You are using an outdated browser and your browsing experience will not be optimal. Please update to the latest version of Microsoft Edge, Google Chrome or Mozilla Firefox. Install Microsoft Edge

June 26, 2024

Vietnam’s New Law on Credit Institutions Introduces Key Changes to Banking Operations

Subscribe to Updates

Vietnam’s new Law on Credit Institutions No. 32/2024/QH15, passed by the National Assembly on January 18, 2024 (“New LCI”), will take effect on July 1, 2024 (except for some clauses regarding the transfer of collateral, which will take delayed effect on January 1, 2025). The New LCI will replace the current Law on Credit Institutions issued in 2010 and amended in 2017, and aims to strengthen banking operations and enhance transparency in this sector.

Some key changes to banking operations introduced by the New LCI are set out below.

Lowering Credit Limits

Article 136 of the New LCI stipulates a gradual reduction of credit limits available to bank clients, to help credit institutions diversify their credit portfolios and minimize overdue risks. There are more stringent requirements for certain persons related to the bank (e.g., managers, auditors, and shareholders) and exemptions for special cases (e.g., approval by the prime minister, entrusted loans).

Specifically, the total balance of credit extended by commercial banks, cooperative banks, foreign bank branches, people’s credit funds, and microfinance institutions to a single client or to a client and related persons of that client will be reduced in stages from the current 15% of the credit institution’s equity capital (vốn tự có) for a single client and 25% for a client and related persons, to 10% for a single client and 15% for a client and related persons by 2029.

For non-bank credit institutions (i.e., general and specialized finance companies), the total balance of credit extended to a single client must not exceed 15% (down from 25%) of its equity capital, and the total balance of credit extended to a single client and related persons must not exceed 25% (down from 50%) of its equity capital.

It is worth noting that the above credit limits do not apply to (1) cases of entrusted loans for which the entrusted credit institution or foreign bank branch does not bear risk, (2) cases where the borrower is another credit institution or foreign bank branch, or (3) cases where the prime minister approves a higher credit limit.

Restricting Bancassurance Activities

Article 15.5 of the New LCI strictly prohibits credit institutions, foreign bank branches, and their managers, executives, and employees from combining the purchase of non-obligatory insurance products with the provision of banking products and services in any form.

This is a new regulation in the New LCI that emphasizes the commitment of the State Bank of Vietnam (SBV) in addressing the past problem of clients being forced to purchase insurance in order to be granted loans, thereby building client trust in both the banking and insurance sectors.

Recognizing Security Agent Services

Article 114.2(dd) of the New LCI explicitly regulates a new service to be provided by commercial banks, which is the provision of third-party security agent services to lenders who are international financial institutions, domestic and foreign credit institutions, and foreign bank branches.

This addresses a past issue in which local commercial banks were not allowed to be independent security agents, but would have to be a lender in a syndicated loan to act as a security agent for the other lenders, which could expose the bank to more risk. Under the New LCI, the local bank is no longer required to be a co-lender in a syndicated loan to act as the security agent for foreign lenders.

Further details on how banks can provide such security agent services may be provided by the SBV in the future.

Disposal of Real Estate Collateral

To facilitate debt recovery, Article 200 of the New LCI grants credit institutions, foreign bank branches, debt management companies, and asset management companies the right to transfer all or part of real estate projects that are secured assets to recover debts in accordance with the provisions of the Law on Real Estate Business and other relevant laws, without applying the conditions normally applicable to the transferor.

This regulation is expected to pave the way for banks to have more options to dispose of large projects mired in legal problems, thereby helping both the bank and the real estate enterprises to generate cash flow and reduce debt—this is especially true for banks with high real estate lending rates.

However, this regulation will only apply from January 1, 2025.

Outlook

Given the stringent requirements, the New LCI is anticipated to have a profound impact on banking operations in Vietnam, and will require changes from credit institutions to ensure their compliance status.

In addition, as the New LCI will take effect soon, a decree guiding the New LCI in detail should be in the final stages of adoption. Therefore, stakeholders are encouraged to stay informed and updated on further legal developments.

Related Professionals

Practices

Banking and Finance

Location

RELATED INSIGHTS​ 

March 12, 2024
Thailand’s Ministry of Finance has issued the Notification re: Criteria, Methods and Conditions for Applying for and Issuing Licenses to Operate Virtual Bank Business, which was published in the Government Gazette on March 4, 2024. This notification opens an opportunity for qualified experts in technology, digital services, and diverse data usage fields to apply for virtual bank licenses to provide financial services through new digital channels. The main goal is to serve the financial needs of target groups that may not have received sufficient or tailored financial services from the traditional banking system. Licensing Timeline Application submission period: 6 months (March 20–September 19, 2024). Announcement of successful applicants: Mid-2025 (approx. 9 months–1 year from the end of the submission period) After the announcement, successful licensees must demonstrate their readiness to commence virtual bank operations within 1 year (extendable for up to 1 additional year) via the following: Having paid-up registered capital of THB 5 billion and plans to increase the paid-up registered capital to at least THB 10 billion after the initial business period; Establishment or adjustment of a financial business group; Procurement of human resources, IT systems, and relevant risk management tools. Number of Licenses to be Issued No written or specified limit, subject to the discretion of the Bank of Thailand (BOT). Key Qualifications Applicants must have the following: Experience and resources to support virtual banking operations according to the business model and plan. Expertise and experience in conducting business that utilizes technology and provides services through digital channels. Experience demonstrating the ability to obtain, access, manage, and utilize data, including development of systems or data connections to facilitate user activities, allowing them to use their data to conduct transactions with other providers. Criteria In assessing applicants’ qualifications for a virtual bank license, the BOT will consider
Read More
January 23, 2024
The Bank of Thailand (BOT) has issued a new notification to sustainably address Thailand’s household debt problems by establishing responsible and fair lending requirements for lending service providers throughout their lending journey. Notification No. SorKorChor. 7/2566 Re: Provision of Responsible and Fair Lending was announced on December 21, 2023, and took effect on January 1, 2024. The lending service providers this notification applies to include both commercial banks and nonbank business operators (e.g., personal loan business operators, nano-financing business operators, and credit card business operators). The key principle of this notification is to provide criteria for responsible and fair lending that supplement market conduct principles, covering eight areas in the debt cycle: Lending product development. Service providers must offer lending products that are suitable to customers’ needs and repayment capabilities, avoiding encouragement of excessive debt. Loan interest rates should align with the borrower’s risk profile and credit characteristics (risk-based pricing) to ensure fair contract conditions. Advertising. Service providers must prepare and control advertisements with “correct and clear” content, presenting complete and comparable conditions, interest rates, and various fees to customers. The advertisements should not encourage excessive debt, enabling customers to make informed decisions and promoting financial discipline. Sales. In the selling process, service providers must ensure that customers receive complete, accurate, and unexaggerated information that facilitates appropriate consideration of decisions based on a correct understanding of the product or service. Products should also align with customers’ purposes or needs for fund utilization, avoiding encouragement of excessive debt. Consideration of debt repayment ability (affordability). Service providers must be conscientious in considering customers’ debt repayment ability, taking into account all obligations and residual income. Promotion of discipline and financial management. Service providers must provide important information and warnings to debtors, including regular reminders to promote responsible borrowing. Helping debtors with persistent debt.
Read More
January 11, 2024
Tilleke & Gibbins’ project finance specialists in Vietnam have contributed the Vietnam chapter to Project Finance 2024 from The Legal 500. The guide, which is part of The Legal 500’s Country Comparative Guides series, furnishes investors and businesses with key information related to project finance in jurisdictions around the world. Each Q&A-style chapter provides in-depth details on the legal regimes affecting a wide range of project financing topics, including: Ownership structures and corporate governance; Security interests, regimes, and enforcement; Regulatory requirements and consents; Foreign exchange considerations; Environmental, social, and governance (ESG) issues; Public-private partnerships; Foreign judgments; Tax considerations; Common funding structures; and Insurance law principles. Tilleke & Gibbins also authored the Thailand chapter of Project Finance 2024. The Vietnam chapter of the guide is available as a PDF through the button below, courtesy of The Legal 500. The full guide is accessible for free on The Legal 500 website.
Read More
January 11, 2024
Project finance specialists from Tilleke & Gibbins’ Bangkok office have contributed the Thailand chapter to Project Finance 2024 from The Legal 500. The guide, which is part of The Legal 500’s Country Comparative Guides series, furnishes investors and businesses with key information related to project finance in jurisdictions around the world. Each Q&A-style chapter provides in-depth details on the legal regimes affecting a wide range of project financing topics, including: Ownership structures and corporate governance; Security interests, regimes, and enforcement; Regulatory requirements and consents; Foreign exchange considerations; Environmental, social, and governance (ESG) issues; Public-private partnerships; Foreign judgments; Tax considerations; Common funding structures; and Insurance law principles. Tilleke & Gibbins also authored the Vietnam chapter of Project Finance 2024. The Thailand chapter of the guide is available as a PDF through the button below, courtesy of The Legal 500. The full guide is accessible for free on The Legal 500 website.
Read More