Vietnam: New draft on Law on Credit Institutions
The Draft Law proposes various changes to the current Law on Credit Institutions, such as amendments to the governance and operation of credit institutions, limitation on ownership in credit institutions, and credit extensions, etc. In particular, the areas that have attracted the most attention from the public and relevant stakeholders are as follows:
·Reduction of shareholding of shareholders in a credit institution being a joint-stock company
·Lowering the limit on credit extensions of commercial banks to customers and their related parties
·Lack of elaboration regarding legal frameworks for the development of digital banks.
We provide our comments on these topics below.
1. Reduction of shareholding of shareholders in a credit institution being joint-stock company
The Draft Law’s proposal to decrease the shareholding of shareholders in credit institutions has generated public attention and discussion.
The maximum shareholding of an individual in a credit institution being a joint stock company is 5% under the current applicable regulations. In the previous versions submitted to the fifth session of the meeting of the National Assembly of Vietnam, this ratio was reduced to 3%. At the National Assembly's sixth session, the maximum shareholding of an individual in a credit institution being joint stock company was brought back to 5% in the version circulated for discussion.
However, the shareholding of the organization was still adjusted from 15% (as stipulated under the current regulations) to 10%, and the shareholding of a shareholder and its related persons decreased from 20% (as being stipulated under the current regulations) to 15%.
As mentioned in the National Assembly's meeting, the suggested proposal to reduce the maximum ownership ratio of a shareholder in a credit institution being joint-stock company aims to limit the shareholder’s dominance over the operation of the credit institution, as well as a number of affiliated companies in the same group of which the credit institution is a part.
The reduction in ownership will have a major impact on existing shareholders, especially strategic shareholders. Specifically, shareholders will have to find solutions to meet the regulations on reducing the shareholding, which will greatly affect their investment and business activities. Moreover, the reduction of shareholding will reduce the influence of strategic shareholders in the internal management of the credit institution. Strategic shareholders will need to find solutions to be able to approve issues within the authority of the general meeting of shareholders of the credit institution when voting.
As such, the reduction in shareholding should consider the stability of existing shareholders, and must be assessed comprehensively. Limiting shareholding will reduce the motivation to invest in Vietnam’s banking and finance sector, leading to limited investment capital and less participation of major strategic shareholders that are foreign financial institutions in the international financial market in Vietnam.
2. Lowering limit on credit extension
Along with the issue of tightening the ownership ratio, reducing the limit on credit extensions is also a matter of special interest in the Draft Law. As lending is the main activity of nearly all commercial banks, the reduction of credit extension limits will make the operation of commercial banks more difficult, especially considering that interest rates at banks are still low.
According to the Draft Law’s proposal, the total credit balance of a customer must not exceed 10% of the core capital of commercial banks or branches of foreign banks, and the total credit balance of a customer and their related persons must not exceed 15% of the core capital of commercial banks and branches of foreign banks (currently 15% and 20%, respectively).
From the perspective of borrowers, this reduction will significantly affect the production and business plans of enterprises in relation to calculating capital sources effectively. This is particularly true for the many businesses that are still facing operation difficulties in the aftermath of the COVID-19 pandemic. Reducing the limit on credit extensions will partly affect the capital mobilization of businesses/borrowers. In cases where borrowers need large loan capital to carry out large projects, the reduction of credit extension limits as proposed in the Draft Law may lead to more complex and time-consuming loan structures, and higher borrowing costs to arrange loans from different banks, including foreign financial institutions and banks.
As proposed by members of the National Assembly in its sixth session, stipulating a roadmap to gradually reduce the limit on credit extensions over a certain period of time will help to minimize the impact.
3. Uncertainty on legal framework of digital banks
While the market has recognized the appearance of digital-only banks/neo banks (in Vietnamese: ngân hàng số) operating as physical banks, the public expects to see certain developments on the regulations that may have a positive impact and a more concrete basis for the development of this type of bank. This was also one of the concerns of the members of the National Assembly during the National Assembly’s meeting.
According to the Draft Law’s proposal, the operation of the credit institutions by electronic means is conducted in accordance with the regulations of the State Bank of Vietnam (SBV) and the laws on e-transactions. This is mostly inherited from Article 97 of current Law on Credit Institutions, stipulating the contents of e-banking operations, under which credit institutions may conduct business activities through electronic means under the SBV’s guidance on risk management and the law on e-transactions.
The Draft Law also proposes that the government provide a regulatory sandbox on the application of technology and the launch of the products, services or new business model in the banking sector. A regulatory sandbox under the Draft Law means a limited and controlled environment (i.e., limited in scope of business, space and time), which requires the participants to satisfy certain conditions and criteria, and to be supervised by the authority.
While other jurisdictions in Asia have certain regulations and methods for governing digital banks (such as Singapore or Hong Kong), the Draft Law should have a clearer guidance on the operation of digital banks in Vietnam's market. There is no further elaboration in the Draft Law on the operation of credit institutions via electronic means and the regulatory sandbox. It is still uncertain as to whether the operation of the credit institution via electronic means would include the digital bank. It is also unclear as to whether the regulatory sandbox mentioned in the Draft Law would be similar to the regulatory sandbox on fintech that has been drafted, and is under review and finalization at the current stage, and whether it would include digital banks as part of the testing program.
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Due to many ongoing discussions and debates, the National Assembly did not pass the Draft Law and requested for further updates to be made to the Draft Law.
OANH H. K. NGUYEN, THUY VAN T. PHAM AND VIET TRUNG NGUYEN