Credit risks can be erased with fresh law

The new law will take effect on July, except for certain transitional treatment and the delayed enforcement of provisions on transfer of real estate as a security enforcement. There are several important impacts of the new law on credit institutions and foreign bank branches operating in Vietnam.

The new law catalyses a more inclusive financial system, introducing amendments to broaden credit access.

Notable changes include the relaxation of requirements for small loans, allowing factoring services without recourse, and permitting commercial banks to act as security agents for international financial institutions. These amendments diversify credit institutions’ activities, enhancing accessibility to capital and financial services for individuals and businesses.

In a move towards rigorous oversight, the law imposes tighter constraints on ownership: capping individual shareholder stakes at 5 per cent, single institutional shareholder ownership at 10 per cent, and groups of related shareholder ownership at 15 per cent of charter capital - a decrease from previous thresholds.

The list of shareholders owning more than 1 per cent of the charter capital of a credit institution shall be publicly disclosed. Simultaneously, the law broadens and clarifies regulations concerning related persons, emphasising a more encompassing approach compared to existing norms.

Lending ceilings for single borrowers are set to tighten progressively. The current caps of 15 per cent for individuals and 25 per cent for related groups of a credit institution’s equity are scheduled to decrease to 10 per cent and 15 per cent respectively by early 2029, while for non-bank institutions, these figures will change from 25 per cent and 50 per cent to 15 per cent and 25 per cent of the equity capital.

This strategic adjustment is aimed at mitigating credit concentration risks for credit institutions.

Embracing the digital age, the new law also lays the groundwork for online lending, electronic transactions, and a regulatory sandbox for the burgeoning fintech sector and banking sector. Nonetheless, how these schemes will be implemented will be subject to further sub-law regulatory guidance.

The new law establishes a meticulous protocol for managing bad debts and prioritises payments in the event of collateral liquidation. It mandates that proceeds from the sale of secured assets adhere to a specific sequence, commencing with the preservation costs of the assets.

Subsequent costs incurred from seizing and managing these assets follow, along with court fees pertaining to secured asset rulings. Additionally, applicable taxes and fees directly associated with the transfer, such as personal income tax and registration fees, are to be settled. This is followed by the satisfaction of the actual secured debt obligations, and lastly, any other unsecured obligations are addressed as dictated by legal provisions.

Bancassurance practices receive a cautionary treatment in the new law. Specifically, credit institutions, foreign bank branches, and their staff are restricted from associating insurance products (other than mandatory insurance) with banking services in any form.

This relates to the market concern of insurance agents compelling customers to purchase insurance products as conditions for granting loans, though the language appears more ambiguous than the prior State Bank of Vietnam’s guidance and should be monitored

Streamlining administrative processes, the new law allows for a consolidated operational licence, eliminating the need for a separate enterprise registration certificate. Credit institutions will now receive a singular licence, functioning as both their operational licence and enterprise registration.

Note that certain operational changes still require notification to the business registration office under the Department of Planning and Investment, subject to further sub-law regulatory guidance.

In sum, the new law ushers in a transformative framework for credit institutions in Vietnam, encompassing a broad spectrum of financial operations and fostering a secure, transparent, and forward-looking banking environment.

Prime Minister Pham Minh Chinh on March 14 chaired a conference launching this year’s monetary policy-related tasks to tackle production and business obstacles, facilitate growth, and maintain macro-economic stability.

Prime Minister Phạm Minh Chính chairs the meeting to implement monetary policy management tasks in 2024, which focuses on removing difficulties for production and business to promote growth and ensure macroeconomic stability.