Credit cap regulation will cause problems for banks wanting to fund larger projects

Credit cap regulation will cause problems for banks wanting to fund larger projects

Under the Law on Credit Institutions, which took effect from July 2024, over the next five years, credit caps for a customer will decrease by one per cent every year and two per cent for a customer and his/her related parties.

Under the Law on Credit Institutions, which took effect from July 2024, over the next five years, the credit cap for a customer will decrease by one per cent every year and two per cent for a customer and his/her related parties. Photo cafef.vn

A regulation on the credit cap will make it difficult for commercial banks to provide capital for larger projects as the regulations come into effect.

The Chairman of the Board of Directors of Vietcombank, Nguyễn Thanh Tùng, said in the future the Government's policy will assign State-owned corporations and groups to implement large projects, and those corporations and groups will have to borrow to implement the projects. However, a current regulation on reducing the bank credit limit for large customers, under the Law on Credit Institutions 2024, will hinder the corporations and groups to have access to the loans.

Under the Law on Credit Institutions, which took effect from July 2024, over the next five years, credit caps for a customer will decrease by one per cent every year and two per cent for a customer and his/her related parties.

Specifically, over its first year of implementation, the credit limit for a customer will fall from the current 15 per cent to 14 per cent of equity and for a customer and his/her related parties from the current 25 per cent town to 23 per cent of equity.

The credit limit will then be gradually reduced until 2029, when it will be 10 per cent for a customer and 15 per cent for a customer and his or her related parties.

Though according to the current regulation, banks can ask competent authorities for an expansion of the credit cap, it takes between three and four months for the expansion due to complicated procedures.

Therefore, to facilitate the provision of capital for large projects to be implemented on time in the coming time, Tùng proposed that the State Bank of Vietnam (SBV) and the Government study and amend regulations related to the procedures for requesting approval of the credit cap expansion.

According to the SBV, the credit cap regulations for a customer and his/her related parties have been clearly defined according to the roadmap, in order to control risks and maintain financial stability in the banking system.

In addition, the new policy will also promote the accumulation of equity capital, contributing to the sustainability and development of the banking industry.

However, according to experts, banks which have the credit cap to a customer exceeding the allowed ratio under the Law on Credit Institutions 2024, will face pressure to restructure loans for this customer group.

The banks’ outstanding loans may also decrease, because this customer group must find other capital sources to pay off existing loans to meet the ratio under the law.

According to Dr Nguyễn Hữu Huân, who is a lecturer at HCM City University of Economics, banks with high outstanding loans for large customers will have to reduce these loans and find other customers to compensate.

Meanwhile, large corporations must accept a reduction in outstanding loans. It means they will have to shrink business activities, or seek additional capital from other banks, Huân said. 

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