Finance Company and the Law on Credit Institutions 2010

Basic Changes to the Law on Credit Institutions

The Law on Credit Institutions has fundamentally introduced significant changes to regulations concerning the establishment, organizational structure, and conditions for the management of credit institutions. The newly issued Law on Credit Institutions also includes new provisions on special control, reorganization, and dissolution of credit institutions that were not fully addressed in the Law on Credit Institutions 1997.

Of particular note, the new Law has introduced many important changes regarding the organization and operation of finance companies—a critical financial institution in the economy. The most significant changes affecting finance companies include:

No Acceptance of Individual Deposits

Pursuant to Clause 4, Article 4 and Point a, Clause 1, Article 108 of the Law on Credit Institutions, finance companies are prohibited from accepting individual deposits and are only allowed to accept organizational deposits. Under the Law on Credit Institutions 1997, as revised in 2004, finance companies were allowed to accept both organizational and individual deposits with terms of one year or more.

In our country, most finance companies were established to meet the capital arrangement needs within large corporations and conglomerates. These companies accept deposits from their parent companies and typically disburse funds within their member companies. It is perhaps for this reason that the law deems the acceptance of individual deposits by finance companies unnecessary and risky, as the projects funded by these companies typically involve large capital mobilization and slower recovery times compared to commercial bank loans.

Although the Law on Credit Institutions has been effective since January 1, 2011, to date, the Government of Vietnam and the State Bank have not issued specific guidelines on the implementation of this provision by non-bank credit institutions or how to handle individual customer deposits. Several other provisions also lack guidelines, resulting in some credit institutions continuing to accept individual deposits under the old Law on Credit Institutions.

The prohibition on the acceptance of individual deposits aligns somewhat with international laws, but it creates significant capital mobilization challenges for non-bank credit institutions. Apart from finance companies established for internal capital arrangement activities, there are also finance companies primarily engaged in providing personal and consumer credit, such as wholly foreign-owned finance companies. Thus, the new provision poses certain difficulties for these finance companies in capital mobilization.

Concurrently, the current law stipulates that non-bank credit institutions can receive organizational deposits but does not specify whether they can accept demand or term deposits, or the length of such terms, leading to much debate. The draft decree guiding finance companies stipulates that they may only accept organizational deposits with a term of over one year. If this regulation is issued, it will severely limit the capital mobilization capabilities of finance companies, especially since the new Law prohibits them from accepting individual deposits.

Narrowing Business Scope

The business activities of finance companies now include some activities that were previously unregulated or ambiguously regulated. The regulations on providing financial derivative products, such as exchange rate derivatives and options, are only specified for commercial bank activities and not for non-bank credit institutions. This restriction hinders finance companies from developing modern financial products.

Additionally, finance companies are prohibited from directly or indirectly engaging in real estate business. Previously, the old law prohibited finance companies from directly engaging in real estate business, which implied that they could do so through subsidiaries. In practice, some finance companies have established real estate subsidiaries to conduct real estate business due to advantages in capital compared to other entities. Finance companies with real estate subsidiaries will have to manage this issue in the coming period, either by divesting or by seeking guidance from the State Bank on the permissible capital holding ratio in special cases, or by following a legal capital divestment schedule.

It can be seen that the changes in the new Law focus on ensuring safety and efficiency in banking operations while minimizing risks. However, these regulations also require finance companies to make substantial adjustments in terms of organizational scale, operations, and product offerings in the near future.

Source: petrotimes.vn

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