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​ 

September 16, 2024
On July 23, 2024, the State Bank of Vietnam (SBV) published a draft circular regulating the implementation of open (publicly available) application programming interfaces, or Open APIs, in the banking industry (Draft Circular) to collect public comments. Open APIs in the banking sector are APIs of banks that allow third parties to process data for their own use or to provide products and services to customers. Urgent need Currently, the development of Open APIs in Vietnam is fragmented, with each bank using different API standards and security standards. There is no common standard for information technology systems, information storage, security, connectivity, or legal frameworks. Therefore, the promulgation of a regulation on Open APIs is urgently needed to create a clear legal basis and guidance for electronic banking transactions, especially in connecting to bank information systems and processing customer data safely, and creating new, innovative products and services to meet the increasing needs of customers. Cooperation of banks required The Draft Circular requires banks to provide Open API services to third parties for connection to the bank system and data processing. Banks have the right to refuse or suspend Open API services if third parties do not meet specified conditions. However, banks will be responsible for ensuring the quality and security of data, providing tools for customer data queries and revocation of third-party data processing rights, and coordinating with third parties and authorities to resolve issues. The Draft Circular standardizes Open API functions for all banks according to the Open API function list and the technical standards list specified in the Draft Circular. Open API service contract The template Open API service contract between banks and third parties using Open API services must have certain required contents such as provisions regarding confidentiality, data use purpose, and that the security level
Read More
August 20, 2024
On June 28, 2024, the State Bank of Vietnam (SBV) issued Circular No. 19/2024/TT-NHNN to amend certain regulations of Circular No. 08/2023/TT-NHNN dated June 30, 2023 (‘Circular 08”), on conditions for foreign loans not guaranteed by the government (“Circular 19”). Circular 19 took effect on July 1, 2024, and provides changes in relation to, among other things, foreign loans to pay for goods import contracts and letters of credit. Foreign Loans to Pay for Goods Import Contracts Circular 08 exempts foreign loans in the form of deferred payment for imported goods (a buyer-seller relationship) from applicable foreign loan conditions. Circular 19 adds provisions regarding foreign loans taken out by non-bank borrowers (a buyer-seller-lender relationship) to make the deferred payments for goods import contracts for the implementation of an investment project, production or business plan, or other project. In this case, the foreign loan’s purpose is determined to be for implementing an investment project, production or business plan, or other project; and the borrower can exclude medium- and long-term foreign loan balances arising from the deferred payment in the import contracts when calculating the foreign loan limit. In addition, the borrower is allowed to borrow from foreign lenders to pay for the goods import contract via letters of credit. However, it is worth noting that other requirements relating to the loans are still applied to the borrower, such as foreign loan agreement, currency, and records/reporting obligations Letters of Credit Following the reclassification of letter of credit (L/C) activities from a “payment service” to “extension of credit” under the Law on Credit Institutions 2024, Circular 19 supplements L/C activities into the current foreign loan regulatory framework, including adding foreign loans between credit institutions and branches of foreign banks (as issuing banks) and non-resident banks (as reimbursing banks) where issuing banks are
Read More
July 5, 2024
In April 2024, Vietnam’s Ministry of Finance published a draft circular concerning securities transactions, clearing and settlement of securities transactions, activities of securities companies, and information disclosure on the securities market (the “Draft Circular”) for public feedback. The Draft Circular, if adopted, will amend several regulations impacting public companies and the securities market. Some of the more notable amendments are discussed below. Relaxing Pre-Funding Requirement for Foreign Institutional Investors To place orders to purchase securities, investors are currently required to have sufficient cash in their securities trading accounts to pay 100% of the cost of the transaction, except in cases of: Margin trading (applicable to Vietnamese investors only); and Transactions in which there is a settlement guarantee or confirmation from the custodian bank on accepting the settlement request. The Draft Circular allows foreign institutional investors (“FIIs”) to purchase securities without 100% pre-funding their securities trading accounts, based on a signed agreement with a securities company. However, the State Securities Commission of Vietnam (“SSC”) has the right to temporarily reinstate the 100% pre-funding requirement if measures for securities market stabilization are required. The Draft Circular also specifies that securities companies must (i) assess the capacity of FIIs to determine the pre-funding requirement under relevant agreements signed between them, and (ii) be responsible to settle the shortfall of a securities purchase order through their proprietary trading account(s) if the FIIs are unable to fully pay for such securities purchase order, except in certain circumstances. Further, a securities company cannot directly exempt or authorize other entities to exempt an FII from the 100% pre-funding requirement if the FII purchases securities of (i) such securities company, (ii) a company in which such securities company is a majority shareholder, or (iii) the parent company of such securities company. The 100% pre-funding requirement for FIIs
Read More
June 27, 2024
On May 17, 2024, Thailand’s Anti-Money Laundering Office (AMLO) issued an amended Notification Concerning the Rules for Designating or Reviewing the List of High-Risk Customers Who Require Close Monitoring under the Ministerial Regulation on Customer Due Diligence B.E. 2563 (2020). This notification, which took effect the following day, updates the previous version of the notification from 2022 to cover cybercrimes listed under the Emergency Decree on Measures for the Prevention and Suppression of Technological Crimes B.E. 2566 (2023). The amended notification sets out the steps that all financial institutions in Thailand must take to manage money laundering risks and to comply with the AMLO’s mandatory Guidelines on Customer Due Diligence. Under the new notification, account holders suspected of engaging in or facilitating technological crimes, as recorded by the Anti Online Scam Operation Center (AOC), are to be classified as “high-risk persons.” The notification includes provisions for listing high-risk customers under two specific codes: HR-03-1: This code applies to individuals who are the subject of either a petition or a complaint related to a predicate offense accepted by the relevant inquiry officer and recorded as a criminal case. It also covers individuals whose bank accounts are suspected of being used to conduct transactions related to crimes under the Emergency Decree on Measures for the Prevention and Suppression of Technological Crimes B.E. 2566 (2023), with victims seeking prosecution. The names of individuals in this category are received from responsible agencies according to the Criminal Procedure Code or the AOC and are documented in a publicly accessible online notification system. HR-03-2: This code is for individuals involved in the commission of a predicate offense or those whose bank accounts are suspected of being used in such offenses, but whose cases have not been accepted or numbered by the relevant inquiry officer. Names
Read More