Partner Hanoi
"The New Law contains an entire chapter on the application of ‘early intervention’ measures – with significantly more detailed provisions than the current law."
Below is a brief overview of the important legislative changes brought about by the New Law.
Security agent activity
Current law provides that “commercial banks shall be permitted to entrust others and to act as trustee and agent in sectors related to banking activities, insurance business and asset management in accordance with State Bank regulations”.¹ However, the SBV has not promulgated any further regulations on this service. Thus, whilst agency is a permitted service, how it is implemented in practice is not clear.
The New Law now provides that commercial banks and foreign bank branches can conduct other business activities in accordance with relevant laws, including acting as “agent managing the security assets for the lenders being international financial institutions, offshore credit institutions, onshore credit institutions and foreign bank branches”.² It appears that a commercial bank or a foreign bank branch may now perform the security agent role on a clearer basis.
Early intervention
The New Law contains an entire chapter on the application of ‘early intervention’ measures – with significantly more detailed provisions than the current law.
Recovery planning
Credit institutions and foreign bank branches in Vietnam will be required to conduct ‘recovery planning’ – in particular making plans for measures to be taken in cases of early intervention.³ The recovery plan must contain certain contents as prescribed under the New Law and must be approved by the general meeting of shareholders, members council or other appropriate entities representing the owner (as applicable) of such credit institutions or foreign bank branches.⁴
The New Law set a deadline of 1 July 2025 or within one year from the Banking License issuance date for all commercial banks and foreign bank branches to approve their recovery plans. In addition, the recovery plan of commercial banks and foreign bank branches must be updated and approved at least once every two years.⁵
Threshold for early intervention
While some thresholds for applying early intervention are remaining the same as under the current law, a threshold has been lowered compared to the current law and new thresholds have also been introduced, in particular:⁶
"The New Law has a specific legal regime to deal with banks facing a mass withdrawal of deposits."
| Current Law | New Law |
|---|---|
| Non-compliance with the capital adequacy ratio (being 8% or a higher ratio subject to regulations of the SBV Governor from time to time) for a continuous period of six months. | |
| Below-average rating by the SBV Governor. | |
| Non-maintenance of the required coverage ratios for a continuous period of three months. | Non-maintenance of the required coverage ratios for a continuous period of 30 days. |
| Not provided | Accumulated loss exceeds 15% of the charter capital, provided capital and the reserves fund and non-compliance with the required capital adequacy ratio. |
| Not provided | Subject to mass withdrawal which have been notified to the SBV governor. |
Powers of the SBV
The New Law gives the SBV significant powers upon a credit institution or a foreign bank branch falling into one of the thresholds for early intervention described above.⁷ In particular:
a) the SBV may request such credit institution or foreign bank branch to increase its capital or liquidity reserves, decrease its operating costs or conduct internal reorganisation; and
b) the SBV may also restrict dividend payout, transfer of shares, disposal of assets or credit provisions; restricts or suspends certain scopes of business; or require changes to the management of such credit institution or foreign bank branch.
In addition to the above, the New Law specifies measures which the SBV can apply to support a credit institution subject to early intervention. Most significantly, if the relevant credit institution seeks to increase its charter capital pursuant to the recovery plan, the SBV may agree to temporarily suspend the usual restriction upon shareholding by a single shareholder and its related parties (see section 5 below).
The New Law also empowers the SBV to approve further bespoke measures which may be applied in respect of credit institutions whose losses exceed 50% of its charter capital and reserve funds, e.g. the receivables interest to be divested is allowed to be allocated according to the credit institution’s financial capacity based on certain principle, for a maximum period of five years.⁸
Bank run⁹
The New Law has a specific legal regime to deal with banks facing a mass withdrawal of deposits. It defines mass withdrawal as “the simultaneous withdrawal of deposits by multiple depositors resulting in a credit institution being at risk of losing its abilities to pay or actually losing its ability to pay in accordance with regulations by the SBV Governor”.
"The New Law has a whole chapter for handling non-performing loans of credit institutions and foreign bank branches which incorporates provisions of current guiding instruments, in particular those secured by land use rights and immovables (including future immovables)."
A credit institution subject to mass withdrawal must (1) immediately cease to pay dividends in cash; (2) suspend or restrict credit provision activities or any other activities which utilise the credit institution’s cash; (3) adopt other measures to ensure ability to meet depositors’ withdrawals; and (4) apply measures stipulated in the approved recovery plan.
To respond to a mass withdrawal scenario, the SBV has the power to provide extraordinary loans to credit institutions (1) to repay depositors in a mass withdrawal scenario; and (2) to effect a recovery plan or compulsory transfer of a credit institution.
The New Law empowers the SBV to make regulations on and approve interest-bearing and secured extraordinary loans. This is a relaxation of the existing SBV regulations, which require the terms of all any extraordinary loans to be subject to approval by the Prime Minister. Nevertheless, the New Law still requires that any extraordinary loans which are either interest-free or unsecured be subject to the approval of the Prime Minister.
Pursuant to current law, extraordinary loans will take priority in repayment over all other debt and liabilities (including secured debts and liabilities) of a credit institution only upon (1) the extraordinary loan becoming due and payable (unless the recovery plan has not been approved); or (2) the dissolution or bankruptcy of the credit institution. The New Law has removed these two limitations, such that any extraordinary loans will take priority in repayment over all other debt and liabilities (including secured debts and liabilities) of a credit institution at all times.
Non-performing loans¹⁰
The New Law has a whole chapter for handling non-performing loans of credit institutions and foreign bank branches which incorporates provisions of current guiding instruments, in particular those secured by land use rights and immovables (including future immovables). Notably, the New Law allows a purchaser of such a loan to be registered as the mortgagee of the relevant security and to succeed to all the rights and obligations of the original mortgagee. It also sets out the order of application in respect of proceeds from the enforcement of security for a non-performing loan, which generally aligns with the existing general principles under the Civil Code.
Changes to the definition of “related parties” and share ownership limit
The New Law introduces several measures intended to prevent cross-ownership and manipulation of credit institutions:
a) Widening the definition of “related parties”: “related parties” now include the relationships between (i) an entity and the subsidiary of its subsidiary; (ii) the subsidiaries of the subsidiary of the same parent company; and (iii) an entity and any of its shareholder holding more than 5% equity or voting rights. The New Law further categorises a list of individual family relationships to include uncles, aunts, grandparents, granddaughters, and grandsons as “related parties”.¹¹ It is also stricter than the definition of “related parties” under the Law on Securities No. 54/2019/QH14 dated 26 November 2019 of the National Assembly (the “Law on Securities”), which currently only applies for public companies, as the Law on Securities does not include those individuals; and
b) Lowering the share ownership limit: an institutional shareholder may not hold more than 10% of the charter capital of a joint stock credit institution (down from 15% under the current Law).¹² The collective shareholding limit for a shareholder and all of its related parties is 15% of the charter capital of a joint stock credit institution (down from 20% under the current Law).¹³ Entities with larger shareholding than the limit prescribed by the new Law are not required to divest their shareholding, however, they will not be permitted to acquire new shares until their shareholding are reduced to below the prescribed limit, except for the case that such new shares are distributed as dividends to existing shareholders.¹⁴
"The New Law introduces several measures intended to prevent cross-ownership and manipulation of credit institutions."
Reduction of the credit extension limit
The limit on extending credit to single borrowers or group, calculated as a percentage of the credit institution’s or the foreign bank branch’s equity, will be subject to a staged reduction as follows:¹⁵
| Limitation on the credit extension to a single borrower | • current limit before 1 July 2024: 15%; • from 1 July 2024 to before 1 January 2026: 14%; • from 1 January 2026 to before 1 January 2027: 13%; • from 1 January 2027 to before 1 January 2028: 12%; • from 1 January 2028 to before 1 January 2029: 11%; and • from 1 January 2029: 10%. |
| Limitation on the credit extension to a single borrower and related parties of such borrower | • current limit before 1 July 2024: 25%; • from 1 July 2024 to before 1 January 2026: 23%; • from 1 January 2026 to before 1 January 2027: 21%; • from 1 January 2027 to before 1 January 2028: 19%; • from 1 January 2028 to before 1 January 2029: 17%; and • from 1 January 2029: 15%. |
Disclosure obligations¹⁶
The New Law provides that a shareholder holding 1% or more of a credit institution’s charter capital must disclose to the credit institution the following information:
- full name, nationality and details of personal identity documents (in the case of individual shareholders);
- details of its business registration certificate or equivalent legal documents (in the case of institutional shareholders);
- details of its related parties;
- number and percentage of shares owned; and
- number and percentage of shares owned by its related person.
Credit institutions must (i) publish and store the above information at the credit institutions’ headquarters and report in writing to the SBV within seven working days from the date of receipt of the above information; and (ii) publicly disclose information about the full name, number and percentage of shares owned of each shareholder holding 1% or more of a credit institution’s charter capital, on its website within seven working days from the date of receipt of the information.
Consolidation of establishment and operation license and business registration certificate
Previously, a credit institution or a foreign bank branch must obtain both (i) an establishment and operation license (giấy phép thành lập và hoạt động), or the foreign bank branch establishment license (the “Banking License”) from the SBV and (ii) the relevant business registration certificate from the business registration authorities. Under the New Law, the Banking License also functions as the business registration certificate of a credit institution or a foreign bank branch,¹⁷ thus removing the need for credit institutions to obtain a separate business registration certificate.
Legal Trainee Tien Le and Paralegal Phan Nguyen also contributed to this article.
footnotes
[1] Article 106 of the current Law
[2] Article 114.2(dd) and Article 131.1 of the new Law
[3] Article 158 of the new Law
[4] Article 143.2, 143.3, 143.4 and 158.2 of the new Law
[5] Article 143.5 of the new Law
[6] Article 156.1 of the new Law
[7] Article 157.1 and 157.2 of the new Law
[8] Article 159.2 of the new Law
[9] Chapter XI of the new Law
[10] Chapter XII of the new Law
[11] Article 4.24 of the new Law and Article 4.24 of the current Law
[12] Article 63.2 of the new Law and Article 55.2 of the current Law
[13] Article 63.3 of the new Law and Article 55.3 of the current Law
[14] Article 210.11 of the new Law
[15] Article 136.1 of the new Law
[16] Article 49 of the new Law
[17] Article 27 of the New Law