Bank

Tightening the Credit Ratio for Large Customers

The new regulations on tightening credit ratios are seen by analysts as a way for banks to mitigate the risk of lending dependence on a specific customer group, thus preventing systemic instability.

Administrator

6 July, 2024

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Tightening Credit Limits for Large Borrowers. (Photo: Vietnam+)

The Law on Credit Institutions 2024 came into force on July 1, marking the beginning of a planned reduction in lending limits.

Over the next five years, the total credit limit for a single borrower will decrease from the current maximum of 15% to 10% of a bank’s capital adequacy ratio (a reduction of 1% each year). The total credit limit for a borrower and related parties will also be reduced from 25% to 15% (a 2% reduction each year).

From July 1, 2024, to December 31, 2025, the credit limit will be reduced to 14% for a single borrower and 23% for a borrower and their related parties.

Previously, the Law on Credit Institutions stipulated that the total credit limit for a single borrower should not exceed 15% of the capital adequacy of a commercial bank, branch of a foreign bank, credit fund, or microfinance institution. The total credit limit for a borrower and related parties should not exceed 25%.

Analysts believe that this new regulation will help banks mitigate lending risks by reducing their dependence on a small group of borrowers, thereby maintaining system stability. The implementation of a gradual reduction in lending limits will also prevent large businesses from experiencing sudden funding disruptions.

Additionally, the new regulation will encourage credit institutions to diversify their loan portfolios and spread credit risk across multiple borrowers. This may create potential advantages for small businesses seeking loans.

Mr. Nguyen Quoc Hung, Secretary-General of the Vietnam Banks Association, stated that lowering credit limits would help banks limit the concentration of credit capital in a single borrower or group of borrowers, promote co-financing, reduce risks, and increase transparency. It would also boost the development of the capital market and reduce businesses’ over-reliance on bank loans.

However, some banks have expressed concerns that this regulation will impact their lending to large corporations and require adjustments to their lending strategies, credit risk management processes, and information technology systems.

Moreover, tightening credit limits may affect relationships with borrowers, who may face challenges due to increased borrowing complexity and costs associated with securing capital./.

Thuy Ha