Banking on some fresh changes

The deck has been reshuffled and non-banking credit institutions have a new hand to play with

This article summarises some of the key changes that the New Law will provide once it becomes effective on January 1, 2011.

The New Law expands the governing scope and regulates (i) the establishment, organisation, operation, special control, restructuring and dissolution of credit institutions and (ii) the establishment, organisation and operation of foreign bank branches and foreign credit institutions and organisations’ representative offices conducting banking operations.

Right to conduct banking activities

The New Law sets forth a bright line with regard to entities that may perform banking activities by strictly prohibiting any organisations or individuals other than credit institutions from performing banking activities (with the exception of escrow deposit transactions and transactions for the purchase and resale of securities by securities companies).  Under the Old Law, the State Bank had the authority to permit a non-credit institution organisation to perform banking operations provided that it satisfied specific conditions.

Scope of activities for credit institutions

The New Law distinguishes between permissible activities of commercial banks and non-banking credit institutions.  Non-banking credit institutions by definition are not permitted to (i) receive deposits from individuals, or (ii) provide payment services via client’s bank accounts. 

Regarding the scope of banking activities, a commercial bank may upon establishment take deposits and extend credit.  Activities such as international payment services, foreign currency business, derivatives issuance and trade, require a bank to satisfy certain conditions and requirements and/or obtain the approval of the State Bank before it may perform them.  Further, banks may now perform investment banking activities, such as brokerage or securities-related activities. 

Ownership in credit institutions

Under the New Law, ownership limitations applicable to shareholding credit institutions are stricter.  The maximum permissible ownership of charter capital in a credit institution has decreased from 10 to 5 per cent for an individual shareholder and from 20 to 15 per cent for an institutional shareholder.  Moreover, a shareholder and its related persons may only hold a maximum of 20 per cent of charter capital.

Exceptions to the threshold for institutional shareholders include(i) state ownership in equitised credit institutions, (ii) foreign ownership as stipulated by the government and (iii) where a credit institution suffers difficulties or increased ownership would ensure the safety of the credit institution system. 

Additionally, the New Law expressly authorises the government to regulate the total aggregate level of share ownership by foreign investors. It can also regulate the maximum share ownership by a single foreign investor in any one credit institution and conditions applicable to Vietnamese credit institutions selling their shares to foreign investors.  

Decree 69/2007/ND-CP (“Decree 69”), an implementing regulation of the Old Law, provides an aggregate foreign ownership cap of 30 per cent shareholding in any one credit institution.  Decree 69 also limits shareholding of a single foreign credit institution to 10 per cent of charter capital and a strategic foreign investor to 15 per cent ownership of charter capital, which may be extended to 20 per cent with permission of the prime minister.  Unless the government issues new implementing legislation under the New Law, the thresholds of Decree 69 are still applicable.

Further, the New Law imposes stricter provisions on the transfer of shares.  For the first five years after establishment of a credit institution, founding shareholders must collectively own at least 50 per cent of the total shares, and institutional shareholders who are founding shareholders must own at least 50 per cent of all founding shares. 

During this period, a founding shareholder may only assign its shares to other founding shareholders.  Individual shareholders or institutional shareholders whose representative is a member of the board of directors or supervisory board, or the general director of a credit institution cannot transfer their interest during the term of office.

Multi-member limited liability credit institutions

For credit institutions incorporated in the form of a multi-member limited liability company, each investor must be a legal entity and the total number of investors shall not exceed five.  Moreover, the ownership of any investor and its related persons shall not exceed 50 per cent of the charter capital of a credit institution.  There is no lock-up period for investors in a credit institution formed as a multi-member limited liability company.

 Administrative procedure

The New Law changes certain timeframes applicable to the licencing process.  Specifically, the time limit for the State Bank to decide whether to issue an operation licence to a credit institution (whether foreign or domestic) is increased from 90 to 180 days.  The time limit for the State Bank to consider issuing a licence for the establishment of a representative office of a foreign credit institution/other institution engaged in banking operations is reduced from 90 to 60 days. 

Foreign bank branch

The New Law imposes stricter requirements on foreign bank branches.  A branch is prohibited from making capital contributions to and establishing enterprises engaged in activities involving insurance, securities and finance leasing.  A foreign bank branch is only permitted to provide a number of foreign exchange services on the international market to clients in Vietnam in accordance with provisions on foreign exchange.  Lastly, the New Law restricts a foreign bank branch from extending loans totalling in excess of 15 per cent of its equity to a single client. 

Investment by credit institutions

Under the New Law, a commercial bank may only use its charter capital or other reserve funds when making capital contributions to enterprises and no capital contribution shall exceed 40 per cent of the bank’s (including its subsidiaries and affiliates) equity capital and reserve funds. 

A bank must establish or acquire subsidiaries or affiliates to carry out any activities involving securities (e.g. brokerage, underwriting, and investment portfolio management), insurance or finance leasing on behalf of the bank. 

Further, a commercial bank (including its subsidiaries and affiliates) may not own more than 11per cent of the equity capital of an enterprise operating in the insurance, securities, foreign exchange, gold or consumer credit sectors. 

A finance company is permitted to contribute capital to enterprises and investment funds. The total ownership by a finance company (including its subsidiaries and affiliates) must not exceed 11 per cent of the charter capital of a target company.  In addition, the total capital contribution by a finance company (including its subsidiaries and affiliates) to other enterprises shall not exceed 60 per cent of its equity capital and reserve funds.

The New Law provides that a credit institution may not extend credit to (i) management officers or their relatives (ii) institutional shareholders whose representative is member of the board of directors or supervisory board (for shareholding credit institutions), and (iii) institutional members or owners (for limited liability credit institutions). 

Moreover, a credit institution is not permitted to extend credit to enterprises engaged in securities activities and under its control. It also cannot extend credit where the underlying security is shares owned by the credit institution or its subsidiary, or provide a loan for a capital contribution to another credit institution based on the receipt of security in the form of shares of the credit institution that is the recipient of the capital contribution.

A credit institution may not provide loans on preferential conditions or without security to (i) auditing firms, auditors or inspectors currently conducting an audit/inspection at the credit institutions or foreign bank branch, (ii) chief accountant, (iii) major shareholders or founding shareholders, (iv) those conducting appraisal and approval of loans or (v) subsidiaries and affiliates.

The New Law on Credit Institutions provides administrative procedure reform and improved provisions on governance. These are both steps in the right direction towards developing a more stable and reliable legal framework for the operations of credit institutions. 

However, the New Law contains a number of stricter provisions regarding operations of foreign bank branches, ownership in credit institutions and extensions of credit by credit institutions, to name a few. 

It remains to be seen whether these arguably less liberal changes, though also improving the stability of the banking sector, will at the same time hinder foreign investment.  Lastly, it should be noted that as of the date of this article, no information on the issuance of implementing guidelines had been published.