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​ 

October 24, 2024
On September 27, 2024, the Securities and Exchange Commission of Thailand (SEC) issued a circular clarifying reporting obligations in relation to listed company securities held by the company’s directors, executives, auditors, or persons related to them (“Key Persons”). The circular aimed to address growing concerns over transparency in shareholding, particularly when shares are used as loan collateral by company executives without sufficient public disclosure, which can lead to sudden share loss and executive departures, destabilizing the company. This circular is likely a stopgap measure, and a full overhaul of the reporting regulations may be needed. The current reporting obligations came into effect on March 16, 2024, and were designed to simplify reporting procedures while still maintaining transparency in the capital markets. The rules allow the Key Persons to consolidate multiple transactions and report them only when certain thresholds are crossed — such as when the total transaction value reaches THB 3 million or when six months have passed since the last report. The rules were intended to reduce the number of minor reports and limit penalties for missed deadlines. However, recent scandals have raised concerns about the reporting rules, particularly issues related to the enforcement of share collateral on executives’ or directors’ loans where the listed company may face a change of direction and management due to such forced sales. To ease these concerns, the SEC issued the new circular to reiterate the rules and lay out three key situations triggering a reporting duty: Force-Selling Due to Default: If shares are forcibly sold due to a loan default, this must be reported, and the transaction should be recorded with the Thailand Securities Depository (TSD). Transfer of Shares to Custodians: Under current rules, the transfer of shares to/from a custodian holding them on behalf of a beneficial owner does not
Read More
October 20, 2024
Following the U.S. Securities and Exchange Commission’s approval of spot Bitcoin ETFs, Thailand’s Securities and Exchange Commission (SEC) is reassessing regulations on the investments of mutual funds and private funds (collectively “Funds”). The SEC has launched a public consultation on new draft notifications introducing  the new asset classes that can be held by Funds, and aims to bring these rules into effect on January 1, 2025. The highlights of these changes are set out below. Eligible New Asset Classes The new asset classes that can be held by Funds can be categorized into two types—investment tokens and crypto assets—and the determination will focus on substance over form. Investment tokens: If the substance involves raising funds, regardless of what the assets are called, and they are legally issued and offered or approved by home regulators that are members of the International Organization of Securities Commissions (IOSCO), Funds can invest in these types of assets as transferable securities within the permitted ratio. Crypto assets: The eligible crypto assets which Funds are entitled to hold focus on crypto ETFs or offshore funds investing in crypto assets, and they are subject to investment limits. Funds can hold crypto assets directly, but only temporarily, and only for the purpose of purchasing, selling, or exchanging the crypto assets, not speculative purposes. The notifications state that Funds may hold Bitcoin/Ethereum for no longer than five business days and USDT/USDC for no more than one month. Investment Limits Typically, the rules segregate investment limits into listed and non-listed digital assets, and the limits depend on the sophistication of the investors in the Funds. In general, UI Funds (mutual funds offered to institutional investors or ultra-high net worth investors) can invest in these new asset classes without any limitations, although net exposure to other crypto assets  –  which
Read More
September 24, 2024
In recent years, Thailand has witnessed significant developments in its personal finance sector, particularly in alternative lending options. This article explores two key concepts in the Thai financial landscape: nano finance and personal loans. These alternative lending models, regulated by the Bank of Thailand (BOT), aim to provide more accessible financial services to individuals and small entrepreneurs who might have limited access to traditional funding sources. Nano Finance: Empowering Small Entrepreneurs The nano finance scheme under the BOT’s supervision is designed to provide funding to small entrepreneurs who might have limited access to traditional financial resources. One of the key features of this scheme is the ability of licensed nano finance providers to use alternative data in assessing loan applicants’ ability to repay (information-based lending). To implement this approach, nano finance providers must have an internal policy on credit approval that supports: Identifying scope and processes for utilizing alternative factors or technologies in determining debt repayment capacity, credit line limits for each loan applicant and total credit limits, and acceptable debt repayment targets; Having resources and personnel with sufficient knowledge, capability, experience, and expertise to operate efficiently and effectively, as well as clear checks and balances; Establishing guidelines for selecting and analyzing factors or financial models to evaluate or predict loan applicants’ ability and willingness to repay; Having an internal sandbox to test key success factors of the selected factors or models; and Having a process for monitoring and reviewing the application of the selected factors or models in assessing debt repayment capability. This approach allows nano finance providers to make more informed lending decisions based on a broader range of data, potentially increasing access to finance for small entrepreneurs who may not have traditional credit histories or collateral. Personal Loans The personal loan scheme under BOT supervision aims
Read More
September 20, 2024
On September 12, 2024, the Bank of Thailand (BOT) Notification Re: Virtual Bank Supervision Criteria took effect. According to this notification, virtual banks must adhere to standards for traditional commercial banks, along with additional requirements tailored to address virtual banks’ digital nature and corporate structure. Specific Requirements The concepts of supervision remain unchanged from the consultation paper titled “Criteria for Supervising Virtual Banks”. Some of the key additional provisions and details on supervision criteria relate to the following: Financial business groups: The notification identifies virtual banks as financial businesses, subject to the BOT’s regulations on financial business group supervision. If a virtual bank is a part of another financial institution’s financial business group, the virtual bank must be under a solo consolidated group. After the “initial phase” (see below), other financial institutions and companies within the financial business group are prohibited from extending credit to or engaging in transactions similar to lending activities with the virtual bank. Capital fund requirements: If other financial institutions’ investment in a virtual bank increases the capital fund in the financial system beyond a safe level and this poses a risk to other financial institutions, the BOT may order the relevant financial institution to maintain capital funds as the BOT deems appropriate. Service channels and outsourcing: Virtual banks must provide services solely through digital channels, except when necessary. For example, with the BOT’s approval, a virtual bank may use other commercial bank electronic branches via an ATM pool system, use a banking agent to serve customer needs for cash, or occasionally provide on-site services. Initial Phase The “initial phase” runs from the date that the virtual bank commences its operations until it receives the BOT’s approval to become fully operational. During this period, certain BOT supervisory requirements are relaxed as follows: Governance: Virtual banks in the initial phase may request
Read More