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.