Limiting the influence of 'Backroom Deals' and curbing cross-ownership: Expectations from amended Cr

The Amended Credit Institutions Law has incorporated various "barricades" aimed at preventing cross-ownership and situations of manipulation that could dominate the operations of credit institutions. However, according to experts, the effectiveness largely depends on the practical enforcement of the law.

Six remarkable highlights of the amended Credit Institutions Law in 2024

Reporter: On January 18, 2024, the National Assembly officially passed Credit Institutions Law (amended). The law will come into effect on July 1, 2024, except for certain provisions that will take effect on January 1, 2025. How do you evaluate the significance of the law's enactment in the current context?

Lawyer Le Cao: The Credit Institutions Law No. 47/2010/QH12 and related guiding documents, implemented for over 13 years with multiple amendments, have contributed to creating a healthy environment for the operations of credit institutions. It serves as the legal foundation to protect the legitimate rights and interests of parties involved in credit activities.

However, as the economy undergoes new developments requiring high adaptability, the Credit Institutions Law must reassess current challenges, such as governance issues in banks, cross-ownership, handling violations by credit institutions, debt resolution, collateral asset management, and the implementation of electronic banking activities (digital banking), etc.

These are practical issues and demands that necessitate the National Assembly to officially pass the Credit Institutions Law (amended), effective from July 1, 2024. With numerous new amendments and supplementations, the law will introduce fresh impacts, contributing to the comprehensive regulation ensuring improved functioning of the credit system and bringing new value to financial and credit activities in the coming period.

Reporter: Could you please highlight the remarkable points of the Credit Institutions Law (amended)?

Lawyer Le Cao: The Credit Institutions Law amended in 2024 introduces several significant changes, and I believe there are six key points that may have a substantial impact on the functioning of the credit system in the upcoming period.

Firstly, the Credit Institutions Law amended in 2024 has reduced the ownership ceiling of shares in banks, limiting control over credit extension. Specifically, according to clauses 1, 2, 3 of Article 63, the maximum ownership ratio for individual shareholders remains at 5%, but organizational shareholders have seen a reduction from 15% to 10% of the charter capital of a credit institution. Shareholders and related persons have also seen a reduction from 20% to 15% of the charter capital of a credit institution.

The Credit Institutions Law amended in 2024 provides more detailed regulations on limiting credit extension in Articles 135 and 136. Specifically, the law stipulates that the total credit extension for subsidiaries and affiliates of credit institutions (excluding cases of mandatory transfer of credit to subsidiaries as credit institutions) must not exceed 10% of the credit institution's equity. However, for all the mentioned entities, the limit is set at 15% of the credit institution's equity (previously 20% under the old law).

The Credit Institutions Law amended in 2024 also introduces a reduction in the overall credit limit for a customer, a customer and related persons, with limits decreasing gradually each year. From the effective date of the law until January 1, 2026, the credit limit for a customer is 14%, and 23% of the equity for a customer and related persons. Subsequently, these limits will decrease annually, reaching 10% of the equity for a customer and 15% for a customer and related persons by January 1, 2029.

Furthermore, it is stated in the law that the total credit extension for a non-banking entity must not exceed 15% of the credit institution's equity, and the total credit extension for a customer and related persons must not exceed 25% of the credit institution's equity for non-banking entities.

Secondly, the Credit Institutions Law amended in 2024 provides clear provisions on early intervention and handling of credit institutions. The law specifies the conditions under which the State Bank of Vietnam can intervene early, based on which specific solutions are proposed to ensure the resolution of issues related to deciding whether to place banks under special control or handle them through other specific measures as stipulated by the law to ensure the safe operation and activities of credit institutions.

Thirdly, the Credit Institutions Law amended in 2024 supplements the group of related persons to credit institutions. It adds several groups of related persons up to the 5th generation, including subsidiaries of the subsidiaries of credit institutions, great-grandparents, grandparents, grandchildren, great-grandchildren, aunts, uncles, cousins, and their spouses. This regulation aims to enhance transparency in the ownership of shares by shareholders and their related persons, limit situations where the operations of credit institutions are manipulated, and further specify individuals authorized to represent institutions. In other words, these provisions aim to make transparent the issue of related persons, prevent relationships that could lead to concerning issues regarding cross-ownership and investment activities, credit extension with the occurrence of behind-the-scenes influences.

Fourthly, the Credit Institutions Law amended in 2024 addresses the issue of public disclosure of information related to shareholders and persons associated with credit institutions. According to Article 49(2) of the Credit Institutions Law amended in 2024, shareholders owning 1% or more of the charter capital of credit institutions must provide the credit institution with information about themselves and related individuals, including: Full name; personal identification number; nationality, passport number, date, and place of issuance for foreign shareholders; Enterprise registration certificate or equivalent legal documents for organizational shareholders; date and place of issuance of these documents. Shareholders must also provide information about the quantity and ownership percentage of their shares and those of related persons in that credit institution.

Furthermore, it is stipulated in Clause 5 of Article 49 that credit institutions must publicly disclose information about the full name of individuals and the name of the organization that is a shareholder owning 1% or more of the charter capital of the credit institution. The quantity and ownership percentage of the shares of the individual and related persons must be published on the credit institution's electronic information page within 7 working days from the date the credit institution receives the provided information. Providing this information will enhance transparency regarding issues related to small shareholders who may be associated with major shareholders. It is also a solution to restrict the activities of interest groups seeking to control the ownership of banks, better controlling the level of association in bank ownership.

Fifthly, the Credit Institutions Law amended in 2024 focuses on legalizing provisions to enhance the resolution of bad debts and collateral management. Specifically, the law includes an entire chapter (Chapter XII) dedicated to addressing bad debt resolution and collateral management issues. These are systematically legalized contents that define what constitutes bad debt, the activities related to bad debt resolution, buying and selling bad debts, handling collateral, and determining the priority order of payments when dealing with collateral for bad debts. These provisions provide credit institutions with specific and clear legal grounds, facilitating the expedited resolution of bad debts in the future.

Regarding some issues of handling bad debts related to real estate projects, according to Clause 3, Article 200, "Credit institutions, foreign bank branches, debt management and asset exploitation companies of credit institutions, asset management companies of Vietnamese credit institutions established and operating in accordance with the law on credit institutions have the right to transfer all or part of real estate projects which are collaterals for debt recovery according to the regulations on transfer of all or part of real estate projects of the Law on Real Estate Business and other relevant laws but does not have to apply regulations on conditions for real estate business entities for real estate project transferors of the Law on Real Estate Business". This regulation will facilitate speeding up bad debt handling activities at banks related to lending and mortgage activities with real estate projects, freeing up capital sources, solving many bad debt recovery problems in the near future.

Sixth, the Law on Credit Institutions 2024 prohibits the act of selling of optional insurance products as an addition to the provision of credit services like "beer served with peanuts". According to Clause 5, Article 15 of the Law, credit institutions, foreign bank branches, managers, executives, and employees of credit institutions and foreign bank branches shall not be selling optional insurance products as an addition to the provision of credit products, services by any means.

In addition, the Law also has many progressive regulations related to reducing administrative procedures for licensing, clearly regulating the process of organizing activities, applying technology and adapting to new electronic transaction activities in the activities of credit institutions.

Practical implementation of the Law is an important factor

Reporter: One of the new points highly appreciated by many financial institutions is the regulation on reducing the shareholder ownership ratio of organizations and individuals in credit institutions. In your opinion, how will this regulation affect the business activities of banks in the coming time?

Lawyer Le Cao: In short period, the new regulations on reducing the shareholder ownership ratio of organizations and individuals in credit institutions will not have a major impact on credit activities. Because the Law has a transitional regulation in Clause 11, Article 210: "From the effective date of this Law, shareholders and related persons with share ownership exceeding the ratio specified in Article 63 of this Law may continue owning their shares but may not increase their shares until they comply with the regulations on share ownership ratio as prescribed by this Law, except in the case of receiving dividends in shares."

However, in the long term, the reduction of share ownership at credit institutions will gradually be agreed through activities of updating new capital or changing shareholders. Therefore, I believe that reducing the share ownership ratio will have an impact on encouraging shareholders, especially small shareholders, to invest in credit institutions, thereby improving investment resources in credit institutions, increasing transparency and reducing the influence of interest groups, reducing conflicts of interest when granting credit and increasing the safety of the banking system. Basically, in the long term, these regulations will have an impact and make banking operations more sustainable.

Reporter: So will reducing the ownership ratio in credit institutions limit the cross-ownership situation that has existed for many years?

Lawyer Le Cao: In my opinion, the regulation on reducing the share ownership ratio is not a prerequisite for quickly reducing cross-ownership at credit institutions. The Law on Credit Institutions 2024 has new regulations mentioned above such as additional regulations on related persons and the issue of transparency of shareholder information, which will contribute to minimizing cross-ownership. However, it is still the same old story, sometimes the person whose name owns the bank capital is not necessarily the actual owner of that capital. Many cases related to banks have been clarified recently, showing that the actual ownership rate compared to the announced rate is different, the phenomenon of ownership under another person's name in interest groups is still a painful problem to control when implementing the Law. The law has clear and specific regulations, but making share ownership transparent and avoiding cross-ownership is an issue that requires drastic implementation in the coming time.

Reporter: Credit institutions are not allowed to grant credit to a client exceeding 10% of its own capital (reduced from 15%); for a single client and affiliated persons, it cannot exceed 15% (reduced from 25%). What would be the impact of this regulation on limiting "disguised" lending?

Lawyer Le Cao: Article 136 of the Law on Credit Institutions has reduced the total outstanding credit extended to a single client; a single client and affiliated persons. However, this reduction in total credit level is carried out according to a specific roadmap, not instantly reduced from 15% to 10% or 25% to 15%. This roadmap will be gradually from now until 2029.

Reducing the credit limit for a single client or a single client and affiliated persons can create opportunities as well as challenges for credit institutions.

Regarding opportunities, this regulation helps limit risks from credit concentration, avoiding the phenomenon of too large a concentration of loans to a small number of clients. The regulation also avoids “disguised” lending or corporate bond purchases, which creates a clear legal basis to minimize risks, helping to diversify credit portfolios.

Regarding challenges, when this regulation takes effect, it will have a great impact on the development of lending plans for the client system. There will be changes to adjust the classification of old and new clients to ensure compliance in balance in credit granting activities. In addition, businesses that borrow capital are also affected if they are dependent on large and stable capital sources from familiar banks.

Reporter: With the new additions in the regulations for transferring collateral assets that are real estate, will the process of handling collateral assets to recover bad debts be accelerated in the coming time?

Lawyer Le Cao: The regulations in Clause 3, Article 200, Clause 15, Article 210 will take effect from January 1, 2025. These regulations help credit institutions have more options for handling assets related to real estate projects and recovering bad debts more effectively.

However, the transfer of all or part of a real estate project being a collateral asset for debt recovery in cases where regulations on real estate business conditions are not required for real estate project transferors is currently unclear in the 2023 Real Estate Business Law itself.

Therefore, more detailed regulations and specific instructions are needed to be implemented in practice. Because when implementing, there will be issues such as the signing entity, financial obligations to the State, rights and obligations between the transferor and transferee, and avoiding risks when one of the parties disputes, rights and obligations of the owner of the real estate project being transferred... Barriers to practical implementation methods and solutions are challenges to applying these seemingly positive regulations. Therefore, we need to wait and see how this regulation will be specifically implemented when it comes into effect.

Overall, the regulations on bad debt handling of the Law on Credit Institutions 2024 are very specific, with a separate chapter, and many other issues have been legalized. In the coming time, bad debt handling activities of credit institutions will have a solid legal basis for implementation, so the impact of the Law on Credit Institutions 2024 on the problem of bad debt handling in the coming time will be very appreciable, hopefully the results achieved from bad debt handling will be good in the coming time.

Sincerely thank you!

CONTACT US:

Lawyers in Da Nang:

99 Nguyen Huu Tho, Quan Hai Chau, Da Nang city

Lawyers in Hue:

366 Phan Chu Trinh, Hue City, Thua Thien Hue

Lawyers in Ho Chi Minh City:

No. 122 Dinh Bo Linh Street, Binh Thanh District, Ho Chi Minh City

Lawyers in Ha Noi:

Room 501, 5th Floor, No. 11, Lane No. 183, Dang Tien Dong Street, Dong Da District, Ha Noi

Lawyers in Nghe An:

 No. 19 V.I Lenin street, Vinh City, Nghe An Province

Website: www.fdvn.vn    www.fdvnlawfirm.vn  www.diendanngheluat.vn  www.tuvanphapluatdanang.com

Email: fdvnlawfirm@gmail.com    luatsulecao@gmail.com

Phone: 0935 643 666    –  0906 499 446

Fanpage LUẬT SƯ FDVN: https://www.facebook.com/fdvnlawfirm/

Legal Service For Expat:  https://www.facebook.com/fdvnlawfirmvietnam/

TỦ SÁCH NGHỀ LUẬT: https://www.facebook.com/SayMeNgheLuat/

DIỄN ĐÀN NGHỀ LUẬT: https://www.facebook.com/groups/saymengheluat/

Youtube: https://www.youtube.com/c/luatsufdvn

Telegram: https://t.me/luatsufdvn

Group “Legal forum for foreigners in Vietnam”: https://www.facebook.com/groups/legalforeignersinvietnam