The business landscape for commercial banks in Vietnam is undergoing significant shifts, as the Draft Law on Credit Institutions has outlined various proposed changes to the regulatory framework governing credit institutions operating within the country. The proposed modifications would bring about consequential adjustments to the day-to-day operations and activities of commercial banks. As Vietnam’s economy continues to mature and attract foreign investment, it is crucial for commercial banks to remain abreast of any changes to the legal and regulatory landscape, in order to navigate the sector’s evolving challenges and capitalize on future opportunities.

Overview

Proposed amendments to the Law on Credit Institutions under review by Vietnam’s National Assembly would have significant implications for the country’s banking industry, particularly regarding the operations of commercial banks. Among the proposed changes affecting commercial banks under the draft revised Law on Credit Institutions are provisions allowing for electronic loan processing, new definitions for “payment agents” and “treasury services,” and the removal of asset management and consultancy services from bank operations. The draft Law on Credit Institutions includes a measure removing the need for prior State Bank approval for organizational or governance changes made by foreign bank branches in Vietnam, which were previously required to obtain such approval upon licensing.

Since 2010, there has been a marked uptick in the equity capital of credit institutions, with state credit institutions witnessing a 6 to 10-fold increase, joint stock commercial banks experiencing a 3 to 10-fold increase, and foreign credit institutions/foreign bank branches seeing their capital swell 2 to 8 times. As a result, the absolute credit balance for a customer or their related person has also seen significant growth, subject to prevailing credit limits. The revision of the Law on Credit Institutions holds vital importance in fortifying the stability of the credit institution system, supporting economic growth, and driving innovation in banking operations that align with the primary objective of restructuring the economy based on the Party’s and Government’s goals, orientations, and vision.

Key changes in the Bank Bill

The regular semi-annual session (5th session of the 15th legislature) of the Vietnam’s National Assembly (“NA”) is taking place, and among its tasks is the review of the draft Law on Credit Institutions (“Bank Bill”). This bill is anticipated to replace the existing Law on Credit Institutions of 2010 (amended in 2017) (“LCI”) once ratified by the NA.

Notably, the Bank Bill proposes several significant changes, such as:

+ Changes to the corporate governance of local banks aiming to reduce cross-ownership’s adverse effects or conflicts of interest.

+ Introduction of intervention measures to assist troubled banks through early intervention measures, special controls, M&A, backstops, and special loans.

Codification of the NA’s Resolution No. 42/2017/QH14, dated 21 June 2017, regarding pilot policies for bad debt settlement (e.g., sales of bad debts, foreclosure of mortgaged assets, etc.)

+ Modifications in the business activities of commercial banks, and

+ Expansion of regulator powers, including investigation powers of the State Bank of Vietnam (“SBV”) into banking violations and inspection powers of the Ministry of Finance into security and insurance-related activities’ violations by banks.

This article aims to highlight the main changes to commercial banks’ business activities (involving wholly foreign-owned banks and branches of foreign banks in Vietnam) proposed under the Bank Bill.

Important changes to branches of Foreign Banks in Vietnam

The Bank Bill proposes a significant change in the organization and governance of foreign bank branches in Vietnam. Currently, under Article 89.1 of the LCI, foreign banks must comply with the laws of their home countries with respect to the organizational structure, governance, and administration of their branches in Vietnam. Additionally, they need prior approval from the State Bank of Vietnam (SBV) for such decisions before implementing them. However, the Bank Bill eliminates these requirements. The new clause replaces Article 89.1, and states that the foreign bank “shall decide on the organizational structure and governance of its branches in Vietnam in accordance with the provisions of this Law on administration, internal control, and audit.”

This change will take effect automatically once the Bank Bill is enacted, without awaiting guidance from the SBV. According to the drafting board’s explanatory notes, the change is necessary for the following reasons:

+ The organizational structure of a foreign bank branch may require modifications at any time, and it would be impractical for the SBV to review and approve each request as long as it complies with Vietnamese laws.

+ The SBV does not provide similar approvals for other banks. The removal of the requirements aims to ensure that the SBV is consistent in its policies.

Conclusion

In conclusion, the Draft Law on Credit Institutions represents a substantial overhaul of the Vietnamese banking regulatory framework. The proposed modifications affecting the operations of commercial banks, including changes to corporate governance, intervention measures for troubled banks, bad debt settlement policies, business activities, and regulator powers, hold the promise of a more stable, efficient, and innovative financial sector. The National Assembly’s review and approval of the Bank Bill promises to be a crucial step forward in advancing the country’s banking industry and its economy overall. If enacted, the Bank Bill will usher in a new era for Vietnam’s credit institutions, with significant opportunities for growth and development.

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