On January 18, the National Assembly officially passed the revised Law on Credit Institutions 2024, which will take effect on July 1, 2024, except for certain provisions that will take effect on January 1, 2025. Accordingly, some notable new points have attracted public attention in recent times, specifically:
1. Expanding the definition of stakeholders need to disclose information
Article 4, Clause 24 of the 2024 Law on Credit Institutions has expanded the scope of related parties to include: subsidiaries of credit institutions’ member companies; Family members within three generations of an individual (including grandchildren, aunts/uncles, cousins, and grandparents).
This provision provides greater clarity in identifying related parties, which contributes to transparency in the ownership of shares by shareholders and their related parties. It also helps to limit the manipulation of the activities of credit institutions.
2. Publicly disclose information about stakeholders with at least a 1% stake
Clause 2, Article 49 of the Law on Credit Institutions 2024 has expanded the scope of those who need to provide and publicly disclose information, specifically: Shareholders holding at least 0.1% of the charter capital of a credit institution must provide the credit institution (i) their personal legal information, information about related parties, (ii) the number and percentage of shares held by themselves and their related parties at that credit institution.
This new regulation helps to maximize the transparency of information related to the ownership of shares of credit institutions in the economy.
3. Lowering the limit on credit extension
The issue of cross-ownership and control in credit institutions has been prominent recently. To mitigate this situation, the 2024 Credit Institutions Law has introduced new regulations under Article 63, aiming to establish better barriers regarding cross-ownership.
Specifically, individual shareholders are not allowed to own more than 5% of the charter capital of a credit institution. The maximum ownership limit for institutional shareholders has been reduced from 15% to 10%. Additionally, the maximum ownership limit for shareholders and related parties has been decreased from 20% to 15%, including indirect ownership. This change does not apply retroactively, meaning that shareholders exceeding the limits can maintain their current ownership rights but are restricted from further increases.
These new regulations enhance the popularity of credit institutions, increasing information transparency, and public supervision. Simultaneously, this separates the management activities from operational activities and aligns well with the principles of transparency in governance recommended by international financial institutions. Additionally, this regulation effectively addresses the issue of cross-ownership and reduces the risks that could impact the operations of credit institutions.
However, whether these attempts to lower ownership percentages genuinely solve the concerns of cross-ownership, manipulation, and control of credit institutions as seen recently depends on effective inspection and enforcement monitoring by competent authorities.
4. Lowering the ratio for credit limit
Regarding credit limits, Article 136 of the 2024 Credit Institutions Law stipulates that banks may lend up to a maximum of 10% of the total equity of the bank to an individual customer (reduced from the previous 15%) and 15% of the total equity of the bank to a group of customers and related persons (reduced from the previous 25%). Loans that exceed these restrictions require approval from the Prime Minister.
However, this reduction will also follow a schedule. Specifically, from the effective date of the law until January 1, 2026, it will decrease to 14% of equity for an individual customer and 23% of equity for a group of customers and related individuals. By January 1, 2027, the limits will further decrease to 13% and 21%; by January 1, 2028, they will be reduced to 12% and 19%. By January 1, 2029, compliance with these regulations is mandatory.
Reducing the credit limit for an individual customer and related persons aims to diversify the credit portfolio, minimizing risks from the customer side and overdue risks for the bank.
However, banks that currently have lending ratios exceeding the new regulations will face pressure to restructure loans for these customer portfolios. At the same time, the creditworthiness of these customer groups may decline as they seek alternative sources of funding to repay existing loans to meet the new regulatory ratios.
With the gradual reduction in the lending ratios, it is observed that large-scale banks are less affected due to their trend of increasing the proportion of retail lending and capital over the past few years. On the other hand, smaller and medium-sized banks, or those with a high proportion of corporate lending, are expected to be more adversely affected. Consequently, this regulation will impact the lending plans of certain banks and pose challenges for businesses in ensuring access to significant capital.
5. Enhancing the settlement of non-performing loans using collateral asset management
One of the highly anticipated changes in the Law on Credit Institutions is the right to transfer collateral assets for the resolution of non-performing loans.
Specifically, in Clause 3, Article 200 (effective from 01/01/2025), new regulations state that credit institutions, foreign bank branches, debt management companies, and asset management companies of credit institutions have the right to transfer the entire or a portion of real estate projects, serving as collateral assets for debt recovery.
This new provision provides banks with additional options for dealing with large projects, especially those entangled in legal issues, helping unlock cash flow for real estate businesses and reducing non-performing loans for banks, especially beneficial for banks with a high real estate lending ratio.
However, the new Credit Institutions Law has omitted provisions regarding the "right to retain collateral," raising concerns about potential delays in the asset recovery process if the collateral provider does not cooperate. It is essential to establish clearer regulations by regulatory authorities on the "right to retain collateral" to better support credit institutions in efficiently addressing non-performing loans.
6. Early intervention when credit institutions exhibit signs of vulnerability
One noteworthy provision in the Law on Credit Institutions 2024 is the addition of an entire chapter consisting of 6 articles (from Article 156 to 161) that regulates early intervention measures for plagued credit institutions.
Accordingly, the State Bank of Vietnam will review and decide to implement early intervention when credit institutions, or foreign bank branches, meet certain conditions as specified in Article 156, specifically: i) Accumulated losses exceeding 15% of the charter capital; ii) Ratings below the prescribed average level; iii) Violation of the repayment capacity ratio or capital adequacy ratio; iv) Experiencing a series of withdrawals. Consequently, credit institutions are required to promptly update and implement corrective plans as stipulated in Article 143 or develop corrective plans as outlined in Article 158.
One of the new provisions in the 2024 Law on Credit Institutions is the addition of measures to restrict credit growth for credit institutions and foreign bank branches that are subject to early intervention. The incorporation of these measures aims to control risks and the scale of credit institutions, preventing financially weak institutions from continuing to grow and expand their operations, as seen in the past. Detecting such issues earlier facilitates more effective handling, avoiding difficulties and requiring fewer resources.
The regulation for early intervention with weak credit institutions is not having a significant impact on currently listed banks. However, it will assist regulatory authorities and the public in promptly identifying major risks through the financial reports published by these credit institutions.
7. Prohibiting the sale of non-compulsory insurance products as an integral part of the products or services offered by credit institutions.
Regarding the insurance agency activities of credit institutions (stipulated in Article 5, Article 113), the law regulates that credit institutions, foreign bank branches, managers, executives, and employees of credit institutions, foreign bank branches are prohibited from linking the sale of non-compulsory insurance products with the provision of banking products and services in any form. Additionally, the State Bank Governor is tasked with defining the scope of insurance agency activities of credit institutions to align with the nature and operations of the banking sector.
The new regulations aim to limit the violations committed by employees of credit institutions, such as inadequate advice leading to customer confusion between insurance and banking products or the requirement to purchase mandatory insurance tied to bank loans when seeking financing.
With these new provisions, the management of the bank's insurance agency activities will be more tightly regulated, slowing down the growth rate of income derived from these operations compared to previous periods.
Conclusion
The Law on Credit Institutions 2024 aims to strengthen the management of the banking industry, particularly ownership rights and lending to related parties. The expansion of the scope considered as related parties, along with the reduction of lending limits to related parties, is targeted at restricting shadow banking activities.
In general, the changes introduced by the Law on Credit Institutions 2024 will promote sustainable growth in the short and long term for the banking industry. This holds significant importance in managing and operating a stable, transparent banking system that aligns with international standards.
In the financial investment sector, we are particularly concerned with regulations affecting capital requirements and the calculation of bank risks, as these factors have a significant and direct impact on the Return on Equity (ROE) ratio. With the new law, it appears that there are no regulatory changes that would significantly alter the ROE structure, suggesting that the focus is primarily on enhancing the overall management of the banking industry.
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