The Law on Credit Institutions was passed by the 12th National Assembly at its 7th session on June 16, 2010, and came into effect on January 1, 2011, replacing the Law on Credit Institutions No. 02/1997/QH10 and the Law Amending and Supplementing Certain Articles of the Law on Credit Institutions No. 20/2004/QH11.
Article table of contents
1. Scope of Adjustment:
Changes compared to the Law on Credit Institutions of 1997, the Law on Credit Institutions of 2010 omits the provision on "other organizations with banking activities." This is because banking activities are conditional business activities. The conditions for engaging in banking activities are very stringent, from the organizational structure to internal management and risk management. These conditions are typically not met by organizations other than credit institutions. This means that to be licensed for banking activities, organizations must be established as credit institutions. Any organization engaged in banking activities must be reorganized as a credit institution or cease such activities (except for securities companies performing margin trading, purchasing, and selling back securities).
On the other hand, the scope of the Law has been expanded from just focusing on activities to covering the management organization and operations of credit institutions. The content on management organization is the most supplemented, as reflected in Chapter III of the Law.
2. Regarding Some Basic Concepts:
The Law on Credit Institutions changes the criteria for identifying an organization as a credit institution by altering the essence of the concept "banking activities": it includes one of the three activities of receiving deposits, granting credit, providing payment services instead of having to perform all three simultaneously. The Law also supplements some important terms such as: "investment to gain control," "related person," "management personnel," "executive personnel," etc., to meet the stricter management requirements compared to the regulations of the Law on Enterprises.
3. Regarding the Principle of Applying the Law:
The Law on Credit Institutions 2010 introduces a new point compared to the 1997 Law on Credit Institutions, specifying the principle of applying the Law: the Law on Credit Institutions specifically regulates the peculiarities in the establishment, organization, management, and operation of credit institutions; when there are different provisions between the Law on Credit Institutions and other laws, the Law on Credit Institutions will be prioritized.
Depending on the legal form of the credit institution, the contents not regulated in the Law on Credit Institutions shall be implemented according to the provisions of the Law on Enterprises, the Law on Cooperatives.
4. Regarding the Organizational Forms of Credit Institutions:
The Law on Credit Institutions stipulates that credit institutions are organized according to the legal forms of the Law on Enterprises (or the Law on Cooperatives). Specifically: domestic commercial banks are established and organized in the form of joint-stock companies (except for state commercial banks which are organized as single-member limited liability companies owned 100% by the State). Domestic non-banking credit institutions are established and organized in the forms of joint-stock companies or limited liability companies. Foreign-owned credit institutions and joint venture credit institutions are established and organized as limited liability companies. Cooperative banks and people's credit funds are established and organized as cooperatives. Microfinance institutions are established and organized in the form of limited liability companies.
5. Regarding the Licensing for Establishment and Operation of Credit Institutions:
The Law specifically stipulates licensing conditions for each type of credit institution, aiming to enhance the safety requirements and criteria for each credit institution and the entire system of credit institutions. The licensing conditions are reviewed to ensure both stringency (ensuring that the entry of new credit institutions does not affect the system's safety) and compliance with World Trade Organization (WTO) commitments. It also clarifies the differences in licensing conditions for people's credit funds and microfinance institutions, which have different operational goals compared to commercial banks and non-banking credit institutions (licensing conditions will follow the guidance of the State Bank).
6. Regarding Changes Requiring SBV Approval:
Compared to the provisions of the Law on Credit Institutions of 1997, the Law on Credit Institutions of 2010 stipulates, adhering to the principles of administrative procedure reform and increasing autonomy for credit institutions regarding changes that require approval from the State Bank. The Law on Credit Institutions of 2010 reduces the contents requiring the State Bank's approval, such as transferring named shares beyond the regulated ratio, changing members of the Board of Directors, the Board of Supervisors, and the General Director of the credit institution; abolishes the procedure of approval of the charter and replaces it with charter registration.
7. Regarding the Organization, Management, and Operation of Credit Institutions:
The organization, management, and operation of credit institutions are among the most novel contents of the Law on Credit Institutions 2010. Compared to the 1997 Law on Credit Institutions, which had only 6 articles on the organization, management, and operation of credit institutions, the Law on Credit Institutions 2010 with over 60 articles on these matters represents a fundamental addition and change in these contents.
Specific contents regarding organization, management, and operation:
- Regarding the approval of the proposed list of persons elected or appointed as members of the Board of Directors, Board of Members, Supervisory Board, and General Director (Director) of credit institutions: According to the 1997 Law on Credit Institutions, members of the Board of Directors, Supervisory Board, and the General Director (Director) of credit institutions must be approved by the SBV after being elected or appointed. The 2010 Law on Credit Institutions stipulates that the SBV approves the proposed list of persons elected or appointed as members of the Board of Directors, Board of Members, Supervisory Board, and General Director (Director). Only those persons on the approved list can be elected or appointed as members of the Board of Directors, Board of Members, Supervisory Board, and General Director (Director).
- Regarding independent members of the Board of Directors: The 2010 Law on Credit Institutions regulates independent members of the Board of Directors. The requirement for independent members aims to harness intellect and increase independence and objectivity in the Board's decisions, limiting the influence in decision-making by non-independent members (usually representatives of major shareholders), protecting the interests of the credit institution and minor shareholders, thereby ensuring stability and safety in the operations of credit institutions and the credit system. The 2010 Law on Credit Institutions mandates that the Board of Directors of joint-stock credit institutions must have at least one independent member; the Board of Directors must have at least half of its members as independent and non-executive members. The Law also stipulates the conditions for independent Board members to ensure they maintain independence in their activities.
- Regarding share ownership limits: The organization and operation of joint-stock credit institutions must be highly public to ensure transparency and limit potential hostile takeovers that could endanger public depositors and systemic safety. Therefore, the Law sets limits on the share ownership ratios of shareholders: An individual shareholder cannot own more than 5% of the charter capital of a credit institution. An organizational shareholder cannot own more than 15% of the charter capital of a credit institution, except in some specific cases. Shareholders and their related persons cannot collectively own more than 20% of the charter capital of a credit institution.
8. Regarding Activities of Credit Institutions:
The 2010 Law on Credit Institutions specifies the scope of activities for each type of credit institution, using the activities of commercial banks as a reference when stipulating the scope of activities for other types of credit institutions.
The 2010 Law on Credit Institutions has changed the criteria distinguishing between banks and non-banking credit institutions. The scope of activities for non-banking credit institutions differs from banks in that they are not allowed to accept deposits from individuals and cannot provide payment services through customers' accounts. This criterion clarifies the distinction between the activities of banks and non-banking credit institutions.
For each type of credit institution, the 2010 Law on Credit Institutions clearly defines the businesses that credit institutions can engage in upon being licensed for establishment and operation, those businesses requiring the State Bank's approval prior to execution, the businesses that require the establishment of subsidiaries or affiliated companies, and the businesses that credit institutions are not allowed to conduct.
9. Restrictions to Ensure Safety in the Operations of Credit Institutions:
Regarding the group of regulations aimed at limiting the excessive concentration of risks from credit institutions into one or a group of customers, the 2010 Law on Credit Institutions has an important adjustment compared to the 1997 Law on Credit Institutions: it does not set a credit limit based on each type of credit activity but provides an overall credit limit for a single customer.
The regulations on capital contribution and share purchase by credit institutions in the 1997 Law on Credit Institutions and its guiding documents were not stringent enough, creating loopholes for credit institutions to expand into too many unrelated fields. Hence, the 2010 Law on Credit Institutions sets specific regulations according to the common practices applied to bank activities, limiting credit institutions' operations to their core activities and directly related fields by prescribing specific limits on capital contribution and share purchase.
The 2010 Law on Credit Institutions introduces regulations to limit internal lending relationships.
The 2010 Law on Credit Institutions restricts cross capital contribution, cross-shareholding, reverse capital contribution, and share purchase between credit institutions, subsidiaries, affiliated companies, and controlling companies.
10. Special Control:
The Law adds two more cases where a credit institution can be placed under special control by the State Bank: Two consecutive years rated as weak according to State Bank regulations; Inability to maintain the minimum capital adequacy ratio as prescribed for one consecutive year or a capital adequacy ratio below 4% for six consecutive months.
At the same time, the Law grants the State Bank greater authority in special control over credit institutions, such as requiring owners to increase capital, build, implement restructuring plans, or mandatorily merge, consolidate, or acquire credit institutions under special control if the owners are unable or fail to increase capital; directly or appoint other credit institutions to contribute capital, purchase shares of the credit institution under special control in certain cases.
11. Transitional Application of the Law on Credit Institutions:
To avoid affecting the operations of credit institutions established and operating under the 1997 Law on Credit Institutions and to allow currently operating credit institutions sufficient time to adjust their organization and operations according to the new Law's provisions, the 2010 Law provides transitional regulations for currently operating organizations under three groups:
- Provisions of the Law that credit institutions must comply with immediately, such as regulations on the scope of banking activities, etc.;
- Provisions of the Law to be implemented in a transitional period of 02 years, such as certain regulations on the organization, management, and operation of credit institutions, etc.;
- Provisions implemented following the SBV's guidance on complex regulations that require a specific compliance roadmap, such as regulations on share ownership ratios, regulations on capital contribution, and share purchase.
Source: hslaw.vn
