Governor of the State Bank of Vietnam (SBV) Nguyen Thi Hong on June 10 explained and clarified some issues of the National Assembly deputies’ concerns when discussing a draft of the Law on Credit Institutions (amended).

One of the provisions of the draft law is the SBV’s right to make early intervention in some cases: when commercial banks face massive withdrawal which result in insolvency; when credit institutions cannot maintain the payout ratio and capital adequacy ratio for three and six consecutive months; and when they have an accumulated loss higher than 20 percent of charter capital value and reserve funds.

In these cases, SBV, Deposit Insurance and other banks can provide special loans, with no collateral, with an interest rate of zero percent.

Hong said the provision was designed by the compilation board after considering recent events during the restructuring of weak banks, as well as the massive money withdrawal at SCB in October 2022.

The compilation board also referred to the collapse of many banks internationally, including the collapse of some US banks recently.

“If credit institutions have worse incidents and are likely to fall into insolvency, they will need stronger management from the management agency and undergo an early intervention process,” Hong said.

For early intervention, first, shareholders and owners of the banks must take responsibility. They must design measures to overcome difficulties and the state management agency will set up limitations on their operations. During difficult periods, the banks will need support measures.

The currently applied law mentions early intervention measures, but are valid for only one year, and the law doesn’t specify support measures, which makes it difficult to deploy the intervention.

The problem will be fixed when amending the law, i.e. support measures will be clarified in the new law, including support from SBV as the last lender and ‘last resort’.

The draft law also says banks can mobilize resources from other credit institutions, deposit insurance, and cooperative banks.

Manipulation and cross-ownership 

National Assembly deputies have also shown interest in the regulations on lowering limitations on shareholders’ ownership ratios as well as limitations on providing credit to one client and related persons.

Hong explained that the draft law is designed this way in order to restrict manipulation and cross-ownership in banks.

“This is the request of competent agencies, and National Assembly’s resolutions also requested to legalize the issue. This is one of the solutions to prevent the manipulation and cross-ownership among banks,” Hong said.

However, Hong stressed that the implementation of the provisions of the law will determine if the law can actually be brought into life. 

In many cases, shares may be in other people’s names, not real owners’ names, and this cannot be discovered by the central bank. Therefore, it is necessary to use tools and solutions from various agencies, including transparency of information.

Hong went on to say that international institutions have voiced their concern about the overly heavy reliance of Vietnamese enterprises on commercial banks. They have warned of risks if enterprises continue to rely on bank loans to implement investment projects.

“When banks get weaker, the national economy will suffer as a result of the domino effect. Therefore, while developing the banking sector, Vietnam also needs to develop the capital market, stock market, and bond market at the same time,” Hong said, adding that the government has solutions to do this.

In the draft law, if clients and related persons want loans that are higher than 15 percent of regulatory capital, the syndicated lending mechanism will be applied, which will help disperse risks. If a big loan is provided by one bank, the credit risk concentration level would be very high.

Thu Hang