THE NEW 2024 LAW TIGHTENS THE OPERATION MANAGEMENT AND STRENGTHENS THE SYSTEMATIC RISK GOVERNANCE OF CREDIT INSTITUTIONS

On January 18, 2024, the National Assembly passed the Law on Credit Institutions ("LCI") 2024, replacing the LCI 2010 and the Law amending and supplementing some articles of the LCI 2017 (hereinafter referred to as "LCI 2010"). The LCI 2024 will come into effect from July 1, 2024, and is expected to further restructure the system of credit institutions (“CIs”) associated with bad debt handling, improve the institutional framework in the monetary and banking sector in line with market principles, ensuring the safety, soundness, and stability of the system, and timely and thoroughly addressing weak CIs. In order to provide a clearer insight into the changes in the LCI 2024, in the article "NEW LAW 2024 TIGHTENING MANAGEMENT ACTIVITIES AND ENHANCING RISK MANAGEMENT OF THE CREDIT INSTITUTION SYSTEM" below, ATA Legal Services will focus on comparing and analyzing the new points of the LCI 2024. Specifically as follows:

1. Supplementing regulations to enhance the responsibility of CIs towards customers

1.1. Enhancing management, protection of customer data in the banking sector

Banks are among the entities with the largest collection and processing of personal data and are also areas with many risks of leakage and trading of data. The LCI 2010 had provisions on customer information security; however, these provisions were not stringent enough and did not effectively ensure maximum information security. Specifically, the subject matter ensured confidentiality includes information related to accounts, deposits, deposited assets, and transactions of customers at CIs, overseas bank branches. Therefore, this provision left open the subjects as personal information of customers such as phone numbers, personal identification information, addresses, etc. In fact, according to statistics from Viettel Cyber Security Company, in 2023, more than 30,000 bank accounts were compromised. This information can be exploited to perform activities such as soliciting services through calls, spam messages, being exploited by fraudulent criminals. In the banking sector, fraud mainly includes fraud through online lending, international money transfers; impersonating e-wallets as well as services related to credit cards.

Regarding this issue, Decree No. 13/2023/NĐ-CP on personal data protection issued in 2023 has created a legal corridor to protect personal data with many stringent provisions on data protection and the responsibility to protect personal data of relevant agencies, organizations, and individuals. CIs, overseas bank branches are not beyond the scope of Decree No. 13/2023/NĐ-CP. Accordingly, to unify regulations on personal data protection in the banking sector, the LCI 2024 updates, supplements the obligations of CIs, overseas bank branches to ensure the confidentiality of customer information according to the regulations of the Government, specifically the provisions of Decree No. 13/2023/NĐ-CP. The enactment of specialized laws in the financial, banking sector officially recognizing customer personal information as a subject to be kept confidential will have the significance of enhancing the rigor and effectiveness of the provisions, raising awareness and increasing the binding force for CIs to strictly comply with this responsibility.

In addition, the Law also supplements principles on data security and ensuring continuous operations. Specifically, Article 14 of the LCI 2024 stipulates that CIs, overseas bank branches must ensure the safety of information systems, data security, and continuous operations according to the regulations of the State Bank Governor and other relevant legal provisions.

1.2. Strict prohibition on tying the sale of non-mandatory insurance products to the provision of banking products, services

Article 15 of the LCI 2024 supplements provisions strictly prohibiting CIs, overseas bank branches, managers, executives, and employees of CIs, overseas bank branches from tying the sale of non-mandatory insurance products to the provision of banking products, services in any form.

It can be said that this is one of the eagerly awaited provisions nowadays as the lending activities of banks have been and are being exploited as a means of distributing insurance products and services. Accordingly, the provision prohibiting the linking of two activities, "selling non-mandatory insurance products" and "providing banking products, services" together, has effectively prevented behaviors including making the purchase of insurance a condition for providing loans, directing customers to purchase insurance at affiliated companies, partner insurance companies, etc., enticing customers to borrow money to buy insurance, etc.

This provision has addressed one of the glaring issues in the banking industry recently, further ensuring the rights and legitimate interests of borrowing customers.

II. Strengthening supervision, control, support, and handling of CIs' activities

2.1. The State Bank, foreign bank branches must develop expected remedial plans when falling into the need for "early intervention"

Compared to the LCI 2010, the LCI 2024 supplements the requirement for commercial banks and foreign bank branches to proactively develop expected remedial plans when they are in need of applying the "early intervention" mechanism as regulated. This plan must include content regarding: organizational structure; financial status, operations; remedial measures; and the timeline, deadline for implementing remedial measures to address the unsafe capital situation of commercial banks, foreign bank branches as prescribed.

This expected remedial plan must be developed, submitted before July 1, 2025, or within one year from the date the commercial bank, foreign bank branch is granted a License for establishment and operation. Additionally, this plan must be updated, adjusted periodically at least every 2 years, and each approved plan must be sent to the State Bank.

In the event that (i) a credit institution subject to early intervention does not submit a remedial plan to the State Bank or fails to adjust the remedial plan according to the State Bank's requirements; or (ii) within the timeline for implementing the remedial plan, the credit institution subject to early intervention is unable to implement the remedial plan; or (iii) upon the expiration of the timeline for implementing the remedial plan without the credit institution being able to remedy the situation leading to the implementation of early intervention, then the State Bank will consider, decide to place the credit institution under special supervision as prescribed.

It can be seen that the above provisions reflect the state's efforts to strengthen management, monitoring, and support to ensure the safety of capital for commercial banks, foreign bank branches - sensitive entities regarding the domestic financial and monetary situation. Having timely scenarios, plans are necessary to ensure the safety of the entire banking system, especially as delays, hesitation in handling problematic banks are one of the major causes leading to systemic crises, which can have far-reaching impacts on other sectors in the economy.

However, on the other hand, these provisions also impose additional obligations for regular reporting that commercial banks, foreign bank branches need to comply with.

2.2. Supplementing provisions on handling cases of CIs experiencing mass withdrawals

The concept of "mass withdrawals" is first mentioned in the LCI 2024, which refers to the situation where a credit institution faces the risk of losing its ability to pay or the ability to pay as required due to multiple customers withdrawing funds simultaneously.

According to the LCI 2024, being subject to mass withdrawals is one of the cases for the State Bank to consider applying the "early intervention" or "special supervision" mechanisms, depending on the severity. However, due to the seriousness and high risk of "mass withdrawals," the LCI 2024 also outlines immediate measures to cope with this situation when CIs encounter it. Specifically:

a. CIs experiencing mass withdrawals must report to the State Bank and immediately take the following measures:

- Do not distribute dividends in cash; temporarily suspend or restrict lending activities and other activities utilizing the institution's funds; implement other solutions to meet deposit repayment requirements for customers;

- Implement measures outlined in the remedial plan for situations involving mass withdrawals as required; update and adjust the plan when necessary.

b. If a credit institution subject to early intervention experiences mass withdrawals, it must report to the State Bank about the situation and review, evaluate the current situation to develop or adjust the remedial plan accordingly and implement it accordingly.

c. CIs experiencing mass withdrawals are eligible for the following support measures:

- Selling valuable papers to the State Bank in open market operations at a 0% interest rate;

- Engaging in foreign exchange transactions with the State Bank to ensure liquidity as prescribed;

- Special borrowing from the State Bank, cooperative banks, people's credit funds, microfinance institutions, special borrowing from deposit insurance organizations, special borrowing from other CIs as regulated.

2.3. Enhancing the responsibility of credit institution managers when the institution is placed under special supervision

According to the provisions of the LCI 2010, CIs placed under special supervision are those that are weak, insolvent, at risk of insolvency, at risk of payment default, or have accumulated losses exceeding 50% of the equity capital and reserves recorded in financial statements, or fail to maintain the prescribed capital adequacy ratio. It can be seen that under the previous regulations, CIs placed under special supervision were often in difficult or irreparable situations. However, the new provisions of the LCI 2024 focus on early prevention and warning for CIs showing signs of weakness and non-compliance. Accordingly, the cases of CIs subject to State Bank review and decision for placement under special supervision have been modified and supplemented as follows:

- CIs subject to early intervention do not submit a remedial plan to the State Bank or fail to adjust the remedial plan according to the written request of the State Bank;

- Within the timeline for implementing the remedial plan, CIs subject to early intervention are unable to execute the remedial plan;

- Upon expiration of the timeline for implementing the remedial plan without the credit institution being able to rectify the situation leading to early intervention;

- Experiencing mass withdrawals and posing a risk to the safety of the credit institution system;

- The capital adequacy ratio of the credit institution is less than 4% for six consecutive months;

- Dissolved CIs unable to fully repay debts during the asset liquidation process.

Additionally, the LCI 2024 also adds provisions regarding accompanying measures when a credit institution is placed under special supervision. These measures include:

- From the date the credit institution is placed under special supervision, owners, capital contributors, shareholders of the institution must report the use of shares, capital contributions; not transfer shares, capital contributions; not use shares, capital contributions as collateral, except as required by competent state authorities;

- From the date the credit institution is placed under special supervision, the principal and interest of its refinanced loans at the State Bank are converted into principal and interest of special loans and continue to be executed under the mechanism of refinancing these special loans; the principal and interest of the loans from people's credit funds at cooperative banks are converted into principal and interest of special loans and continue to be executed under the lending mechanism of cooperative banks for people's credit funds.

These are entirely new additions compared to previous regulations. Implementing measures immediately from the date the credit institution is placed under special supervision is significant in preventing consequences and minimizing risks for both the institution and customers, thereby enhancing the responsibility of managers when the institution is placed under special supervision.

2.4. Reducing credit limits in phases

LCI 2024 adjusts the credit limits of CIs as follows:

The new regulations aim to minimize the risk of lending depending on a group of customers, aiming for tighter management of the capital adequacy ratio of CIs to avoid instability in the system. Regarding the credit granting ratio of commercial banks, foreign bank branches, people's credit funds, and microfinance institutions, LCI 2024 provides a gradual reduction plan for the credit granting ratio over five years (until 2029). This is a suitable provision to help these entities, often large and sensitive CIs, avoid sudden capital shortages that could affect the capital market as a whole.

III. Enhancing Transparency in Organization, Management, and Operation of CIs

3.1. Adjusting Regulations on Capital Contribution, Share Purchase of CIs in a Tighter Manner

The LCI 2024 introduces additional restrictions regarding capital contribution and share purchase in CIs as follows:

The aforementioned provisions aim to ensure capital safety in CIs and limit cross-ownership, controlling, and manipulation of banks, thereby making the FI system more transparent, accountable, and secure.

Regarding the reduction of the shareholder ownership ratio in CIs, the LCI 2024 also provides guidelines for the enforcement of these regulations as follows:

- From the effective date of the LCI 2024, shareholders, large shareholders, and related persons owning shares exceeding the aforementioned ownership ratio shall continue to maintain their ownership ratio but shall not increase their shares until they comply with the regulations on share ownership ratio as stipulated, except for receiving stock dividends.

- The maximum shareholding ratio of a large shareholder, a shareholder, and related persons in a commercial bank performing national defense tasks exceeding the mentioned share ownership ratio before the effective date of the LCI 2024 shall be maintained at an appropriate share ownership ratio according to the previous regulations in the LCI 2010.

3.2. Expanding the Scope of "Related Persons"

To ensure safety in the operations of CIs and transparency in share ownership of shareholders and related persons of those shareholders, limiting the manipulation of FI activities, the LCI 2024 has added several groups of related persons including:

- Parent companies with subsidiary companies of their subsidiaries, and vice versa;

- CIs with subsidiary companies of their subsidiary companies, and vice versa;

- Controllers of parent companies or CIs;

- Companies or CIs with controllers of companies;

- Individuals with grandparents; grandchildren; paternal or maternal uncles, aunts, nephews, and nieces;

- Other related groups for customers of people's credit funds as regulated.

Compared to the provisions on related persons in regulations such as the Enterprise Law, Securities Law, etc., it can be seen that the scope of related persons according to the LCI is more comprehensive, ensuring clarity in determining related persons and demonstrating strict control over the internal governance activities of CIs.

3.3. Tightening the Conditions for Holding Positions in CIs

The LCI 2024 adds individuals who are not allowed to be members of the Board of Directors, members of the Board of Members, members of the Supervisory Board, the General Director (Director), Deputy General Director (Deputy Director), and equivalent titles as regulated in the Charter of the CIs, including:

- Persons related to members of the Supervisory Board, Deputy Directors of the people's credit fund; and

- Individuals responsible according to inspection conclusions leading to CIs, foreign bank branches being fined for administrative violations in the monetary and banking sector at the highest fine level for violations of regulations on licensing, management, operation, shares, stocks, capital contribution, share purchase, lending, corporate bond purchase, safety assurance ratio as regulated by law on handling administrative violations in the monetary and banking sector.

Here, as analyzed, the concept of "related persons" is also expanded by the LCI 2024, making the scope of individuals not allowed to hold positions in CIs increasingly diverse.

3.4. Supplementing Requirements for Providing Information for Shareholders, Managers, and Related Parties

a. Adding provisions requiring members of the Board of Directors, members of the Board of Members, members of the Supervisory Board, the General Director (Director), Deputy General Director (Deputy Director), and equivalent titles as regulated by the CIs to provide additional information about their related parties (including both individuals and organizations).

b. Shareholders owning from 01% of the charter capital or more of the CIs must provide legal information; related parties; the quantity and proportion of their shares and those of their related parties in the CIs.

All the above information must also be listed by the CIs, kept at their main headquarters, and reported to the State Bank of Vietnam within 7 working days from the date the CIs receive the provided information. Additionally, annually, the CIs must also disclose this information to their Shareholder General Meeting, Members' General Meeting, and Board of Members.

3.5. Enhancing Objectivity in the Operations of the Board of Directors of Joint Stock Companies

The LCI 2024 strengthens transparency, objectivity, and independence in the operations of the Board of Directors (BoD) of joint-stock companies (JSCs) by regulating an increase in the number of independent members of the BoD and reducing the proportion of related persons participating in the BoD.

Specifically, according to the new regulations, the BoD must have a minimum of 02 independent members (previously it was 01), and ⅔ of the total number of members must be independent members (previously it was ½).

The new regulations also limit the number of related persons participating in the BoD of JSCs. Previously, individuals and related persons of these individuals or representatives of a shareholder organization and related persons of these individuals were allowed to participate in the BoD, but not exceeding one-third of the total number of BoD members. According to the new provisions of the LCI 2024, individuals and related persons of these individuals or representatives of a shareholder organization and related persons of these individuals may participate in the BoD but not exceed 02 BoD members of a JSC.

IV. Supplementing Guidelines, Creating Conditions for the Operations of CIs

4.1. Simplifying Procedures for Small-Value Loans

The LCI 2010 stipulates that CIs must request customers to provide documents proving the feasibility of their capital utilization plan, their financial capacity, the legal purpose of capital utilization, and measures to secure the loan before deciding to grant credit, without distinguishing the value of the loan.

However, to simplify credit-granting procedures, Article 102 of the LCI 2024 specifically regulates that for some small-value loans, CIs only need to request customers to provide minimal information about the legal purpose of capital utilization and the customer's financial capacity before deciding to grant credit. Small-value loans include:

• Loans for living expenses, credit card loans from commercial banks, branches of foreign banks;
• Financial leasing, consumer loans, non-bank credit institution card loans;
• Loans for the living expenses of people's credit funds;
• Loans from microfinance institutions.

This provision contributes to simplifying and providing flexibility in the credit-granting operations of CIs for customers seeking small-value loans, ensuring the rights of borrowers, and supporting low-income individuals' access to credit.

4.2. Legalization of Provisions on Non-performing Loan Handling and Collateral of CIs

Although the LCI 2010 does not address certain issues related to handling non-performing loans (NPLs) and collateral of CIs, these matters have been mentioned in other legal documents such as Circular 09/2015/TT-NHNN on the trading of NPLs by CIs and foreign bank branches, or Resolution 42/2017/QH14 on the pilot handling of NPLs by CIs, etc.

Compared to Resolution 42/2017/QH14, the LCI 2024 has legalized and supplemented a chapter on handling NPLs and collateral, notably as follows:

a. Clear and unified provisions regarding the scope of application of NPL handling, including:

- NPLs of CIs, foreign bank branches, including NPLs that are already written off in the accounting balance sheet and NPLs that have been provisioned for risk but have not been recovered and are monitored off the balance sheet as regulated;

- NPLs acquired by organizations for trading, handling acquired by CIs, foreign bank branches but have not been recovered.

b. Inheritance and supplementation of provisions on the priority order of payment when handling collateral assets of NPLs. Accordingly, the LCI 2024 specifies that the proceeds from handling collateral assets of NPLs shall be allocated in the following priority order:

• Costs of collateral asset preservation;
• Costs of retention and handling of collateral assets;
• Court fees for judgments, decisions of the court related to the handling of collateral assets;
• Taxes, fees directly related to the transfer of collateral assets, including personal income tax, stamp duty;
• Secured obligations for CIs, foreign bank branches, organizations for trading, handling of debts;
• Other obligations without collateral as stipulated by law.

c. Supplementing provisions allowing CIs to transfer the entire or part of real estate projects as collateral assets to recover debts to harmonize with the provisions of the Law on Real Estate Business 2023.

It can be seen that the financial market plays a crucial role in the development of each economy but at the same time poses systemic risks. Both globally and in Vietnam, there have been many financial crises related to the weakness of the banking system. Controlling and creating a legal framework for the development of CIs, especially banks, is always an important priority. With tightening regulations and enhancing risk management as mentioned above, the LCI 2024 is expected to contribute to creating a transparent, stable, and safe capital market and financial market, thereby promoting economic development as a whole.

[1] https://cafef.vn/hon-30000-tai-khoan-ngan-hang-tai-viet-nam-bi-danh-cap-du-lieu-hang-chuc-trieu-du-lieu-ca-nhan-bi-rao-ban-188231116065244952.chn

[2] According to Article 156 of the LCI 2024, the specific cases requiring consideration for the application of "early intervention" by CIs and foreign bank branches have been amended and supplemented to include:

1. When the cumulative loss ratio of a CI or foreign bank branch exceeds 15% of the value of charter capital, contributed capital, and reserve funds recorded in the most recent audited financial statements or according to the conclusions of inspections, audits by competent state agencies, and violates the minimum capital adequacy ratio requirements (this is a newly added provision).
2. Being rated below average according to regulations.
3. Violating the repayment capacity ratio as prescribed continuously for 30 days (previously 03 consecutive months).
4. Violating the minimum capital adequacy ratio requirements continuously for 06 months.
5. Experiencing a massive withdrawal of funds and reporting to the State Bank (this is a newly added provision).

[3] According to Clause 1 of Article 162 of the LCI 2024.