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Solutions to Improve the Law on Ensuring Safety in Credit Activities of Vietnamese Commercial Banks


+ Regulate activities that commercial banks are not allowed to perform to ensure safety in their operations;

+ Regulate the activities that commercial banks must perform to ensure safety in their operations.

As for detailed adjustments on safety assurance in credit contracts of commercial banks, the State Bank should provide specific instructions.

Third, ensure the sustainability of the law on ensuring safety in credit granting activities of commercial banks.

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Completing the law in general and the law on ensuring safety in credit activities of commercial banks must be based on ensuring its sustainability. According to Professor Le Minh Tam, the goal of building and perfecting the law is not only to promote economic growth and development but also to ensure sustainable development of society, ensuring that the legal system has sufficient legal basis to promote positive aspects and limit negative impacts of the market economy . 228. Regarding ensuring safety in

In banking activities, the sustainability of the law is demonstrated through its regulatory results: ensuring growth in banking business, increasing efficiency in operations, controlling and limiting risks in the process of providing banking services.

Solutions to Improve the Law on Ensuring Safety in Credit Activities of Vietnamese Commercial Banks

Similarly, according to Roland Benediker, banks need to be built in the direction of increasing responsibility to the community, transparency and sustainability 229 . This approach is quite interesting and can be considered for application to ensure safety in the credit activities of Vietnamese commercial banks from the following perspectives:

+ The law needs to regulate to ensure that banks are responsible to the community. In fact, commercial banks are organizations that trade in currency and banking services with the main goal of profit. However, in addition, banks need to be responsible to the community because in terms of capital sources, in addition to charter capital (which constitutes equity capital), bank capital mainly comes from mobilization from the people. Therefore, banks need to be responsible to their shareholders (or capital contributors) and depositors. From the perspective of a service provider, banks need to meet the capital needs of the economy. This is also one of the functions of commercial banks. In both aspects, banks need to ensure safety in their operations to promote their responsibility to the community.

+ In addition, the law needs to regulate the transparency of banks' operations. In fact, transparency aims to strengthen supervision to ensure safety in banks' operations. According to Dr. Le Thi Huyen Dieu, the Vietnamese banking system needs to apply a dual risk control model through the bank's internal control and audit department; supervision by the State Bank; supervision by external supervisory agencies;



228 Le Minh Tam (2003), Tlđd (No. 222), p. 172.

229 Roland Benediker (2011), Tlđd (No. 14).


Market control, shareholders 230. Implementing such a dual control mechanism will ensure increased safety in the credit activities of commercial banks.

+ In addition, the law also needs to regulate to ensure sustainable development of banks. This is the basic viewpoint in building and perfecting the Vietnamese legal system in the current period.

Fourth, end the banking system's monopoly.

As the author has analyzed in the previous sections, one of the reasons for the lack of serious implementation of the law on safety assurance in credit activities of commercial banks, which negatively affects the safety of commercial banks, is the current situation of manipulation and monopolization of the banking system in Vietnam. Because when being manipulated and monopolized, banks can ignore the necessary regulations and procedures to ensure safety in general operations and credit activities in particular; carry out activities according to the "instructions" and requests of certain subjects for personal gain.

Therefore, perfecting the law on ensuring safety in the credit activities of commercial banks is necessary from the perspective of ending the situation of manipulation and monopolization of the banking system. To implement this requirement, the law needs to stipulate measures to closely monitor the share ownership ratio; measures to handle when individuals and organizations own more than the maximum share ownership ratio prescribed by law; and monitor the share ownership ratio of related persons. In addition, the State Bank must also review the organizational structure of commercial banks, especially inspecting the establishment of some councils such as the Founding Council, Investment Council, etc. In case the establishment of these Councils has duties and powers contrary to regulations, these Councils must be immediately dissolved.

Fifth, well control banking activities as well as the risk status of commercial banks.

In fact, many banks in Vietnam today have “bet” the debt repayment of the creditor on the collateral. Even for the sake of credit growth and expected profits, some banks have ignored the conditions for granting credit as well as financial discipline. Pursuing such a “reckless” credit policy has created potential debts that have accumulated over a long period of time. At some point, when it exceeds the tolerance of banks, banks must face many challenges such as high bad debt, poor liquidity, and even bankruptcy.

That shows us that there is a lack of a mechanism to control banking activities as well as control the risk status of banks. Therefore, the law needs to be improved in the direction of better controlling banking activities as well as the risk status of commercial banks. According to the author, there are three issues that need to be implemented simultaneously: improving regulations on


230 Le Thi Huyen Dieu (2010), Tlđd (No. 18) , p. 144.


Internal control at banks, applying the dual risk management mechanism as above has been approached and completed, and implementing well the law on inspection and supervision of the State Bank of Vietnam.

In short, the improvement of the law on ensuring safety in credit activities of commercial banks must be based on certain principles and requirements, which are: consistent with the guidelines, policies and strategies of the Communist Party of Vietnam; must overcome the difficulties and shortcomings of current laws; absorb international experiences, standards and practices on ensuring safety in banking activities; and at the same time must rely on theories on ensuring safety in credit activities of commercial banks.

4.2. Solutions to improve the law on ensuring safety in credit granting activities of Vietnamese commercial banks

Solutions to improve the law on ensuring safety in credit activities of commercial banks include the following main contents:

4.2.1. Regulations on commercial banks' obligations to ensure safety in credit granting activities

As mentioned above, the author determines whether ensuring safety in the credit contract of commercial banks is a right or an obligation of commercial banks. According to the traditional legal approach, the right of the subject is the ability to act of the participants in the relationship as prescribed by legal norms and protected by state coercion . 231 Thus, the right of the subject has three characteristics: (i) the ability to act within the framework determined by legal norms; (ii) the ability to demand the other party

(subjects participating in legal relations) perform their obligations (performance can be by action or inaction); (iii) the ability to request competent state agencies to apply necessary coercive measures to the other party to perform their obligations, in case the subject's rights are violated by the other party.

Legal obligation is a mandatory conduct determined in advance by legal norms that one party must conduct in order to satisfy the exercise of the other party's subjective rights . 232 Legal obligation has the following three characteristics: (i) The obligation to conduct certain conduct determined in advance by legal norms; (ii) This conduct is aimed at exercising the other party's subjective rights; (iii) In case of necessity, legal obligation will be guaranteed by state coercion.

From that approach, the author believes that the regulation on ensuring safety in the credit contracts of commercial banks is the obligation of commercial banks and those who manage and operate commercial banks, which is more appropriate than the right of commercial banks, because the approach is the right of commercial banks.


231 Nguyen Cuu Viet (2001), Tlđd (No. 96) , p. 402.

232 Nguyen Cuu Viet (2001), Tlđd (No. 96) , p. 403.


creating the possibility for commercial banks to act or not to act, thus not beneficial for the implementation of safety assurance. However, if the regulation is the obligation of commercial banks and bank managers and operators, what is its content? How can the regulation of safety assurance obligations in the credit contracts of commercial banks become a business rule and be seriously and effectively implemented?

First of all, from the current status of the law on ensuring safety in credit activities of commercial banks in Vietnam, the author proposes that it is necessary to regulate the obligation to ensure safety in credit activities of commercial banks and those who manage and operate banks for the following reasons:

Firstly, current law has stipulated the right to business autonomy in banking activities (Article 7 of the Law on Credit Institutions 2010). Therefore, commercial banks have the right to business autonomy and are also responsible for their own business results, including the obligation to ensure safety. Not only that, the Law on Credit Institutions 2010, the Law on Enterprises 2014 and related documents also stipulate the rights of managers and operators of enterprises in general and banks in particular. These rights must go hand in hand with obligations, including the obligation to ensure safety in banking activities.

Second, ensuring safety in the credit activities of commercial banks is not only a matter of each bank, but also a matter of the banking system and the entire socio-economic system, because any risk and loss of a bank also affects the entire system. The practice of risk handling of the Vietnamese banking system in the past as well as at present clearly shows this problem: when each bank increases credit growth rapidly and does not closely monitor credit activities leading to high bad debt, not only that bank, but also the state and the whole society must handle the risk. Therefore, business is the business of each bank, but ensuring safety is the obligation of each bank.

Third, regulations on the obligation to ensure safety in credit granting activities of commercial banks and bank managers and operators will clearly show the obligations of each bank, avoiding confusion and ambiguity about the rights and obligations of banks as is currently the case.

Fourth, regulating the obligations of commercial banks in ensuring safety in credit contracts will create a necessary legal mechanism to promote the responsibility of commercial banks in ensuring safety for themselves, thereby benefiting the system of credit institutions in Vietnam.

According to the author, the obligation of commercial banks to ensure safety in credit contracts has some differences compared to the legal obligation according to the traditional approach mentioned above. The basic difference is that if the legal obligation according to the traditional approach aims to exercise the rights of other subjects , the obligation to ensure safety of commercial banks aims to ensure safety for the bank itself, for the system of commercial banks and the general safety of the entire economy . Such a regulation will have the following positive impacts: (i) consistent with the characteristics of banking activities, which are monetary business activities, have high risks, and impact


chain and subject to very strict management by the state; (ii) beneficial for ensuring the safety of each bank as well as the commercial banking system in our country; (iii) facilitating the inspection and supervision of the safety of banking operations by the State Bank.

However, the regulation of the obligations of commercial banks in ensuring the safety of credit activities may have "side effects" such as the cost of implementing that obligation will increase over a certain period of time; initially implementing this obligation may encounter certain difficulties and obstacles. However, with the strict implementation of this regulation in legal documents on banking and currency, combined with effective supervision of banking activities, banking activities will quickly return to a safer and more effective mechanism.

4.2.2. Closely monitor the safety status in credit granting activities of commercial banks

The author proposes to closely monitor the safety status of commercial banks' credit activities for the following reasons:

Firstly, it comes from the current state of safety supervision in the legal system and the practice of implementing this work at commercial banks is still weak. In fact, the safety supervision mechanism within commercial banks has not been effective. The practice of trying the case of Huynh Thi Huyen Nhu and accomplices shows this: commercial banks have not detected and prevented risks caused by their own officers and employees; the State Bank's supervision mechanism for commercial banks is still weak; the market's supervision mechanism for commercial banks is not effective, the shareholder's supervision mechanism for commercial banks is still weak. The World Bank's 2014 business environment report shows that the level of responsibility of members of the Board of Directors has a score of 1/10; the ease of shareholders filing complaints is 2/10; the investor protection index is 3.3/10. In 2015,

These scores are higher than in 2014 but are still low overall at 233 .

Second, commercial banks are important, complex and highly risky business organizations. Therefore, through a strict monitoring mechanism, all activities of commercial banks are identified and assessed for risks, thereby ensuring appropriate risk prevention and handling. At the same time, only by closely monitoring the risk status can commercial banks have appropriate risk management strategies, monitor all activities of their officers and employees, and avoid negative behaviors as has occurred at some commercial banks in the recent past. In addition, closely monitoring the risk status also ensures that the State Bank has appropriate measures to handle commercial banks that violate safety regulations.


233 See also: http://www.worldbank.org/content/dam/Worldbank/document/EAP/Vietnam/VNscorecard%20DB14_VIE.pdf (accessed May 9, 2015) and website doingbusiness.org (accessed May 9, 2015).


Regarding the content of closely monitoring the risk status of commercial banks, it is essentially the application of the dual risk control mechanism that the author mentioned in the previous section. According to this mechanism, closely monitoring the credit activities of commercial banks is done through: (i) monitoring from the commercial banks themselves according to the regulations of the internal control and internal audit systems; (ii) monitoring from the State Bank; (iii) monitoring from the market and (iv) monitoring from shareholders.

Regarding supervision from the commercial banks themselves through the internal control and internal audit systems: according to the author, the State Bank needs to guide commercial banks to develop strict and specific procedures and regulations, and at the same time, clearly decentralize tasks for each task at the commercial bank. The author makes this proposal because: (i) Commercial banks are business organizations that play a very important role in the economy, are professional, and are trusted by people in the transaction process. Therefore, commercial banks must have procedures and regulations to control this issue; (ii) Commercial banks conduct transactions through authorized representatives (or representatives with the authority to sign). In current practice, customers coming to make transactions at commercial banks cannot (or find it very difficult) to transact with legal representatives (Chairman of the Board of Directors or General Director), but often transact with transaction staff at the bank. Therefore, banks must be responsible for these transactions of bank staff; (iii) In practice, the current mechanism for monitoring the operations of commercial banks is still very loose. This is an important cause for violations of the law in general as well as crimes committed by bank officers and employees.

Regarding supervision by the State Bank: The State Bank needs to have strict control over the implementation of procedures and regulations of commercial banks. Implementing the above issues will reduce operational risks and ensure safety in credit activities of commercial banks.

Regarding shareholder supervision: it is necessary to improve the law in the direction of strengthening shareholder supervision over the operations of commercial banks, especially the issue of shareholder supervision over the operational safety of commercial banks. Although the Enterprise Law 2014 has provisions to strengthen shareholder supervision, increase the protection of small shareholders (shareholders, groups of shareholders owning at least 1% of common shares continuously for 06 months have the right to sue on their own or on behalf of the company... But it is necessary to have regulations on this issue in the Law on Credit Institutions; transparency in the organization and operation of commercial banks.

Regarding market supervision: it is necessary to improve the law on the stock market in the direction of strengthening discipline and transparency of information on the stock market, and sanctioning violations of information disclosure on the market.

Applying strict supervision of the safety status in the credit activities of commercial banks will have a positive impact on the operations of commercial banks. Through risk supervision, commercial banks will enhance their capacity to prevent and handle risks. Enhance the responsibility of the State Bank as well as shareholders of commercial banks and social supervision of ensuring safety in the credit activities of commercial banks. Unwanted impacts of applying


The application of risk status monitoring for commercial banks is difficult in accessing information on the safety status of commercial banks' operations; the coordination mechanism between monitoring institutions may encounter difficulties; and the problem of information transparency.

4.2.3. Prescribe stricter sanctions for violations of safety in credit granting activities of commercial banks.

The principle of the law on ensuring safety in credit activities of commercial banks is to stipulate the limits (boundaries) to be implemented to ensure safety in banking activities. When banks exceed those boundaries, they will be considered violations and subject to sanctions. Therefore, the law needs to be improved in this direction. Currently, the law has established the basis for handling violations in the monetary and banking fields. However, the regulations on administrative sanctions for violations in the monetary and banking fields to ensure safety for banks are still limited. Specifically, some violations of safety have not been specifically regulated, such as violations of credit procedures and violations of loan use inspection. At the same time, the level of administrative sanctions for violations of safety in credit activities is still low, not commensurate with the nature and level of danger of the violation. This is reflected in Decree 96/2014/ND-CP dated October 17, 2014 on administrative sanctions for violations in the monetary and banking sector. According to this Decree, the maximum fine for violations of safety regulations in credit institutions is 450 million VND (violation of minimum capital safety ratio), and other violations are fined from 10 million VND to 300 million VND, while the maximum fine prescribed in this Decree is 1 billion VND for individuals and 2 billion VND for organizations. The author believes that it is necessary to increase the level of fines for violations of safety assurance in credit institutions of commercial banks to ensure deterrence and prevent violations that inherently have extremely serious consequences for each bank, the banking system and the whole society.

4.2.4. Other solutions

In addition to the basic solutions mentioned above, there should be other complementary solutions such as: human resource solutions, technology solutions.

About human resources solutions

Human resource solutions are considered one of the solutions to ensure safety in the credit activities of commercial banks through influencing the human factor in preventing and handling risks, because "people are the center of development". The practice of credit activities of commercial banks has proven that when the professional qualifications and skills of credit officers are still inadequate compared to job requirements, lacking skills in grasping and analyzing market information, lacking forecasting ability, weak ethics and professional responsibility


Poor... are the causes of credit risks of the banks themselves 234. Therefore, human resource solutions need to focus on the following contents: (i) Separating and clearly assigning functions to departments and complying with the stages in the process of resolving loans 235 ; (ii) Paying attention to recruiting personnel who meet the requirements of expertise, ethics, integrity, and diligence; (iii) Staff management needs to receive due attention from bank leaders; (iv) Organizing training courses and knowledge development to improve the capacity of bank staff; (v) building a code of ethics for banks...

About technology solutions

Technology solutions in general and information technology in particular play a very important role in banking operations. It is considered the key to improving the efficiency of business operations and limiting risks 236 . Currently, the construction of risk management processes with international standards is best implemented on a modern technology platform 237 . However, the application of technology that is not synchronized and poorly operated can also be a type of risk - technological risk. This is an aspect of operational risk 238 . Therefore, the operational practices of commercial banks need to effectively apply advanced technological measures, appropriate to the scale, nature and type of service provision of commercial banks to prevent risks.

In summary, there are a number of solutions to improve the law on safety assurance in credit activities of Vietnamese commercial banks. The basic solutions are: Regulations on the obligations of banks to ensure safety in credit activities; Closely monitoring the safety status in credit activities of banks; Stronger regulations on sanctions for violations of safety in credit activities of banks. In addition, human resources and technology solutions are considered as complementary solutions to ensure safety in credit activities of commercial banks.

4.3. Recommendations for improving laws and implementing laws on ensuring safety in credit granting activities of Vietnamese commercial banks

4.3.1. Proposals to improve laws and implement laws on risk prevention to ensure safety in credit granting activities of Vietnamese commercial banks

4.3.1.1. On recommendations for improving the law

First, on cases of non-credit granting, credit restriction and credit limit



234 Nguyen Trong Tai, “Prevention and handling of credit risks of commercial banks – experiences and issues for Vietnam”, Journal of Economic Research, No. 361, June 2008, p. 13.

235 Trinh Ba Tuu, “Credit risk prevention – experience of Thai banks”, Banking Magazine, Special Issue 2005, p. 55.

236 Le Thi Huyen Dieu, “Exchange rate risks of Vietnamese commercial banks – some solutions and prevention experiences”, Banking Magazine, Special issue 2005, p. 68.

237 Tran Ngoc Minh, “Solutions to improve risk management capacity from the operational practices of commercial banks in Ho Chi Minh City”, Banking Magazine, Special issue 2005, p. 51.

238 Ha Thi Kim Nga, “Types of risks and risk management in banking activities”, Banking Magazine, special issue 2005, p. 20.

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