Key changes and impacts to be aware of 6 min read
The newly passed Law on Credit Institutions 2024 (effective from 1 July 2024) will lower the ownership limits in Vietnamese credit institutions to address cross-ownership issues. It will also impose stricter ownership disclosure requirements to increase market transparency.
In this Insight, we highlight the key changes and its impact on investors and the operations of Vietnamese credit institutions.
The new law reduces the ownership limit in Vietnamese credit institutions by Vietnamese investors as shown in the table below:
|Any individual shareholder
|Any institutional shareholder
|Any shareholder and its related persons
For the purpose of the above limits, ownership includes 'indirect ownership' through (i) an investment trust or (ii) an entity where the investor owns more than 50% interest.
The new law also casts a wider net on who is considered a 'related person' including, among others, grandparents, grandchildren, uncles, aunts, and nieces/nephews. This expanded definition and the enhanced disclosure requirement, as discussed below, aim to provide more control and transparency over the shareholder structure of Vietnamese credit institutions. This is consistent with the current policy to prevent 'shadow ownership' and concentration of ownership and control within credit institutions.
No forced divestment
The new law allows existing shareholders with current shareholding exceeding the new ownership limits to keep their current shareholding. However, they are not permitted to acquire additional shares unless their shareholding reduces to below the new limits (except for additional shares obtained through stock dividends).
The new law suggests that ownership limits applicable to 'foreign' shareholders will be provided later by the Government. This means until the new decree to implement the new law is issued, limits for foreign shareholders will remain the same as under Decree 01/2014/ND-CP as follows:
Current foreign ownership limit
|Any individual foreign shareholder
|Any institutional foreign shareholder
|Any strategic foreign investor
|Any foreign shareholder and its related persons
Under the current law, the same ownership limit rules apply to both Vietnamese and foreign investors. So the current Decree 01 may be amended by the Government to adopt the reduced ownership limits under the new law for foreign investors as well. However, so far we are not aware of any indication of the approach to be taken by the Government on this issue.
The current law only requires the management of credit institutions to disclose their related interest (eg the enterprise's identity which he/she is the management or holds 5% or more of the charter capital). For listed credit institutions, there are only disclosure requirements in relation to major shareholders (ie who hold 5% or more of voting shares).
The new law now requires that any shareholder (whether it is a foreign or domestic investor) holding 1% or more of the charter capital of a credit institution must disclose the following information to such credit institution:
- identification of such shareholder;
- related persons of such shareholder; and
- number of shares and ownership ratio of the shareholder and its related persons and any change to such ownership ratio by a 1% increment or decrement.
Such shareholders must also inform the credit institution of any changes to the disclosed information within seven business days of the change.
The credit institutions will publish and keep such information at their head office. Further, this information will be reported to the State Bank of Vietnam (SBV) and posted on the credit institution's website (except for the identity of the related persons) within seven business days from its receipt.
Restriction on investment
Credit institutions are no longer allowed to contribute capital or buy shares in other companies or other credit institutions that are related to persons of the major shareholders of such credit institutions. This rule will also apply to subsidiaries of credit institutions.
Single borrowing limits
The new law sets out a schedule for commercial banks and foreign bank branches to reduce their credit exposure1 to a single client and its related persons as follows:
A single client
A single client and related persons
|Before 1 July 2024 (current law)
|1 July 2024 – 1 Jan 2026
|1 Jan 2026 – 1 Jan 2027
|1 Jan 2027 – 1 Jan 2028
|1 Jan 2028 – 1 Jan 2029
|From 1 Jan 2029 onwards
Further, the new law also reduces the ratio of non-bank credit institutions from 25% to 15% applicable to a single client and from 50% to 25% applicable to a single client and related persons with effect from 1 July 2024.
In a welcoming move to reduce administrative burdens, credit institutions will now only need to obtain and hold one license from the SBV for its establishment and operation without the need to apply for an enterprise registration certificate from the Department of Planning and Investment (DPI). However, it is unclear if credit institutions still have an obligation to notify the DPI of any change in its corporate information (eg name, capital or address of headquarters) for DPI to sync the credit institutions' corporate information into the National Enterprise Registration Portal.
In another major administrative improvement, SBV approval will no longer be required for share sale by a major shareholder of a credit institution (even if following such sale, the selling shareholder ceases to be a major shareholder) unless such sale results in the buyer becoming a major shareholder.
Previously, the SBV issued directives and carried out inspections to correct the practice of tying non-compulsory insurance products (eg life insurances) to banking services (such as loans). Now, the new law formalises this restriction, explicitly prohibiting credit institutions, foreign bank branches, and their staff from linking the sale of optional insurance products with the provision of any banking services. The law provides that the SBV will issue further guidance on bancassurance activities by credit institutions.
The new law has supplemented two following scenarios where the SBV can intervene early in the credit institutions' operation before putting the credit institutions under the SBV's special control:
- bank run2 and report to the SBV; or
- accumulated losses are greater than 15% of the charter capital, allocated capital and reserve funds; and the CAR is lower than 8% or a higher threshold regulated by the SBV from time to time.
This is the ratio of total outstanding credit extended to a single client and its own capital.
'Bank run' occurs when a large group of depositors withdraw their money from banks at the same time leading to the insolvency or risk of insolvency of credit institutions.