholder with over 5 percent equity or voting rights in the organization.

Additionally, familial relationships, such as grandparents, great-grandparents, grandchildren, great-grandchildren, aunts, uncles, cousins, nephews, and nieces, are now categorized as related parties.

This wider range of related parties offers a more efficient management tool, as the involvement of such parties can impact the oversight of various aspects, including share ownership ratios, credit limits, approval of transactions involving related parties, disclosure requirements, and information distribution.

Tougher rules on share ownership

According to the new legislation, shareholders who own at least 1 percent of a credit institution's capital must disclose information about themselves, their holdings in the institution, related parties, and the holdings of those related parties.

In addition, individual shareholders are restricted to owning 5 percent or less of the institution's capital, including any indirect ownership. Organizations are subject to a maximum ownership limit of 10 percent.

Furthermore, shareholders and related parties are not allowed to collectively own more than 15 percent of a credit institution's capital, a decrease from the 20 percent limit in the current law. Moreover, major shareholders and related parties of one credit institution are prohibited from owning more than 5 percent of another institution's capital.

The 2024 Law on Credit Institutions includes a transitional provision that allows shareholders and related parties who hold shares exceeding the limits to maintain such holdings, but they are prohibited from acquiring additional shares until they comply with the ownership regulations in the law.

However, these rules do not apply to state ownership in equitized credit institutions and foreign investors' ownership.

The scandal involving Sai Gon Joint Stock Commercial Bank (SCB) and Van Thinh Phat in 2024 had a significant impact on Vietnam's financial and credit system, raising concerns about cross-ownership and manipulation of credit institutions by individual shareholders or large shareholder groups. The regulations outlined in the new law are crucial for improving public oversight, ensuring the separation of management and operational activities, and promoting transparent governance in businesses in accordance with international standards.

Resolution of delinquent debts and assets used as security

The new law, Chapter XII, includes provisions from the 2010 legislation, specifically addressing the resolution of non-performing loans backed by land use rights and immovable properties.

A positive change in the new law is that buyers of such loans can now be registered as the mortgagees of the relevant security. As a result, they assume all rights and responsibilities of the original mortgagees.

The 2024 Law on Credit Institutions also introduces several new provisions, such as:

- Disclosure requirements to improve transparency and accountability in credit institutions.

- Combining establishment and operation licenses with business registration certificates to streamline administrative procedures.

- Regulation on security agents, providing guidelines for entities acting as security agents in financial transactions.

- Reduction of the credit extension limit to encourage responsible lending practices and reduce risks in the financial sector.

Roles and duties of pertinent agencies and organizations

The Prime Minister of Vietnam has released a set of 10 guiding documents for the implementation of the new law, delegating specific responsibilities to relevant authorities:

- The State Bank of Vietnam is responsible for issuing decrees on various aspects such as the organization and operation of the Vietnam Bank for Social Policies, licensing conditions for credit institutions and foreign bank branches, regulations on non-cash payments, microfinance programs of socio-political organizations and non-governmental organizations, and decisions on approving credit overextensions by credit institutions and foreign bank branches.

- The Ministry of Finance is tasked with issuing decrees concerning the organization and operation of the Vietnam Development Bank and financial regulations governing policy banks.

- The Ministry of Labor – War Invalids and Social Affairs is mandated to issue a decree on regulations pertaining to salaries and allowances for officials and public employees of policy banks.

- The Ministry of Natural Resources and Environment is entrusted with issuing a decree on the registration of changes to land regarding collateral, specifically land use rights or property on land, for debts originating from bad debts of credit institutions or foreign bank branches.

- The Ministry of Justice is assigned to issue a decree on collateral registration for land use rights, property on land, and property on land for debts originating from bad debts of credit institutions and foreign bank branches.

During the conference on disseminating the 2024 Law on Credit Institutions, the SBV governor stressed the importance of credit institutions reviewing their charters, internal documents, and regulations. They should make revisions, amendments, supplements, and replacements to ensure full consistency with the new law and the accompanying guiding documents. Additionally, credit institutions were encouraged to conduct comprehensive dissemination.

Conclusion

The 2024 legislation on Credit Institutions introduces extensive regulations that govern the operations of credit institutions and foreign bank branches, offering transparent and explicit guidance. At the same time, it sets the stage for credit institutions to modernize their activities, meet practical needs, and improve their competitiveness within the financial industry.