New Credit Institutions Law: Important Changes to Improve Clarity and Transparency and Safeguard the Operations of Credit Institutions

July 30, 2024

Highlights

On January 18, 2024, the National Assembly passed the Law on Credit Institutions No. 32/2024/QH15 (“LOCI 2024”), which took effect on July 1, 2024.  LOCI 2024 replaces the Law on Credit Institutions No. 47/2010/QH12 dated June 16, 2010, as amended and supplemented by Law No. 17/2017/QH14 dated November 20, 2017, of the National Assembly (“LOCI 2010”).  This law is the culmination of a 2-year legislative process at the National Assembly.  The first draft of LOCI 2024 was prepared at the request of the National Assembly in June 2022, submitted for debate in May 2023, and finally approved in January 2024.  The State Bank of Vietnam (“SBV”) is the primary regulatory authority under LOCI 2024.

As highlighted in the Government’s submission on the draft LOCI 2024, the new law was enacted to improve clarity and transparency and safeguard the operations of credit institutions.  The key policy objectives of LOCI 2024 include:

• Firstly, LOCI 2024 clarifies the scope of operations of credit institutions to account for current market practices, including security agency arrangements, and emerging trends in banking services, particularly in technology and digital transformation.
• Secondly, LOCI 2024 improves transparency in corporate governance of credit institutions, addressing issues such as cross-ownership and manipulation within institutions. A key measure in relation to this issue is the lowering of ownership limit for a single shareholder and related persons.
• Thirdly, LOCI 2024 emphasizes prudent operation of credit institutions. The new law recognizes extension of credit as an important area of risk, potentially increasing non-performing loans (NPLs). As a result, LOCI 2024 provides a roadmap to gradually reduce single borrower limits over time.
• Fourthly, LOCI 2024 clarifies mechanisms to address NPLs, including enforcement measures by State-owned asset management companies (e.g., Vietnam Assets Management Company or VAMC) and accounting treatment for debt recovery.
• Finally, the overarching objective of LOCI 2024 is to establish a more robust framework for early intervention and special supervision regimes, as well as recovery and bankruptcy procedures for credit institutions. The new law aims to provide clearer criteria to detect and manage distressed credit institutions and grants the SBV broader authority to monitor and intervene in the operations of problematic credit institutions.  Additionally, LOCI 2024 establishes a clearer procedure for liquidation and bankruptcy of failing credit institutions, which aims to better protect depositors’ interests and maintain overall financial stability.

In addition to the above key policy objectives, LOCI 2024 also includes drafting changes to ensure consistency with other recently issued laws.  In particular, the amendments align LOCI 2024 with the provisions of the Civil Code 2015, the Law on Enterprises 2020, and the Law on Securities 2019.

Several key provisions of LOCI 2024 are discussed below.  However, as of this writing, the SBV is preparing various guidelines for LOCI 2024.  Therefore, the full impact of LOCI 2024 will only be known once those guidelines are issued in the coming months.

Scope of LOCI 2024

LOCI 2024 inherits the scope of LOCI 2010 in regulating the establishment, organization, operation, restructuring, and dissolution of credit institutions.  Similar to LOCI 2010, credit institutions are defined under LOCI 2024 to include both banks and non-bank credit institutions, such as finance companies.

Even though the scope of the law has not changed significantly on the surface, the new provisions of LOCI 2024 will have a profound and long-lasting impact.   As discussed below, LOCI 2024 clarifies the scope of operations of credit institutions, improves transparency in their corporate governance, sets out a roadmap to gradually reduce single borrower limits, and clarifies mechanisms to address NPLs and enforcement of security.  Most importantly, LOCI 2024 enhances and clarifies early intervention and special supervision regimes, as well as recovery and bankruptcy procedures for credit institutions, building upon the foundations established in LOCI 2010.   In particular, the SBV now has broader authority to address bank runs, including the use of special loans.

LOCI 2024 is silent on its relationship with other laws, relying instead on general laws such as the Civil Code 2015 and the Law on Enterprises 2020 to clarify this relationship.  While these laws govern the operations of entities and businesses generally, LOCI 2024 specifically governs the operations of credit institutions.  According to these laws, LOCI 2024, as a specific law, prevails over the Civil Code 2015 and the Law on Enterprises 2020 in case of inconsistency.  In the relationship between the Law on Securities 2019, which governs public companies generally, and LOCI 2024, which among others governs credit institutions that are public companies, LOCI 2024 prevails.

Scope of Operations of Credit Institutions

LOCI 2024 clarifies the scope of operations of credit institutions to reflect current market practices and emerging trends in banking services.  Generally, credit institutions may only engage in activities specified in the operating licenses issued by the SBV, or otherwise permitted by law.  For banks, the scope is limited to commercial banking services, including primarily (i) taking deposits, (ii) extending loans, providing guarantees and other types of credit, and (iii) providing payment services.  Investment banking services, including M&A advising, securities placement, and underwriting, are typically provided by securities companies licensed by the State Securities Commission.  Although many banks in Vietnam own securities companies, they cannot directly provide investment banking services.

If an activity is neither specified in an operating license nor permitted by law, it may be unauthorized.  For example, banks have often acted as security agents in financing transactions, but operating licenses typically do not mention security agency as a permitted activity.  At the same time, LOCI 2010 also did not specifically permit this activity, leading to ambiguity regarding whether a bank could provide security agency services.  LOCI 2024 clarifies that banks may provide security agency services in lending transactions, as well as several other services that were not clearly authorized under the prior law.  These other services include issuing letters of credit (common in project or corporate finance for procurement of equipment), payment agency services (common in export finance or retail banking), and treasury services (common in retail banking), among others.  However, the new provisions of LOCI 2024 are somewhat generic, which could lead to differing interpretations, and may require further clarification in the SBV implementing regulations.

LOCI 2024 recognizes the need for digital banks and, for the first time, permits a sandbox mechanism for them.  Digital banking has been a focus in Vietnam in recent years, and this sandbox mechanism authorizes the SBV to grant licenses on a pilot basis, similar to what it did previously for e-wallet and e-payment companies.

Finance companies are grouped into two categories: General finance companies and specialized finance companies.

• LOCI 2024 permits general finance companies to have a broader scope of operations, similar to banks, except that they cannot provide payment services.
• Specialized finance companies have a narrower scope of operations. Additionally, a type of specialized finance company is not permitted to conduct the specialized operation of the other types of specialized finance companies.  Among these, consumer finance companies can issue credit cards and other services like general finance companies (except for bank guarantee, financial leasing services and factoring); financial leasing companies can offer financial leasing services and other services like general finance companies (except for bank guarantee, issuance of credit cards and factoring); and factoring finance companies can provide factoring services and other services like general finance companies (except for bank guarantee, financial leasing services, and issuance of credit cards).

Additionally, LOCI 2024 prohibits credit institutions and their managers, executives, and employees from tying the sale of non-mandatory insurance products to provision of banking products and services in any form.  This prohibition responds to recent public anger with banks that have forced customers to purchase insurance products, especially life insurance products.  It affects the economics of bancassurance arrangements.

Corporate Governance of Credit Institutions

LOCI 2024 aims to improve transparency in corporate governance of credit institutions.  In several important cases, LOCI 2024 imposes higher standards than those provided in the Law on Enterprises 2020 and the Law on Securities 2019.

LOCI 2024 imposes two significant requirements on the composition of the board of a credit institution that is a joint-stock company:

• At least two board members must be independent (instead of at least one independent board member under LOCI 2010), and at least two-thirds of board members must be independent and non-executive (instead of at least one-half under LOCI 2010). Specifically, an independent board member and related persons may not directly or indirectly own 1% or more of the charter capital or voting shares of the credit institution (instead of 5% under LOCI 2010). While it is not regulated in LOCI 2024, an independent board member must not directly or indirectly own 1% or more of the charter capital or voting shares of the credit institution in accordance with the Law on Enterprises 2020.
• No more than two board members may be related to another board member or the CEO. This restriction limits the number of board members appointed by a single shareholder.

In addition to the fiduciary duties described in the Law on Enterprises 2020 and the Law on Securities 2019 (e.g., acting in the best interests of the company and its shareholders, loyalty, and avoiding conflicts of interest), LOCI 2024 imposes additional duties.  These include a duty to act according to SBV instructions, primarily in cases of early intervention or special supervision, a duty to report system risk, safety warnings, and potential legal violations to the SBV, and a duty to comply with recommendations or instructions of the SBV following inspections or investigations.

The Law on Enterprises 2020 permits a board member to authorize another individual to attend board meetings if approved by the majority of the board members.  However, for certain important matters, LOCI 2024 does not allow such authorization and the board members must attend in person.  Those matters include, among others:

• Matters proposed by the board to be decided by the general meeting of shareholders;
• Equity investment in other entities;
• Sale and purchase of fixed assets;
• Material contracts;
• Appointment, removal, and remuneration for the CEO, deputy CEO, and other key managers;
• Issuance of internal corporate governance, risk management rules, and annual reports; and
• Dividend plans.

Ordinary resolutions passed by shareholders require at least 50% of the total voting shares of all shareholders attending a general meeting of shareholders, at least 50% of the total voting shares of all shareholders in the case of a written ballot, or a higher ratio prescribed by the charter of the credit institution. This reduction to 50%, from the 51% prescribed in LOCI 2010, aligns with the Law on Enterprises 2020.

Cross-Ownership and Ownership Limits in Credit Institutions

Cross-ownership between credit institutions and other entities continues to be prohibited under LOCI 2024, with more stringent restrictions.  Under LOCI 2010, credit institutions were restricted from contributing capital or purchasing shares in enterprises or other credit institutions that were shareholders of that credit institution.  Now, under LOCI 2024, this restriction also applies to subsidiaries of credit institutions.  Additionally, LOCI 2024 prohibits credit institutions and their subsidiaries from contributing capital or purchasing shares in enterprises or other credit institutions that are related persons of major shareholders, a provision that was not included in LOCI 2010.

Any shareholder owning 1% or more of the credit institution’s charter capital must disclose personal identification information, details of related persons, and the number and percentage of shares owned by them and related persons.  The credit institution must report this information to the SBV and publicly disclose it. This new disclosure requirement aims to provide greater transparency in the ownership of credit institutions.  How this requirement is enforced in practice will have an important bearing on compliance with ownership limits.

LOCI 2024 decreases the ownership limits in credit institutions to avoid concentration of ownership and manipulation within these institutions.

Compared to the Law on Enterprises 2020 and the Law on Securities 2019, LOCI 2024 broadens the concept of “related person”.  It now includes grandparents, uncles, aunts, and cousins of an individual. These people were not included in LOCI 2010.

Individual institutional ownership is based on both direct and indirect ownership of each shareholder.  Indirect ownership includes holding through trusts or entities in which a shareholder holds more than 50% of its charter capital.  The combined ownership of a shareholder and a related person includes shares purchased by another person through an authorization and does not count the holdings by a related person who is a subsidiary of a shareholder being a credit institution.

Prudent Ratios in Operations of Credit Institutions

LOCI 2024 e emphasizes ensuring prudent operations of credit institutions, recognizing that extension of credit is a key area of risk for increasing NPLs.  Under LOCI 2010, the credit limit for a single borrower for a bank is 15% of the bank’s capital, and the combined limit for a customer and related persons is 25%. 

LOCI 2024 gradually reduces the single borrower limits for banks over time, with targeted limits of 10% for a single customer and 15% for a customer and related persons, to be achieved by January 1, 2029.  The rationale for this gradual reduction is twofold.

• On the one hand, the overall capital of banks has significantly increased in recent years. It is reported that, since 2010, state-owned banks have increased their capital by 6 to 10 times, and joint-stock commercial banks have increased their capital by 3 to 10 times.  Accordingly, the absolute amount of credit extended to a single customer or a customer and related persons has also increased.
• On the other hand, an abrupt reduction of credit will affect the supply of capital to the economy, especially in the current context of a looming recession and low credit growth. The 10% and 15% targeted limits were originally proposed in the early draft of LOCI 2024 to apply from July 1, 2028, and later postponed to January 1, 2029, in the final approved version.

LOCI 2024 also reduces single borrower limits for non-bank credit institutions.  The new limits are 15% and 25% of the institution’s capital (instead of 25% and 50% under LOCI 2010) for a single borrower and combined with related persons, respectively.

Notably, loans among banks, non-bank credit institutions, and foreign bank branches are not subject to these credit limits.

Dealing with NPLs

LOCI 2024 codifies numerous provisions of Resolution No. 42/2017/QH14 dated June 21, 2017, of the National Assembly (“Resolution 42”) on addressing NPLs and enforcement of collateral for NPLs.  Resolution 42 created a pilot program for addressing and enforcing collateral of NPLs, which expired on December 31, 2023.  LOCI 2024 establishes a formal regime to replace Resolution 42.

Several highlights of the new LOCI 2024 regime are:

• NPLs include (i) on-balance-sheet NPLs determined in accordance with SBV regulations, (ii) off-balance-sheet NPLs for which risk provisions have been set aside but not yet recovered, and (iii) NPLs purchased by debt trading companies (such as the VAMC) from credit institutions but not yet recovered. The SBV will issue implementing regulations that specify the parameters for the determination of NPLs.
• Enforcement proceeds are paid in the following order of priority: (i) costs and expenses for preserving the collateral; (ii) costs for repossessing and enforcing the collateral; (iii) court fees related to judgments and decisions of the court concerning the collateral enforcement; (iv) taxes and fees directly related to the transfer of the collateral; (v) secured obligations of credit institutions and debt trading companies; and (vi) other unsecured obligations prescribed by law. This priority order aligns with the Bankruptcy Law 2014, the Civil Code 2015, and market practices.
• Unlike Resolution 42, LOCI 2024 does not grant the right to repossess collateral to credit institutions and debt trading companies. This repossession right is not specifically recognized under the Civil Code 2015.  Instead, a securing party, or a third party in possession of collateral, must hand over the collateral when an enforcement event occurs.  If a securing party or third party does not voluntarily hand over the collateral, a secured party must seek court assistance for repossession.  LOCI 2024 aligns with the approach under the Civil Code 2015.  It should be noted that LOCI 2024 does not prohibit parties from agreeing that the secured party has the right of repossession, which is the market norm.  In addition, LOCI 2024 grandfathers enforcement of the collateral repossessed pursuant to Resolution 42 after the effective date of LOCI 2024.
• The Law on Real Estate Business 2023, which sets out conditions for transfer of real estate projects takes effect on August 1, These conditions are more stringent than those provided in Resolution 42.  Enforcement of the collateral being real estate projects result in transfer of such projects.  LOCI 2024 grandfathers enforcement of the collateral being real estate projects if enforcement is not completed before July 1, 2024, the effective date of LOCI 2024.  However, transfer of real estate projects as a result of enforcement after July 1, 2024, will be subject to the Law on Real Estate 2023 from August 1, 2024.
• LOCI 2024 removes the requirement that a securing party or third party in possession of the title documents for the collateral hand over such title documents to credit institutions and debt trading companies. However, LOCI 2024 does not prohibit parties from agreeing on delivery of title documents, which is the market norm.
• In contrast to Resolution 42, LOCI 2024 does not permit estimated interest which could be recovered from NPLs but is not certain. Consequently, it appears that credit institutions cannot record estimated interest from NPLs as revenue on their balance sheets.  However, LOCI 2024 provides an exception for estimated interest for NPLs allocated pursuant to Resolution 42, allowing such interest to continue to be recorded as revenue from January 1, 2024, through August 14, 2027.

Detecting and Addressing Problematic Credit Institutions

The LOCI 2024 provisions on handling problematic credit institutions were extensively debated at the National Assembly, resulting in a prolonged approval process.  LOCI 2024 reflects the SBV’s proactive stance in maintaining financial stability and mitigating systemic risks by enhancing the legal framework and providing clearer guidelines for managing problematic credit institutions.

Firstly, LOCI 2024 establishes a more robust and structured approach to problematic credit institutions.  It emphasizes early intervention in detecting and managing credit institutions that show signs of financial instability.  Specifically, LOCI 2024 expands the circumstances when early detection and intervention may occur.  If a credit institution reports cumulative losses exceeding 15% of its charter capital and reserve funds and it violates the minimum capital adequacy ratio, or in the event of a bank run, the SBV is empowered to step in and impose early intervention measures or place the problematic credit institution under special supervision.

Secondly, LOCI 2024 dedicates attention to bank runs, which have occurred several times recently, including the Saigon Commercial Bank (SCB) scandal. Credit institutions must report a bank run to the SBV and promptly implement measures to retain cash at the credit institution, including prohibiting dividend distribution and suspending or restricting extension of credit.  In addition to placing problematic credit institutions under early intervention or special supervision, the SBV may force the problematic credit institution to sell certain liquid and low-risk assets, such as government and municipal bonds and SBV notes, to the SBV. The SBV may also grant special loans to problematic credit institutions.

Thirdly, LOCI 2024 empowers the SBV with broader authority to monitor and intervene in the operations of problematic credit institutions.  During early intervention, the SBV may demand, among others, an audit by an independent audit firm, suspension of certain business activities, or replacement of executive members and managers who are deemed to have committed illegal actions or caused the institution to incur significant risks.   Furthermore, if a problematic credit institution is placed under a special supervision regime, the SBV may promptly impose corrective measures on the institution and its shareholders.  This includes the authority to demand detailed disclosures on their shareholding in problematic credit institutions and impose transfer restrictions.  By enhancing the SBV’s oversight capabilities, LOCI 2024 aims to address issues at an early stage and prevent them from escalating into full-blown crises.

Fourthly, LOCI 2024 provides further elaboration on tools for resolution of problematic credit institutions.  The conditions for issuing special loans, a critical tool for providing immediate liquidity to problematic institutions, are clarified.  Problematic credit institutions subject to early intervention regimes may now request special loans from the SBV, the Deposit Insurance of Vietnam, or other credit institutions.  This represents a significant change because previously only credit institutions already under special supervision could obtain special loans.

To support recovery of a problematic credit institution, the SBV may order it to prepare plans for capital injections, mergers, acquisitions, or mandatory transfers of shares to other investors.  LOCI 2024 also specifies certain privileges for problematic and rescuing credit institutions, a notable improvement because the previous law was silent on such privileges, requiring special government approval instead.  For example, a rescuing credit institution may temporarily classify the loans to the problematic credit institution as standard debt and assign a 0% risk weight to these loans when calculating capital adequacy ratios during the rescue period.

Finally, if all measures fail to recover failing credit institutions, LOCI 2024 provides clear procedures for liquidation and bankruptcy, ensuring an orderly exit from the market while protecting depositors and maintaining overall financial stability.  In carrying out the bankruptcy of failing credit institutions, LOCI 2024 enhances the protection of depositors.  The SBV may order a failing credit institution to prepare a bankruptcy plan that includes the estimated amounts to be paid to depositors and payment timeframes.  This clear framework provides greater assurance to depositors which will prevent or discourage bank runs, thereby boosting public confidence in the banking system. At the same time, bankruptcy is no longer a remote possibility for banks, even those considered too big to fail.

Conclusions

The introduction of LOCI 2024 reflects SBV’s determination and effort in restructuring and ensuring the safety of the credit institution system.  This is especially crucial at this moment because the credit system has just gone through a challenging period of bad debt due to the COVID-19 pandemic and the handling of weak banks.  LOCI 2024 is stricter and more cautious than the previous regulatory regime, which may significantly impact financing transactions, particularly in light of lower credit limits, as well as regulations on handling NPLs and collateral for NPLs.  On the other hand, bank restructuring and consolidation will likely increase.

Because LOCI 2024 is a backbone law in the Vietnamese legal system, its introduction will necessitate future amendments to implementing regulations of the SBV, involving an enormous volume.  We will continue to provide in-depth analysis on the key new issues of LOCI 2024 and the guiding regulations of the SBV.

If you have any questions regarding this update or LOCI 2024, please contact our lawyers below:

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