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With the enactment of the 2024 Law on Credit Institutions, Vietnam aims to establish a robust legal framework that addresses the challenges faced by credit institutions, particularly those experiencing liquidity risks and poor performance. This law comprises 210 articles and seeks to rectify shortcomings of the previous 2010 Law on Credit Institutions while promoting the integration of modern banking practices.
Objectives and Key Provisions
The 2024 Law aims to enhance the organizational and operational regulations of credit institutions, emphasizing the adoption of science and technology in banking services. Its objectives include:
- Strengthening Self-Inspection and Accountability: The law encourages credit institutions to adopt rigorous self-inspection and internal control measures, fostering greater accountability in banking operations.
- Increasing Transparency: It emphasizes the importance of publicity and transparency in banking activities, ensuring that stakeholders are well-informed.
- Dealing with Liquidity Risks: A significant focus of the law is on establishing a framework to address credit institutions facing liquidity challenges, particularly through regulations on non-performing loans.
Effective July 1, 2024, the law provides comprehensive guidelines on the establishment, organization, and operation of credit institutions. It covers crucial areas such as early intervention, special control, reorganization, dissolution, and bankruptcy procedures.
Early Intervention Measures
A notable feature of the 2024 Law is its emphasis on early intervention measures, which are outlined in Chapter IX. This chapter specifies conditions under which the State Bank may apply early intervention, including:
- Cumulative losses exceeding 15% of charter capital.
- Poor performance rankings as defined by the State Bank Governor.
- Inability to maintain solvency ratios for specified periods.
- Incidents of mass withdrawals.
Credit institutions subjected to early intervention must comply with measures defined by the State Bank to mitigate risks and safeguard the banking system’s stability.
Shareholding Rate Adjustments
The law introduces significant changes to shareholding rates to minimize governance risks:
- Individual Shareholders: The maximum shareholding rate is reduced to 5%.
- Institutional Shareholders: The shareholding rate is decreased from 15% to 10%.
- Shareholders and Related Persons: This rate drops from 20% to 15%.
These adjustments aim to diversify the shareholder structure and enhance the governance of credit institutions while ensuring compliance with international commitments regarding foreign investment.
Credit Extension Limits
The 2024 Law also revises the limits on credit extensions to individual customers and their related persons:
Commercial Banks, cooperative banks, foreign bank branches, people’s credit funds, or microfinance institutions: 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.
These measures are intended to enhance financial stability and manage risks associated with excessive credit exposure.
The 2024 Law on Credit Institutions marks a significant advancement in Vietnam’s banking regulatory framework. By addressing liquidity risks, enhancing transparency, and promoting responsible governance, the law is poised to strengthen the banking sector’s resilience and ensure sustainable growth. The emphasis on early intervention, adjusted shareholding rates, and credit extension limits reflect a proactive approach to mitigating financial risks and safeguarding the interests of stakeholders in the evolving banking landscape.
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