New credit institution law to bring stability, transparency to banking system: brokers 

The newly-approved amended Law on Credit Institutions is a significant step that governs the stable and transparent management and operation of the banking system, said securities brokers.

The National Assembly, Vietnam’s highest legislative body, passed the amended Law on Credit Institutions last hursday with 91.28% of votes in favor.

The law, with 15 chapters and 210 articles, was okayed at the closing session of parliament's fifth extraordinary meeting. The law, taking effect from July 1 this year, is expected to have direct positive impacts on the macroeconomy as well as monetary and fiscal policies.

It aims to limit cross-ownership, manipulation, and control of credit institutions; and prevent and strictly handle violations of credit institution employees in providing insurance consultations. It also covers issues related to handling of bad debts and collateral in the form of real estate projects, and the State Bank of Vietnam's timely intervention in credit institutions to minimize systemic risks.

Tightening cross-ownership

To increase transparency in the ownership structure and reduce cross-ownership, the new Law on Credit Institutions adds regulations on subsidiaries of credit institutions’ member companies and direct and indirect relationships with relatives such as stepfather, stepmother, stepchild, daughter-in-law, son-in-law and grandparents.

The amended law also requires credit institutions to publicly disclose information about stakeholders with at least a 1% stake, instead of 5% as in the old version.

In order to reduce cross-ownership, credit institutions are no longer allowed to contribute capital or buy shares in businesses or other credit institutions which are related to their major shareholders or capital contributors.

An institutional shareholder is not permitted to hold more than 10% of a credit institution's charter capital (previously 15%), while individual shareholders and related persons must not own more than 20% of a credit institution's charter capital (previously 20%) to reduce dominant ownership.

However, the law features a transitional regulation that shareholders and related persons with a stake exceeding the permitted ownership ratio may continue to maintain their stake but not increase it until they comply with the regulations. There are exception clauses for state ownership in equitized credit institutions and ownership by foreign investors.

With the above regulations, Maybank Securities Vietnam (MSVN) said the new Law on Credit Institutions aims to strengthen the management of banking industry operations, specifically related to ownership of and lending to related parties. Expanding those persons considered “related” will minimize “backyard” lending.

Credit institutions are not allowed to provide credit exceeding 10% of their equity to a customer (down from 15%) and 15% to a customer and related persons (down from 25%), thus reducing risks for the banking system.

However, there is a roadmap for ratio reduction. From the effective date of the law on July 1, 2024 to January 1, 2026, the ratio will decrease to 14% of equity regarding lending to a customer and 23% to a customer and his/her related persons. It will be 13% and 21% respectively from January 1, 2027; 12% and 19% from January 1, 2028. From January 1, 2029, it will be brought to the prescribed level.

MSVN assesses that the above regulations will affect the lending plans of some banks and create challenges for businesses in securing large capital sources. Banks or borrowers may have to use more forms of syndicated loans.

Unleashing bad debt settlement

The amended Law on Credit Institutions provides a separate chapter on handling bad debts and collateral. Credit institutions are allowed to transfer part or all collateral in the form of real estate projects to recover debt. The time for handling real estate collateral has been extended from three to five years.

Another broker MBBank Securities (MBS) said banks will have more options to handle large projects with a small portion facing legal problems, thereby helping unleash the cash flow for real estate developers and bringing banks’ bad debts down, especially listed banks with high real estate loan rates such as Techcombank, MBBank, VPBank, SHB and HDBank.

Regarding bancassurance activities, the new law prohibits credit institutions from selling insurance when providing banking services such as loan contracts. With this tightening, according to Yuanta Vietnam Securities, banks' bancassurance activities will be affected and need a long time to recover. When people are aware of the importance of insurance, it will be easier for banks to distribute insurance products.

MBS also noted that the growth rate of income from bancassurance will slow compared to the 2019-2021 period. The group of joint stock commercial banks with a high proportion of bancassurance income such as VIB and ACB will be most affected.

Finally, there will be early intervention by the State Bank of Vietnam in credit institutions when accumulated losses are greater than 15% of charter capital, allocated capital and reserve funds do not meet minimum safety ratio requirements, ratings are lower than the average, regulations on solvency ratios are breached for 30 consecutive days, rules on minimum capital adequacy ratios are violated for six consecutive months, and there are mass deposit withdrawals.

These regulations will make the banking system safer and will not have much impact on banks listed on the stock exchanges, according to MBS.

MSVN noted that financial investors should pay more attention to regulations that affect banks' capital requirements and risk calculations.

Meanwhile, MBS argued that issues related to insurance or handling of real estate collateral will only affect banks in the short term. In the long term, the amended law will make a significant contribution to the stable and transparent management and operation of the banking system, bringing it closer to international regulations.