The full text of the new Credit Institution Law No. 32/2024/QH15 (the "New Law") adopted by the National Assembly on 18 January 2024 has now been released. The New Law governs Vietnamese credit institutions and foreign bank branches (collectively "credit institutions") and will take effect from 1 July 2024. The New Law introduces significant changes expected to materially affect the governance and operation of credit institutions.
It aims to enhance the autonomy and responsibility of credit institutions, strengthen the resilience of the banking system, and improve the supervision, inspection and monitoring of Vietnam's banking sector.
Consequently, we have identified five key changes under the New Law which will affect foreign investment across product lines and sectors - namely onshore and offshore lending, M&A, bancassurance, and restructuring and workouts.
1. Limiting Consolidated Ownership
It is no secret that some credit institutions are dominated by large Vietnamese corporate groups, despite such shareholders technically complying with ownership thresholds set out under the law. Moreover, cross-ownership across two or more credit institutions has been one of the key challenges over the years to stability in the banking sector, exemplified in a number of high profile stories in the news.
Cross-ownership and the dominance of certain banks by large corporate groups, such as the highly publicised case of a property developer and its relationship with one of Vietnam's largest privately owned commercial banks, raise concerns about conflicts of interest in the lending and deposit-taking policies of banks, and highlight the need for regulatory scrutiny to ensure the stability and integrity of the financial sector.
Historically, large corporate groups have relied on informal nominee arrangements (i.e. friends, family and neighbours holding shares on behalf of the controlling group) to thwart the intent of regulators. The New Law imposes more stringent requirements to better control ownership in credit institutions in several key areas:
- Expansion of the Definition of "Related Person": The New Law broadens the definition of "Related Person" to capture more individuals and entities that should be considered as such to prevent manipulation of the operations of credit institutions. This change also indirectly tightens several conditions and limits applicable to credit institutions (such as shareholding limits and lending limits).
- Disclosure by Shareholders Holding from 1%: Shareholders holding 1% or more of the charter capital of a credit institution are now required to provide that credit institution several pieces of information on its identity and related persons, and their respective ownership at such credit institution, including upon any changes to the disclosed information. The credit institution must report the provided information to the State Bank of Vietnam (SBV) within seven business days upon receipt, and report to the annual meeting of shareholders, as well as publish it on the credit institution website.
- Reduction of Shareholding Limits: Shareholding (including indirect ownership) limits in a credit institution being a joint stock company are reduced from 15% to 10% for an institutional shareholder, and from 20% to 15% for a shareholder and its related persons, whereas the limit on individual shareholder remains as 5%. Note that this relates to domestic shareholding and does not affect foreign shareholding in joint stock bank credit institutions which remains subject to the regulations of Decree 01/2014.
- Reduction of Lending Limits: The New Law sets out a schedule for reducing lending limits of commercial banks and foreign bank branches (collectively "banks") starting from 1 July 2024 with lowered lending limits of 14% of the bank's equity for a single customer and, in aggregate with its related person, 23%. By 1 January 2029, these limits shall have been reduced to 10% and 15%, respectively. The lending limits of non-banking credit institutions are also reduced to 15% for a single customer and, in aggregate with its related persons, 25%. This measure will place further stress on foreign bank branches and subsidiaries of international banks for whom the single customer limits are quite constraining.
2. Prohibition on Selling Insurance
Bancassurance has been rapidly developing in Vietnam, making great contribution to the total revenue of the insurance market. However, recent years have seen an increasing number of reported cases of bank staff forcing customers to buy insurance in order to receive bank loans. To address this issue, the SBV has issued several official letters to credit institutions providing guidelines on selling insurance and warning about coercing customers to buy. The Ministry of Finance has issued Circular No. 67/2023/TT-BTC imposing certain requirements and restrictions to prevent credit institutions inducing or forcing customers to buy insurance involuntarily. Nevertheless, this issue has not been thoroughly resolved due to lack of a clear basis for prohibition and control.
The New Law has now banned credit institutions from bundling insurance together with banking services, which provides a clear legal basis for the SBV's control of bancassurance, though it is also expected to significantly impact on credit institution's income from bancassurance.
3. Security Agency Service
The New Law now recognises the service of security agent for international financial institutions, offshore credit institutions and onshore credit institutions.
The increase in offshore lending and syndicated lending transactions in recent years has resulted in increased demand for security agency services from credit institutions in Vietnam to hold the secured assets.
Under current law, the concept of security agent is only provided in the context of syndicated lending, where the security agent must be one of the lenders – and generally acts as an agent for all the lenders on the basis of authorisation, rather than as a third party providing security agency services. There are still no specific provisions on the requirements for acting as a security agent under the current law, which may result in operational risks to the credit institutions.
While further guidance from the SBV on this activity would be needed, this change has provided a clear basis for credit institutions to engage in this activity.
4. Bad Debts and Restructuring
Managing bad debts of credit institutions has been governed by resolution No. 42/2017/QH14 dated 21 June 2017 (as amended) of the National Assembly (Resolution 42) which promulgates a pilot mechanism for dealing with bad debts of credit institutions, providing the legal framework and conditions for credit institutions to effectively manage bad debts since 2017 – especially collateral related to real estate projects – and facilitating settlement of bad debts of credit institutions. However, Resolution 42 has expired since 31 December 2023.
The New Law now includes a new chapter for dealing with bad debts – including determination methodology, sale and purchase of bad debts, enforcement of security and payment priority upon enforcement. But certain important provisions which were welcomed as positive developments under Resolution 42, such as the right to seize collateral, may raise concerns for credit institutions as these have not been retained under the New Law.
The New Law also permits transfer of all (or part of) real estate projects subject to security for debt recovery without having to satisfy the conditions for transferring projects applicable to real estate developers under the Law on Real Estate Business, which will take effect from 1 January 2025.
5. Early Intervention
The recent high-profile case involving a property developer and its relationship with one of Vietnam’s largest privately owned commercial banks highlighted the importance of early intervention for struggling banks.
The New Law seeks to address this gap with a whole new chapter for this matter, stipulating additional circumstances in which the SBV may decide to apply early intervention measures to credit institutions before putting them under a regime of "special control" or receivership.
The New Law also details the actions that must and may not be taken by credit institutions when an early intervention is initiated and provides further guidance on remedial and supportive measures, including the preparation and implementation of the remedial plan by the credit institutions being subject to early intervention and the cessation of early intervention. These measures may open the door to increased involvement and opportunities for restructuring professionals and advisors in restructuring distressed banks in Vietnam.
