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On the morning of February 19, 2024, representatives of the Office of the President of Vietnam announced the full text of the President’s Order on the promulgation of the amended Land Law and the amended Credit Institutions Law, which were passed by the 15th National Assembly at its extraordinary general meeting, the fifth of the year 2024.
Accordingly, the Credit Institutions Law 2024, numbered 32/2024/QH15 (“Credit Institutions Law 2024“), has officially been passed and promulgated nationwide for implementation starting from July 1, 2024. It is expected that the Credit Institutions Law 2024 will be accompanied by 2 Decrees and 4 guiding Circulars to be issued in the future.
The Credit Institutions Law 2024, comprising 15 chapters and 210 articles, has completed provisions aimed at enhancing management requirements, governance, limiting abuse of the rights of major shareholders, governance rights, and operations to manipulate the activities of credit institutions as well as increasing market resilience to significant impacts.
In recent times, the banking system and credit institutions in Vietnam have suffered significant damages from scandals involving the ‘sale of agency’ of corporate bonds or erroneous advice, causing confusion for people between various forms of savings deposits turning into bond investments, notably the restructuring and fraud case related to the Saigon Commercial Joint Stock Bank (SCB).
These incidents have demanded urgent amendments to the Credit Institutions Law to build a financial system with banks and credit institutions as pillars. However, the need for rapid change does not equate to rushed, truncated phases without completing the legal system.
At the sixth session held from November 2023, National Assembly deputies unanimously agreed to postpone the passage of the Credit Institutions Law to the extraordinary general meeting in January 2024 because provisions regarding early intervention, support for credit access with banks under special control, and special control measures are still rudimentary or flawed, lacking the ability to stabilize the market.
Provisions in the Credit Institutions Law 2024 have been revised, supplemented, and reviewed multiple times to ensure the goal of building a healthy banking and credit institution system, ensuring system safety, increasing resilience, and resisting shocks from both internal and external economic factors.
The following article will analyze the new noteworthy provisions of the Credit Institutions Law 2024, including reducing the shareholding ratio of shareholders, tightening regulations on related parties in share ownership, prohibiting the sale of non-mandatory insurance with loans, limiting the credit provision ratio to reduce systemic risk, and adding provisions on methods to cope with mass withdrawals.
Reducing Shareholding Ratio of Shareholders
The ability for shareholders to own high percentages of shares as currently practiced has led to situations of cross-ownership, cross-investment, or monopolization, manipulating credit institutions by facilitating virtual capital transportation and registration, thereby increasing systemic risks when one party faces a crisis, thereby affecting the operation capabilities of banks and credit institutions, which are the backbone of the economy.
To limit the situation where individuals and organizations own large amounts of shares, which may affect the normal operations of credit institutions, Article 63 of the Credit Institutions Law 2024 has reduced the shareholding ratio of shareholders in credit institutions.
Specifically, a shareholder who is an organization is not allowed to own shares exceeding 10% of the charter capital of a credit institution, previously 15% as stipulated in the Credit Institutions Law 2010, numbered 47/2010/QH12 (“Credit Institutions Law 2010“).
Shareholders and related persons of those shareholders are not allowed to own shares exceeding 15% of the charter capital of a credit institution, previously 20%. At the same time, major shareholders of a credit institution and related persons of those shareholders are not allowed to own shares from 5% of the charter capital of another credit institution upwards.
Furthermore, the shareholding ratio for individuals remains unchanged at 5% as previously stipulated, with a proposed reduction to 3% not being approved.
Shareholders, shareholders and related persons who own shares exceeding the permitted shareholding ratio before July 1, 2024, are allowed to maintain their shares but are not allowed to increase them until complying with the regulations on shareholding ratios, except in cases of receiving stock dividends.
The goal of reducing the shareholding ratio in credit institutions is to limit cross-ownership situations as well as the ability to dominate and manipulate banks for group interests, thereby helping credit institutions operate more openly and transparently.
However, reducing this ratio may also have some negative impacts, such as diminishing the rights of existing shareholders, especially strategic shareholders, making it difficult for them to carry out related business and investment activities. Reducing the shareholding ratio also means reducing the influence of shareholders, which may lead to shareholders being unable to unanimously vote on important issues related to the development plan of credit institutions.
Furthermore, reducing the shareholding ratio does not necessarily limit cross-ownership situations or reduce the ability to monopolize and manipulate bank activities. This is because the core issue of manipulating the activities of credit institutions lies in the relationship between individuals and organizations holding shares.
For example, the recent SCB banking scandal demonstrated how an individual, Ms. Truong Thi My Lan, could manipulate bank activities for personal purposes and group interests through undisclosed relationships to hold controlling shares in the bank.
Therefore, more importantly, it is essential to identify the relationship between individuals and organizations holding shares that have the potential to combine to control the operations of credit institutions.
Tightening Regulations on Related Parties in Share Ownership
To limit cross-ownership situations, clarifying the definition of “related parties” in the draft amendment of the Credit Institutions Law has been given special attention.
Compared to the 5 cases listed, explaining the definition of related parties stipulated in Article 4, Clause 28 of the Credit Institutions Law 2010, Clause 24 of the Credit Institutions Law 2024 has amended and supplemented a total of 8 cases of related parties in banking activities, including organizations and individuals with direct or indirect relationships with other organizations and individuals.
The Credit Institutions Law 2024 expands the concept of related parties of companies, credit institutions to subsidiary companies of subsidiary companies, parent companies of parent companies, and related individuals of individuals to all family members within 3 generations, including relatives both internally and externally.
While the shareholding ratio is more of a formal aspect than a substantial impact, clearly defining the concept of “related parties” will help reduce legal exploitation loopholes.
For instance, according to the investigation conclusion, in the SCB fraud case, Ms. Truong My Lan was an individual who legally held 4.98% of the bank’s charter capital on the books. However, through undefined relationships as related parties, she collaborated with 27 individuals and legal entities to control up to 91% of the bank’s shares, completely dominating the bank’s decision-making power.
With strict legal corridors combined with proactive internal bank supervision and oversight from state management agencies, it is expected that the situation of a group of shareholders attempting to cross-own shares, controlling the operations of credit institutions will decrease, and banks and credit institutions can operate more transparently and effectively.
Prohibition of Selling Non-compulsory Insurance Without Loan
One of the notable provisions in the Credit Institutions Law 2024 is the prohibition of banks and credit institutions from selling non-compulsory insurance only in exchange for granting loans or providing credit.
According to statistics from the General Statistics Office of Vietnam, despite 2023 being a challenging year for the Vietnamese economy overall, revenue from life and non-life insurance fees through channels such as individual agents, organizational agents – sold through banks, etc., still reached approximately 227.1 trillion VND, a decrease of 8.33% compared to the same period last year.
The decline is mainly attributed to the scandal in early 2023 related to insurance distribution through the bancassurance channel. According to reports from the Ministry of Finance, some insurance companies were involved in prominent disputes, including BIDV Metlife, Sun Life, MB Ageas, and Prudential. The most prominent case was the collaboration between Manulife Vietnam Limited Liability Company and SCB Bank to convert customers’ savings deposits into life insurance contracts.
These companies cross-sold insurance through the banking channel, through the advice of transaction agents, brokers, but with low quality. According to complaints from many parties, employees did not directly advise customers or did not fully guide the procedures and required documentation, leading to customers not fulfilling their obligations or not completing them correctly, causing financial losses.
Clause 5, Article 15 of the Credit Institutions Law 2024 strictly prohibits the acts of credit institutions, foreign bank branches, managers, executives, and employees of credit institutions, foreign bank branches from linking the sale of non-compulsory insurance products with the provision of banking products and services in any form.
This regulation was issued in the spirit of Circular 67/2023/TT-BTC guiding the Insurance Business Law, which prohibits banks from selling investment-linked insurance before and after 60 days from the disbursement date of the entire loan for customers, along with improving the quality of advice such as insurance agents must record some content during the advisory process.
However, due to the dependency relationship between the borrower as the customer and the lender as the bank, the ability to completely terminate the situation of selling non-compulsory insurance without loan conditions is low. The situation where borrowers are pushed into borrowing despite the accompanying conditions will still occur. However, overall, the public pressure from banks to obligate borrowers to purchase insurance before approving loans will decrease.
This will also lead to a slowdown in income growth from insurance sales by banks, somewhat contributing to the economic slowdown. However, tighter management and regulation of banking and credit institution activities will bring more positive impacts in the medium and long term.
Restricting Credit Issuance Ratios to Mitigate Systemic Risks
In order to reduce the risk of systemic crises, the Credit Institutions Law 2024 has amended regulations regarding the credit issuance ratios for individual customers and customer groups.
Specifically, Article 136, Clause 1 of the Credit Institutions Law 2024 gradually reduces the credit issuance limits for individual customers and customer groups from 15% to 10% for an individual customer and from 25% to 15% for a customer group. For non-bank credit institutions, these ratios decrease from 25% and 50% of own capital to 15% and 25% by 2029.
The reduction in credit issuance ratios will be implemented according to a roadmap, in five stages from July 2024 to the end of 2028. Starting from January 2029, instead of abruptly cutting credit issuance ratios when the Credit Institutions Law 2024 takes effect. On average, each year, the total credit balance for an individual customer, a customer and related parties of that customer held by credit institutions must decrease by 1% of own capital for an individual customer and by 2% of own capital for a customer and related parties.
For non-bank credit institutions, the total credit balance for an individual customer must not exceed 15% of own capital, and for a customer and related parties, it must not exceed 25% of the own capital of the non-bank credit institution.
Restricting and reducing credit issuance ratios for credit institutions helps mitigate the risk of concentrated credit. Recently, there have been many reports from experts and reputable organizations that Vietnam’s credit system is facing the risk of a crisis similar to China’s credit system in the past. The main cause is that banks are approving too many real estate mortgage loans.
If the risk of a real estate bubble bursting or other risks such as the market freezing in 2022 occurs, banks and credit institutions will face significant risks, even the possibility of collapse like the US financial market in 2008.
Reducing credit issuance ratios, although it may pose difficulties for businesses in accessing capital, thereby slowing down the economic development momentum, is necessary to reduce systemic risks and ensure the safety of the entire economy.
Additionally, restricting credit issuance from banks and credit institutions also contributes to balancing the financial market, as individuals and businesses will have to seek other capital mobilization channels such as the stock market and bonds. According to international experience, developed countries all have a balance between different capital mobilization methods instead of relying mainly on the banking sector as in Vietnam.
Helping the market allocate various capital mobilization methods will increase the safety ratio of the market against unpredictable fluctuations domestically and internationally. The ability of banks and credit institutions to cope with crises is one of the important factors to assess the stability and development potential of an economy.
Supplementing Regulations on Mass Withdrawal Incidents
To ensure the sustainability of the economy, the Credit Institutions Law 2024 supplements Chapter XI regarding the handling of emergency situations such as when banks and credit institutions face mass withdrawals and cases of decision-making authority in handling special loans.
In the SCB Bank scandal, Vietnam’s financial system faced a high risk when people collectively decided to withdraw money from the bank. It is noteworthy that not only SCB Bank but also Sacombank faced risks because people confused the names with the stock codes of these two banks.
Currently, the compulsory reserve ratio is implemented by the State Bank of Vietnam according to Document No. 1158/QD-NHNN, ranging from 1% to 8% for other credit institutions, depending on the term of deposits.
This ratio reflects the minimum amount of money that credit institutions must hold at their organizations to deal with unforeseen situations, while the rest is circulated by credit institutions for business purposes such as credit issuance activities, investments in various forms.
Thus, if people collectively withdraw money from the bank, credit institutions with low reserve ratios will face the risk of collapse due to liquidity shortages, forcing the State Bank to intervene to ensure the stability of the financial system.
The Credit Institutions Law 2024 has supplemented methods and procedures for handling mass withdrawal incidents, with emergency measures such as temporarily suspending or restricting credit issuance activities and other activities that use the funds of credit institutions to ensure the rights of depositors as well as the liquidity of Vietnam’s financial system.
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