Vietnam’s new banking law tightens rules on cross-ownership, credit limits

Vietnam’s recently-passed amended Law on Credit Institutions will make cross-ownership more difficult and prevent bank manipulation, a move welcomed by local experts.

Stricter regulations

The amended Law on Credit Institutions will be enacted on July 1, 2024, except for some provisions where it will take effect from January 1, 2025.

Some experts share the view that the amended law has added quite detailed regulations on ownership limits, credit limits, and information disclosure with the aim of minimizing cross-ownership and bank manipulation.

The new rules are also expected to help credit institutions operate in a more market-oriented, open, transparent and proactive manner in mobilizing and using capital.

Here are some key changes in the amended law to limit cross-ownership and manipulation of banking activities:

1. Expanding the definition of “related persons”

“Related persons” are stipulated in Clause 24, Article 4. They include corporate entities and individuals. Subsection g of this clause is added, stipulating “other legal entities and individuals with potentially risky relationships for the operations of credit institutions and foreign bank branches are determined according to the internal regulations of the credit institution or foreign bank branch or at the written request of the State Bank of Vietnam through inspection and supervision activities.”

2. Shareholders with 1% or more must publicly disclose information

Clauses 2, 5, 6 are added to Article 49 on provision and public information disclosure of shareholders who own 1% or more of the charter capital of a credit institution.

As such, credit institutions must publicly disclose information on the full names of individuals, names of organizations that are shareholders with 1% or more of the credit institution's charter capital and information on the credit institution's website within seven working days from the date the credit institution receives the information provided.

3. Reducing ownership limits

Article 63 stipulates that an institutional shareholder is not allowed to own more than 10% of the charter capital of a credit institution; and a shareholder and related persons of that shareholder must not own more than 15% of the charter capital of a credit institution. Both ratios are cut from respective 10% and 15% of the existing law.

In addition, a major shareholder of a credit institution and related persons of that shareholder are not allowed to own more than 5% of the charter capital of another credit institution.

4. Adding subjects not eligible for loans

Clause 1, Article 134 is modified, stipulating cases in which credit is not granted to: wives, husbands, fathers, mothers, children, brothers, sisters of members of the board of directors, members of the board of members, members of the supervisory board, general director (director), deputy general director (deputy director) and equivalent titles as prescribed in the charter of that credit institution; general director (director), deputy general director (deputy director) of that foreign bank branch.

5. Reducing credit limits following roadmap

Article 136 on credit limit stipulates that total outstanding loans for a customer, a customer and related persons of that customer of a commercial bank or cooperative bank, foreign bank branches, people's credit funds, and microfinance institutions must not exceed: 14-23% from the effective date of the amended law until 2026; 13-21% from 2026; 12-19% from 2027; 11-17% from 2028; 10-15% from 2029.

Total outstanding loans for a customer must not exceed 15% of the non-bank credit institution's equity; total outstanding loans for a customer and related persons of that customer must not exceed 25% of the non-bank credit institution's equity.

Consequently, as the amended Law on Credit Institutions, there will be disruptions in credit granting activities and the organizational structure of most banks. Some large institutional shareholders at the bank will be forced to divest and reduce their ownership ratio if their holdings exceed 10%.

Credit limits will also force banks to diversify their customer base, and customers will also have to diversify their creditors.

Changes for the better

Most experts consulted by The Investor share the view that amendments to the new Law on Credit Institutions are necessary, helping the banking sector become more transparent and sustainable.

Lawyer Truong Thanh Duc, director of ANVI Law Firm, assessed that the new regulations in the amended Law on Credit Institutions are tighter and more stringent than current regulations, but customers will see positive impacts.

The amended law adds that shareholders owning 1% or more of the charter capital of a credit institution must provide information, and at the same time, credit institutions must publicly and transparently disclose information of shareholders, which will facilitate the State Bank of Vietnam’s management.

“Even in the worst case scenario where many shareholders joining hands to own shares of less than 1% each, even if there are 10 people who are linked together, the ownership ratio should not be too high,” Duc analyzed.

Of the same side, Nguyen Tri Hieu, a banking and finance expert, said that amendments to the law based on the principle of reducing the ownership ratio will reduce the power of shareholders in an organization, and also reduce the risk of a group of shareholders manipulating a bank.

For example, the ownership limit ratio is 15% now, thus it requires four large shareholders to be affiliated to be able to manipulate banking operations. When this ratio drops to 10%, six large shareholders are needed to gain the same power.

However, given major crimes occurring in the banking industry recently, Hieu raised the question of implementing the law in real life to achieve the goals of reducing cross-ownership and manipulation of banking activities.

He suggested that punishments be specified to handle violations of dishonest declaration and excess bank ownership ratio, including withdrawal of the bank's license after many warnings.

Regarding the new regulations on information disclosure, Hieu said that this regulation can help clarify banking ownership and operations. This is necessary to achieve transparency and create confidence in the banking industry. Along with expanding related persons, regulations on information disclosure for shareholders owning 1% or more of a bank’s charter capital will help investors have a better vision of the organizational structure of a bank.

Regarding lowering credit limits, some securities companies said that the regulations will help diversify credit portfolios, minimize ethics risks from customers and bad debt risks for banks. With the roadmap to gradually reduce the ratio each year, large banks are almost unaffected thanks to the trend of increasing the proportion of small loans and increasing capital over many years.

However, banks with a low and medium capital base or a high proportion of corporate loans will be impacted to a certain extent when the amended Law on Credit Institutions takes effect.