One of the stumbling blocks that the banking industry has ever faced is that the legal system and related policies have many loopholes and exist.
Through each bold change in laws and policies, the banking industry is gradually developing more sustainably and substantively. Therefore, timely identification of the “holes” of policies and laws is very important.
Looking back on the past, the old Law on Credit Institutions (Law on Credit Institutions 1997, revised in 2004) had many loopholes going on for a long time, until the Law on Credit Institutions came up. 2010 was born to fill it. These vulnerabilities have unintentionally created tools for some credit institutions and other individuals and organizations to “evade the law”, distorting the monetary management policy of the State Bank.
For example, the old law did not include the outstanding debt to buy bonds issued by enterprises into the loan balance and credit extension, so banks have circumvented the ceiling on lending and granting credit to a customer and group of customers. related customers by purchasing corporate bonds, which are essentially loans. The conditions for buying corporate bonds were then very easy. It was this that made the regulations on the ceiling of outstanding loans and credit granting to a customer and related groups of customers no longer made sense in reality at that time.
Another example is the capital contribution, the purchase of shares of credit institutions and the story of cross-ownership. Previously, our purpose was to allow individuals and organizations to establish and contribute capital to establish banks and credit institutions to encourage investment and develop the fledgling banking industry. Therefore, regulations and policies on the establishment, capital contribution, and share purchase to establish banks and credit institutions (such as legal capital, conditions for applying for establishment permits, share ownership ratio, conditions for capital contribution, share purchase of credit institutions, etc., are much more open than now. The old law did not prohibit credit institutions from buying shares or capital contributions of the shareholders and members of that credit institution (buying shares and contributed capital from each other).
It was this openness and ease that inadvertently created favorable conditions to turn the general into illegal cross-ownership and gave birth to a number of weak credit institutions. Before embarking on restructuring (in 2011), Vietnam’s credit system had nearly 60 organizations. Compared to the population size, this number is not much, but with the level of economic development and the level and experience of managing credit institutions, this number is beyond the capacity.
Mistakes in the banking and finance industry often leave serious financial consequences
The Law on Credit Institutions 2010 is a progressive and systematic legal document that solves many previous problems. However, after more than 5 years of implementation, we need to review it because currently, there are still many legal “loopholes”.
Specifically, the Law on Credit Institutions 2010 stipulates that credit institutions must periodically report bad debt data. However, with current regulations on reporting regimes, credit institutions can still “cook” bad debts into good debts on paper and books to have a “beautiful” report with the State Bank of Vietnam. country. This leads to a lot of skepticism about the reports of bad debt ratios of credit institutions. Up to now, the Law on Credit Institutions 2010 and its guiding documents have not been able to solve this problem.
In order to limit credit institutions dealing in securities, the Law on Credit Institutions 2010 stipulates that credit institutions are not allowed to grant credit to enterprises operating in the field of securities trading for which the credit institution is not authorized. take control. However, this regulation still cannot prevent the fact that credit institutions transfer capital to their securities companies for securities trading, which are actually credit institutions that are directly trading securities.
In fact, credit institutions circumvent this regulation in many different forms such as buying bonds from securities companies or lending loans to certain individuals and organizations, then these individuals and organizations re entrust the loan amount to the securities company of a credit institution to conduct securities business. Then, the credit institution accepts these securities as collateral for the above-mentioned loan.
The Law on Credit Institutions 2010 stipulates that credit institutions are not allowed to do real estate business. However, in practice, this provision does not make sense because the Law prohibits credit institutions from doing real estate business, but it does not prohibit credit institutions for subsidiaries, affiliated companies, and companies that the organization owns. Credit institutions have the power to govern and control loans for real estate business.
“Credit institutions can still circumvent the law on credit extension, capital contribution limit, and share purchase of related groups by similar methods.”
The Law prescribes limits on credit extension, capital contribution and share purchase by groups of related people in order to limit risks to the credit institution’s operations. However, the concept of “related person” in the Law is still heavily theoretical, quantified according to available formulas. This concept has not been developed for the purpose of controlling the rate of safety, not covering all the cases that are arising in reality.
For example, in case a credit institution asks other individuals or organizations to set up a “backyard” company in order to receive preferential loans from that same organization; On the books and documents, the credit institution and the company are not related according to the concept of the Law on Credit Institutions, but in fact, the credit institution holds the power to dominate and control the company. and often lend these companies preferential loans, exceeding the safety margin.
In this case, the Law on Credit Institutions 2010 is still “hands-on”, unable to handle it. In fact, credit institutions can still circumvent the law on credit limit, capital contribution limit, and share purchase of groups of related people in similar ways.
The Law on Credit Institutions 2010 assigns a lot of work to the State Bank, as this regulation follows the instructions of the State Bank, the other is regulated by the State Bank, but so far, it has been more than 5 years. Since the Law took effect, there are still many provisions of the Law that have not been guided by the State Bank. For example, the 2010 Law on Credit Institutions stipulates that the establishment and operation of microfinance institutions must comply with regulations and guidance of the State Bank. However, up to now, the State Bank has not provided guidance on the establishment and organization of operations of microfinance institutions in accordance with the provisions of the Law on Credit Institutions 2010…
The “holes”, existing in the Law, are mainly due to the fact that the Law and policies have not kept pace with the daily changes in the activities of credit institutions, so gradually, the thinking of the Law has become erroneous. late, not comprehensive.
On that basis, we think that we need to focus on implementing some of the following solutions:
Firstly, it is necessary to regularly re-evaluate the implementation of legal documents, so as to early identify problems and gaps in the law. The Law on Credit Institutions 2010 has been in effect for more than 5 years, but there has not been any survey or large-scale assessment of the implementation of this law.
Second, the State Bank Inspectorate should build a team of experts to work on risk forecasting on laws and policies. There are timely advices for the State Bank to make appropriate changes in laws and operating policies…
Social relations regulated by the law are constantly changing, creating many loopholes in the law. Therefore, law enforcement and legislators need to have a more specific view of the changing social relations so that they can detect existing gaps and irrationalities.
Third, the scope of activities of credit institutions is very wide, so it often involves many different legal documents, of which the Law on Credit Institutions is the focus. Therefore, when formulating laws and policies related to the operation of credit institutions, it is necessary to study other legal documents to have comprehensive and synchronous regulations.
The above solutions are aimed at the goal of the rule of law state, which is the core value in monetary policy management: not to give too many orders and directives, but to build a real legal corridor. the solidity as a basis for credit institutions to comply, as a basis for the State Bank to operate.
Lawyer Tran Duc Hung
Special issue of Banking Overview 2016
Posted in Securities Investment newspaper on May 3, 2016