Law on Credit Institutions

With 210 articles, the 2024 Law on Credit Institutions (the Law) aims to improve regulations on organization and operation of credit institutions, help overcome shortcomings of the 2010 Law on Credit Institutions (the 2010 Law), promote the application of science and technology in the banking sector and develop modern banking products and services. The Law also seeks to intensify self-inspection, internal control and accountability of credit institutions, and increase publicity and transparency in banking activities. At the same time, the Law is expected to complete a legal framework for dealing with credit institutions facing liquidity risks and poorly-performing credit institutions, on the basis of inclusion of a number of the National Assembly-resolved regulations on handling of non-performing loans of credit institutions and foreign bank branches.

Effective on July 1, the Law regulates the establishment, organization, operation, early intervention, special control, reorganization, dissolution and bankruptcy of credit institutions; the establishment, organization, operation, early intervention, dissolution and termination of operation of foreign bank branches; and the establishment and operation of Vietnam-based representative offices of foreign credit institutions and other foreign institutions engaged in banking activities. It also governs the handling of non-performing loans and collateral of credit institutions, foreign banks branches, and state-owned organizations with debt trading and handling functions. 

Superseding the 2010 Law (with amendments made in 2017), the Law is added with four chapters concerning the Policy Bank; application of early intervention to credit institutions and foreign bank branches; handling of credit institutions undergoing mass withdrawal and special borrowing and lending; and handling of non-performing loans and collateral. It also has remarkable changes relating to shareholding rate and credit extension limit.

Early intervention

The Law places significant emphasis on early intervention measures, devoting a separate chapter, Chapter IX, to this issue.

As stated in Article 156.1, the State Bank will consider applying early intervention when a credit institution or foreign bank branch falls into one or more of the following circumstances:

- It has a cumulative loss higher than 15 percent of the value of its charter capital or allocated capital and reserve funds stated in the audited latest financial statement or stated in the inspection/audit conclusions of a competent state agency, and fails to maintain the law-specified capital adequacy ratio;

- It is ranked below the average level under the State Bank Governor’s regulations;

- It fails to maintain the law-specified solvency ratio for 30 consecutive days or the law-specified capital adequacy ratio for six consecutive months; and,

- It suffers a mass withdrawal as reported to the State Bank.

Credit institutions and foreign bank branches subject to application of early intervention have to implement one or several of the requirements and measures specified in Article 157 of the Law within a time limit requested by the State Bank.

The Law also defines cases of termination of application of early intervention.

The provisions on early intervention not only help credit institutions and foreign bank branches mitigate risks but also create a legal framework for the State Bank to intervene and forestall further impacts on the banking system and the stability of the economy.

Shareholding rates

The Law provides a decrease of shareholding rates for institutional shareholders and for shareholders and their related persons to minimize risks affecting the governance, administration and credit extension activities of credit institutions. In addition, such reduction of shareholding rates also aims to increase the number of shareholders and diversify the structure of shareholders of credit institutions.

Specifically, the maximum shareholding rate for an individual shareholder is 5 percent of the charter capital of a credit institution. Meanwhile, the shareholding rate for an institutional shareholder is adjusted from 15 percent of the charter capital of a credit institution as provided in the 2010 Law to 10 percent, and that of a shareholder and its related persons is decreased from 20 percent under the 2010 Law to 15 percent.

The Law also clarifies that the shareholding rates for individual shareholders and institutional shareholders include indirectly held shares, which mean shares held through investment entrustment or through enterprises in which such shareholders own more than 50 percent of the charter capital. 

Regarding shareholding rates for foreign investors, the Law inherits the provisions of the 2010 Law to ensure compliance with international commitments and treaties in each period. As assigned in Article 63.7, the Government is held responsible for setting the total maximum shareholding rate for foreign investors, the maximum shareholding rate for an institutional foreign investor, and the maximum shareholding rate for a foreign investor and its related persons in a Vietnamese credit institution. The cabinet is also assigned to lay down conditions and procedures for foreign investors to purchase shares of Vietnamese credit institutions and conditions for Vietnamese credit institutions to sell shares to foreign investors.

Lower limits of credit extension

The Law sets a reduction of the total balance of credit extended to a single customer or to a single customer and its related persons.

Accordingly, for a commercial bank, cooperative bank, foreign bank branch, people’s credit fund or microfinance institution, from January 1, 2029, the total balance of credit extended to a single customer or to a single customer and its related persons must not exceed 10 percent (instead of 15 percent under the 2010 Law) or 15 percent (instead of 25 percent under the 2010 Law), respectively, of equity of such bank, branch, fund or institution, as set out in Article 136 of the Law.

This ratio, set for other periods, must not be higher than:

- Fourteen percent for a single customer; or 23 percent for a single customer and its related persons, for the period from July 1, 2024, to before January 1, 2026;

- Thirteen percent for a single customer; or 21 percent for a single customer and its related persons, for the period from January 1, 2026, to before January 1, 2027;

- Twelve percent for a single customer; or 19 percent for a single customer and its related persons, for the period from January 1, 2027, to before January 1, 2028; or,

- Eleven percent for a single customer; or 17 percent for a single customer and its related persons, for the period from January 1, 2028, to before January 1, 2029.

Meanwhile, the total balance of credit extended to a single customer or to a single customer and its related persons must not exceed 15 percent (reduced from 25 percent under the 2010 Law) or 25 percent (reduced from 50 percent under the 2010 Law), respectively, of equity of a non-bank credit institution.

Limits of and conditions for the extension of credit for investment and trading in stocks and corporate bonds of credit institutions and foreign bank branches must comply with the regulations of the State Bank Governor.-

By VLLF