VnEconomy / Vietnam Economic Times held an online dialogue on February 3 regarding the amended Law on Credit Institutions, with the theme “Allocating resources effectively”.

The National Assembly passed the amended Law on January 18, which comprises 15 chapters and 210 articles and will take effect from July 1. It adds new regulations on four key issues: ownership limits; credit limits for customers and groups of customers; risk prevention, early intervention, and the handling of credit institutions; and the handling of bad debts.

Handling cross-ownership and bank manipulation through regulations on ownership ratio limits is among the focal points in the amended Law. Article 55 stipulates that the ownership ratio of one shareholder reduces from 15 per cent to 10 per cent. The ownership ratio of shareholders and related parties has decreased from 20 per cent to 15 per cent.

“This is one of the aspects that, compared to the previous iteration, has been adjusted, and this adjustment is also one of the aspects related to limiting the manipulation by shareholders over the operations of credit institutions,” said Dr. Nguyen Quoc Hung, Vice President and General Secretary of the Vietnam Banks Association. “However, the ownership ratio of one shareholder decreasing from 15 per cent to 10 per cent, and the ownership ratio of shareholders and related parties decreasing from 20 per cent to 15 per cent, is, in my view, a necessary measure to reduce ownership ratios that influence the control of credit institutions’ activities.”

According to Lawyer Truong Thanh Duc, Director of the ANVI Law Firm, to avoid negative impacts and the risk posed to the entire banking system due to the concentration of banks, it is necessary to focus on addressing several issues. Firstly, the ownership ratio of shares. When shareholders and related parties hold a large ownership ratio, they naturally dominate the bank’s operations. Second is the lending ratio, and third other governance and management issues.

“Compared to the rest of the world, the ownership ratio of banks in Vietnam has been tightly controlled and is not extravagant at all, but in reality cases of bank manipulation still occur, with many lessons learned,” said Mr. Duc . “Therefore, it is necessary to exert rigorous management at all stages"

Mr. Duc emphasized that not only limits on the ownership ratio but also detailed implementing documents of the Law need to be designed to control the sources of capital contribution by shareholders. “If this is the money that shareholders contribute to the bank, this is very good, but in reality, there are situations where capital is inflated,” he said.

In addition, Article 49 also adds provisions on providing and disclosing information to shareholders owning from 1 per cent of the charter capital of credit institutions.

The forwarding provision of Article 5 of Article 210 allows shareholders and related parties exceeding the prescribed ratio to continue to hold their share but must also have a reduction plan.

Dr. Quoc Hung also assessed that this regulation will have a positive impact on preventing cross-ownership and bank manipulation. For example, in the case of SCB bank, an individual holds over 90 per cent of the bank’s shares through hundreds of nominees, but the regulatory authorities do not know who the representative is until the investigative agency intervenes.

“Shareholders owning 1 per cent of the capital must also disclose transparent information so that management agencies and the public can assess their actual capabilities,” he said. “Is this really the money they contribute to the bank? Through the information to be disclosed, such as personal information, occupation, and financial status, the management agency can identify the person named as a shareholder.”

The Vietnam Bank for Agriculture and Rural Development (Agribank), as a 100 per cent State-owned bank, without external shareholders, is actively reviewing related persons of individuals holding managerial positions to comply with the new regulations, according to Mr. Vu Viet Hung, Deputy Head of the Legal Department at Agribank.

In addition, Mr. Quoc Hung has repeatedly emphasized that to effectively address the issue of bank manipulation, it is necessary to enhance the supervisory role of the Board of Directors and the Supervisory Board at credit institutions.

Diversifying credit portfolios and reducing concentration risk through co-financing schemes

Article 136 of the Amended Law on Credit Institutions reduces the credit limit for a customer from 15 per cent to 10 per cent of the bank’s equity for commercial banks, foreign bank branches, people’s credit funds, and microfinance institutions by 2029; and reduces the credit limit for a customer from 25 per cent to 15 per cent of the equity of non-bank institutions by 2029. According to experts, with this new regulation, credit institutions will have to diversify their credit portfolios, minimizing concentrated risk. This regulation aims to reduce lending limits for related customer groups. The provision will help develop sustainable lending activities in the long term. However, in the short term, banks lending to related customer groups will face pressure to restructure their loans.

“The proverb ‘Don’t put all your eggs in one basket’ is very true for the banking industry,” said Mr. Duc. “Previously, banking ordinances stipulated that the ten largest customers of a credit institution could not account for more than 60 per cent of total outstanding loans of that credit institution. The banking sector is unlike other sectors due to its large interconnections. In other fields, the strong survive, and the weak perish, but if you are a credit institution, you must ensure the safety requirements set by the management agency.”

Mr. Quoc Hung said the trajectory for reducing credit limits for a customer group by 2029 will also help businesses prepare to access other credit institutions or other capital mobilization channels. From now on, it is necessary to strengthen and develop a stable capital market so that institutions and enterprises can mobilize capital for production and business activities in the capital market. Banking credit is only supplementary capital, not medium or long-term investment capital.

Along with that, Mr. Quoc Hung proposed that the management agency have a policy mechanism to encourage credit institutions to unanimously open co-financing commitments.

“Perhaps banks have a mentality that if a customer is good, they must keep them for themselves, but I think there needs to be a change in mindset,” he said. “If banks co-finance, then businesses will have as much capital as they need, so there’s no need to worry about capital shortages.”

Agreeing, Mr. Duc believes that if many banks participate in co-financing, the risk will be dispersed. At the same time, risk control activities will be better because a customer / project will have more appraisers, inspectors, and reviewers.