Introduction:

On 18 January 2024, the National Assembly passed the Law on Credit Institutions 2024. The Law on Credit Institutions 2024 introduces significant changes compared to the Law on Credit Institutions 2010, which is expected to enhance the safety, soundness, and sustainable development of credit institutions in the foreseeable future and address the shortcomings encountered in the last decade.

In practice, there are cases where a shareholder group cross-owns a majority of shares and controls the operations of credit institutions. The amendments under the Law on Credit Institutions 2024, as analyzed below, reflect the government's efforts to address the sophisticated and almost invisible techniques of cross-ownership, control, and manipulation of banks.

1. Facilitating Foreign Loans with Simplified Collateral Management

Commercial banks are now empowered to act as  security asset management agents for international financial institutions, foreign credit institutions, and foreign bank branches. This regulatory change marks a significant reform to bolster Vietnamese businesses securing loans from these entities.

Currently, businesses face restrictions under land law, limiting their ability to mortgage land use rights and assets on land to international financial institutions, foreign credit institutions, and foreign bank branches. Such collateral was reserved for credit institutions established in Vietnam. Real estate, being a primary asset for collateral, prompted complex lending methods involving guarantees through Standby Letters of Credit from licensed Vietnamese credit institutions, along with intricate structures featuring numerous mortgage transactions.

With the new regulation, international financial institutions, foreign credit institutions, and foreign bank branches can now directly extend loans to Vietnamese businesses. These entities can leverage collateral management services from Vietnamese commercial banks to manage borrower security assets, including real estate. This simplifies loan structures, minimizing borrowing costs. While awaiting the official implementation of the law, guidelines from the State Bank may be necessary to define the types of assets, including real estate, that commercial banks can provide for this service, as well as outlining the rights and obligations of all parties involved, especially concerning real estate collateral in agency agreements.

2. Some regulations aim to enhance borrowers' access to credit through credit institutions. 

Firstly, fundamental changes include exempting small loans (such as credit cards and daily-use loans) from requiring customers to provide a feasible capital use plan.

With respect to factoring services, factoring services without recourse is now permitted, expanding beyond the previous "with recourse" limitation.

Financial leasing companies are now allowed to offer consulting services, extending beyond their previous role of consulting for customers who are financial lessees.

3. Regulatory Approval for Fintech Solutions via Sandbox Scheme

The Law on Credit Institutions 2024 officially endorses a Sandbox Scheme, creating a controlled testing environment within the banking sector. This mechanism enables testing technology applications and introducing new products, services, and business models in the banking sector, subject to limitations in scope, space, and execution time.

Organizations participating in this controlled testing must fulfil specific conditions and criteria for approval and remain under the supervision of competent state agencies. Fintech solutions, including credit granting on technology platforms, credit scoring, data sharing through application programming interfaces (API), peer-to-peer lending (P2P Lending), blockchain technology, distributed ledger technology (DLT), and other technological applications in banking operations, may obtain official licenses from the State Bank of Vietnam if they meet all conditions after the sandbox period.

4. Reduction of shareholder ownership limits

Firstly, the amendment in Article 63 of the Law on Credit Institutions 2024 reduces shareholder ownership limits, aiming to curb cross-ownership and prevent bank manipulation. Specifically, it caps ownership in a credit institution of an individual shareholder at 5% (unchanged), of an organization shareholder at 10% (previously 15%), and of a shareholder and its affiliated persons collectively capped at 15% (previously 20%). Each major shareholder (defined as a joint stock company directly or indirectly owning from 5% of the voting share capital of that institution) and its affiliated persons collectively are restricted from holding over 5% in another institution.

5. Information disclosure by shareholders owning 1% of a credit institution's charter capital

Another noticeable amendment in Article 49 of the Law on Credit Institutions 2024 is that besides maintaining regulatory requirements for key personnel to provide information, it also requires each shareholder owning 1% or more of a credit institution's charter capital to provide its identification information or registration information, its related parties, and relevant percentages of shares. Credit institutions must publicly disclose this information about shareholders owning 1% or more of the charter capital on their websites and submit a written report to the State Bank of Vietnam. This new regulation will increase the reporting burden for credit institutions, particularly public companies, due to the frequent changes in the ownership ratio of shareholders in publicly traded companies. With implementing the Law on Credit Institutions, some public companies may make these reports daily.

6. Lowering credit extension limits

The third adjustment pertains to the schedule-based lowering of credit extension limits under Article 136. The total outstanding credit limit of a commercial bank, foreign bank branch, people's credit fund, or microfinance institution is reduced from 15% for a single client and 25% for a single client and affiliated persons under the Law on Credit Institutions 2010 to 14% and 23%, respectively, as of the effective date of the Law on Credit Institutions 2024, and is reduced yearly by schedule to 10% and 15%, respectively, by 2029. For non-bank credit institutions, this ratio will decrease from 25% and 50% of equity capital to 15% and 25%.

This adjustment is considered one of the restrictive regulations. The narrowing of credit limits is expected to lead credit institutions, primarily commercial banks and foreign bank branches, to adopt the syndicated credit method more widely. However, it's worth noting that the syndication loan method typically incurs higher costs than a single loan. The structure involving multiple lenders increases negotiation time between lenders and between lenders and borrowers, making transactions more complex, as indicated in the credit documents.  

7. Consumer Loan Approvals Under New Regulations

Unlike the 2010 Law on Credit Institutions, which lacked specific guidelines for small-value loans, the Law on Credit Institutions 2024 (Article 102) provides clear directives. Credit institutions are now required to gather information on the legal purpose of capital usage and customers' financial capacity before approving credit. This regulation applies to various small-value loans, including those for daily needs, credit card offerings from commercial banks and foreign bank branches, financial leases, consumer loans, credit offerings from non-bank credit institutions, loans supporting daily needs from people's credit funds, and loans from microfinance institutions.

This regulation is set to enhance consumer credit management by requiring an explicit declaration of loan purposes. Being diverse and often used for various needs like purchasing appliances or covering educational expenses, consumer loans may involve multiple purposes in a single disbursement, requiring swift processing. In reality, to streamline this, credit institutions should provide easy-to-use options, such as online disbursement via a mobile app, where borrowers can conveniently select predefined loan purposes before submission.

8. Forbid the sale of optional insurance with loans

The Law on Credit Institutions 2024, under Article 15, explicitly forbids credit institutions, foreign bank branches, as well as their managers and employees, from selling insurance products that are not mandatory for the associated banking services. This prohibition applies to all types of banking products and services. This regulation heightened regulation aims to bring more stringent control over insurance sales activities, potentially leading to a slowdown in the growth rate of banks' income from bancassurance compared to previous periods.

9. Transfer of real estate projects used as collateral to recover debts

The Law on Credit Institutions 2024 supplements the regulations on the transfer of collateral assets in Article 200.3. Accordingly, credit institutions, foreign bank branches, debt management and asset exploitation companies of credit institutions, and asset management companies of Vietnamese credit institutions have the right to fully or partially transfer “real estate development projects” used as collateral to recover debts. At the same time, provisions on conditions for real estate business entities do not apply to such transfers, which is favorable for debt recovery.

Previously, Article 132 of the Law on Credit Institutions 2010 confined the realization of collateral to selling, transferring or purchasing "real estate" with a time limit of three years. This makes it difficult to handle debts as “real estate project transfer" in cases of lack of project investor cooperation because, in a real estate project, in addition to the real estate itself, there are many rights of the developer related to the project that are difficult to separate from the real estate and other rights of the investor, especially for real estate projects that are still under construction and development.

As of September 2023, the real estate non-performing loans ratio was increasing and reached 2.89%.[1] Therefore, allowing the transfer of real estate projects used as collateral to recover debts is considered one of the solutions for handling non-performing loans in the banking sector and is also a channel to mobilize capital for the sluggish real estate sector post-Covid 19, attracting new investors with unfinished projects.

Conclusion:

To conclude, the Law on Credit Institutions 2024 have introduced tighter regulations on certain activities while creating new opportunities for various financial activities. The introduction of the sandbox scheme for Fintech Solutions, in particular, is expected to usher in a new era for digital finance. Additionally, it opens up avenues for commercial banks to offer asset management services to international financial institutions, foreign credit institutions, credit institutions, and foreign bank branches, paving the way for accessing loans from foreign capital sources.

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[1] Tuan Thuy, “Real estate credit increased sharply but is it safe?”, Online Financial Magazine, 27 November 2023

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Disclaimer: ThisLegal Update is intended to provide updates on the Laws for informationpurposes only, and should not be used or interpreted as our advice for businesspurposes. LNT & Partners shall not be liable for any use or application ofthe information for any business purpose. For further clarification or advicefrom the Legal Update, please consult our lawyers: Ms Minh Vu at minh.vu@lntpartners.com