Credit law creates banking safeguards

February 07, 2024 | 22:00
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The latest amendment of Vietnam’s Law on Credit Institutions is set to significantly enhance the banking sector’s resilience and transparency, profoundly impacting its operational landscape and consumer accessibility.

The revised legislation, expanding to 210 articles spread across 15 chapters, represents a notable increase from its draft version and marks a pivotal step in fortifying the country’s banking sector.

Credit law creates banking safeguards
Can Van Luc, member, Financial Monetary Policy Advisory Council

Central to the reform is the bolstering of the legal framework governing both policy banks and a spectrum of non-bank credit institutions (NBCIs) - a segment encompassing cooperatives, credit funds, finance companies, and leasing firms.

The law now features a dedicated chapter for policy banks, outlining a comprehensive set of regulations covering their operational models, governance, and bad debt resolution. Similarly, detailed provisions have been introduced, significantly clarifying their management and governance structures.

This strategic legislative move is poised to catalyse the operations of policy banks, potentially reshaping the financial market’s landscape. By reducing dependence on conventional commercial banks, it is expected to infuse greater resilience and sustainability into Vietnam’s financial sector.

However, we advise prompt introduction of governmental decrees to regulate financial conglomerates and banking groups, mirroring practices in several other nations, to mitigate systemic risks while promoting synergies across banking, securities, fund management, and insurance sectors.

A notable aspect of the amended law is its focus on enhancing credit accessibility for consumers and enterprises. It simplifies loan procedures, particularly for smaller credit, and introduces non-recourse payment services, a notable shift from the existing recourse-based systems. Additionally, the law expands the operational scope for financial leasing companies and payment agencies, reflecting a more inclusive and diversified financial services landscape.

In a nod to the digital age, the law also paves the way for innovative banking practices like online lending and electronic transactions, underpinned by a regulatory sandbox approach for fintech in the banking sector. This stance, however, demands meticulous implementation to balance technological advancement with risk management. The law also anticipates future regulations for entirely digital banks, aligning Vietnam with digital banking trends in Southeast Asia.

Another key reform is the tightening of ownership caps in credit institutions. The new law sets more stringent limits on individual and organisational shareholdings, aiming to prevent majority control by a single shareholder group. This measure is designed to curb cross-ownership and potential manipulations, as underscored by recent cases in the banking sector.

The law’s transitional provisions offer a pragmatic approach, allowing existing shareholders exceeding these limits to maintain their stakes, subject to a gradual compliance roadmap leading up to 2029. The effectiveness of this regulation hinges on its enforcement, emphasising the need for transparent and timely disclosure.

The law addresses credit concentration risks by revising exposure limits for credit institutions and non-bank counterparts. This gradual reduction in limits is expected to diversify credit risks, although it could pose challenges for large businesses reliant on substantial loans. To counterbalance this, the law encourages the development of more robust capital markets, urging enterprises to tap into equity and bond markets for their long-term financing needs.

Another pivotal aspect of the legislation is the heightened transparency standards. The law now requires senior officials in credit institutions, including board members and top executives, to disclose comprehensive personal and business-related information. Furthermore, shareholders with stakes exceeding 1 per cent of a bank’s charter capital must also make similar disclosures.

This push towards greater openness, particularly for non-listed institutions, aims to reduce the risks associated with cross-ownership and undue influence. The effectiveness of these measures, however, hinges on rigorous enforcement and commitment to timely and authentic information disclosure.

Another significant change is the prohibition of linking non-compulsory insurance product sales with banking services (Section 5, Article 15). This move, aligning with existing regulations in the Law on Insurance Business, is designed to protect consumer interests and is expected to impact the bancassurance model, potentially curtailing a key revenue stream for many banks in the short term.

Regarding risk management, the law strengthens the framework for dealing with underperforming and problematic institutions, particularly in situations requiring immediate intervention or in cases of mass withdrawal. It lays out clear guidelines for early intervention, special control measures, and handling scenarios involving significant customer withdrawals.

These provisions are intended to safeguard the banking system by enabling timely and appropriate responses to institutions facing significant issues, thereby reducing systemic risks and enhancing overall sector resilience.

In terms of soured debt and collateral management, the law fills a legislative gap left by the expiration of a 2017 resolution on pilot settlement of bad debts. It establishes clear guidelines for managing bad debts and collateral assets, ensuring a systematic approach to these critical aspects of banking operations.

However, the law stops short of expanding the scope of entities eligible to engage in bad debt trading, particularly in the private sector, suggesting potential challenges ahead in debt resolution.

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By Van Luc

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