Commercial banks and branches of foreign banks would not be permitted to offer loans for securities investment and trading, according to the eighth draft of a law amending the 1997 Law on Credit Institutions which is currently unveiled for public comment.
The State Bank of Vietnam (SBV), the drafting agency, said that the draft law has been designed on the basis of experience drawn from the current financial crisis towards minimizing risks in banking operations.
The fundamental difference between the draft law and current regulations lies in its Chapter VI - a totally new chapter on restrictions to ensure safety in the operation of credit institutions.
Specifically, it places numerous restrictions on credit supply, forbidding credit institutions to provide loans to securities trading enterprises where they hold a controlling stake, grant credit mortgaged by equities of those credit institutions or their affiliates or lend capital for contribution to other credit institutions by receiving security assets being equities of the institutions to which capital will be contributed.
Explaining the above restrictions, SBV deputy governor Dang Thanh Binh was quoted by the Dau Tu Chung Khoan (Securities Investment magazine) as saying that credit institutions are not only lenders but also borrowers, hence, they should restrict lending for risky sectors in order to ensure safety for themselves, the banking system and the economy as a whole.
Regarding the expansion of operation of credit institutions to domains outside the scope of their principal activities, the SBV argued that it is the loophole in the current Law that credit institutions are allowed to broaden their operations to areas with no direct relations to their main functions, adversely affecting their competitiveness in major sectors and posing risks to their safety. To redress this problem, the draft law restricts the operation scope of credit institutions within their principal sector, i.e. grant of credit and provision of credit-related services. Expansion of commercial banks’ activities to such domains as securities, insurance, asset management and credit information would only be permitted through the establishment of independent companies. Meanwhile, credit institutions would not be allowed to participate in areas not directly related to their principal operations, even through setting up subsidiaries or associated companies.
A commercial bank’s proportion of capital contributed to, or shares purchased from, an enterprise operating in sectors other than banking, securities and insurance must not exceed 11% of that enterprise’s charter capital while its aggregate proportion of capital contributed to all enterprises operating in these domains is restricted to 40% of these enterprises’ charter capital.