An Dao of LNT Partners in Ho Chi Minh City discusses the changes to banking and security regulations
Following the issuance of Civil Code 2015, banking regulations have been amended substantially in early 2017. Among these amendments, two are crucially important for bringing about improved conditions for credit institutions and their clients: 1) Circular No. 39/2016/TT-NHNN, which provides new regulations for lending transactions of credit institutions and/or foreign bank branches with clients (“Circular 39”); and 2) Resolution No. 42/2017/QH14 on Pilot treatment of bad debts of credit institutions (“Resolution 42”). These new regulations, together with the Civil Code 2015, will affect the practice of credit activities and can hopefully address existing issues.
Regulation of credit activities under Circular 39
Circular 39’s enactment was a response to the criticism that Decision No. 1627/2001/QD-NHNN on the Regulations on lending by credit institutions to clients (“Decision 1627”) was outdated (it had been in effect for fifteen years). Circular 39’s amendments are discussed below.
Prior to Circular 39, Decision 1627 recognized numerous individuals and groups as customers that had the legal capacity to borrow capital from credit institutions. Those individuals and groups included: both Vietnamese and foreign organizations and individuals; households; private enterprises; cooperative groups; partnerships; as well as other organizations. However, on the basis of the Civil Code 2015, Circular 39 now only recognizes borrowers as legal entities established and/or operated within the territory of Vietnam, Vietnamese individuals, and foreign nationals1. Accordingly, households, cooperative groups, and other non-juridical subjects are no longer eligible to borrow from banks. Instead, individuals, who are the owners of private enterprise and households, have the right to borrow money from the bank for their businesses’ capital needs.
Hierarchy of legal applications in credit activities
Before the enactment of Circular 39, there were eight different legal instruments that simultaneously governed credit activities, creating difficulties for credit applications. Circular 39 has corrected this problem by prescribing the hierarchy of legal applications in credit activities2. Specifically, credit activities must comply with the Law on Credit Institutions, Circular 39, and other relevant legislation. If particular documents of the Vietnamese Government, the Prime Minister, and the State Bank of Vietnam prescribe the application of Circular 39 or contents relating to lending operations that are not prescribed in particular documents, Circular 39 still applies. However, if the Government, Prime Minister, and the State Bank of Vietnam issue documents for specific lending operations, those documents will prevail. This provision clears up the issue of ambiguity in previous instruments.
Taking into account Articles 466 and 468 of the Civil Code 2015, as well as the Law on Credit institutions 2010, Circular 39 provides that credit institutions and their clients shall agree on loan interest rates based on several factors. One factor is supply and demand in the capital market. Another factor is the demand for loans. The third factor is the creditworthiness of clients.
One exception to this rule for interest rates is the application of a maximum interest rate for short-term loans for five priority sectors, which the State Banks’s Governor will decide from time to time3. However, the ceiling interest rate regulation is only applied to short-term VND loans for priority fields.
Regarding the interest rate charged on overdue paid interest, customers will pay late payment interest over the outstanding balance of late payment interest at the interest rate agreed to by the credit institution and customer (which cannot exceed 10% per annum). Where a debt has become delinquent, the client must pay interest on the outstanding amount of principal which is overdue. In that case, the interest rate cannot exceed 150% of the interest rate originally charged before the debt became delinquent.
New practical lending rules
Circular 39 makes efforts to include three additional types of loans that credit institutions recommended. These three loans are for crop season intervals, revolving loans, and rollover loans4. Circular 39 is the second legal document after Decree No. 55/2015/ND-CP to recognize loans for crop season intervals, thereby demonstrating the Government’s determination to encourage investment in rural and agricultural development. Revolving loans and rollover loans are common in other markets, and have been utilized frequently by foreign bank branches in Vietnam to satisfy the demand of enterprises with relatively low capital turnover for working capital. Since Circular 39’s enactment, the inclusions have been welcomed as they not only reflect actual credit practices, but also provide legal certainty for credit institutions and their clients.
With respect to the security of the loan, the Civil Code introduced two new measures of security for performance of civil obligations: title retention and a lien on property5. The 2005 Civil Code already recognized these measures, but not as means of security.
A lien on property is a security measure established by the law, under which the obligee in possession of assets, which are the subject of a bilateral contract, is entitled to retain the assets if the obligor fails to perform its obligations6.
Title retention is a security measure established through written agreements. In a sales contract, it allows the seller to retain ownership of property until the buyer pays the purchase price in full7. More importantly, title retention is not only effective between the contracting parties, but also against third parties. The new approach of the 2015 Civil Code better reflects the nature of these measures in accordance with international practice, and offers greater flexibility when choosing measures of security.
Circular 39 also imposes other rules for credit activities. For example, the calculation of the loan term has been modified. Previously, it started on the date on which the client began to receive the loan funds. It ended on the date on which the principal and interest were repaid in full as agreed in the credit contract between the credit institution and the client. Now, under Circular 39, the term begins on the day following the day when a credit institution begins to disburse the borrowed funds to a client. It ends on the day when the client has to repay the principal and interest amounts in full as agreed. If a loan term is not a full day, the provision enshrined in the Civil Code on the date of commencement of a term is applied8. With regard to fees, Circular 39 maintains most of the fee regulations related to lending activities. However, it adds a fee paid for a commitment to withdraw the borrowed funds9. This fee is in line with international practice, and allows credit institutions to avoid situations where the client refuses to withdraw the funds provided by the credit institutions under the loan agreement.
Settlement of bad debts under Resolution 42
Resolution 42 is expected to create legal certainty and resolve the inadequacies of the former regulations regarding the process of handling bad debts. Some notable components of Resolution 42 are the inclusion of a new method for handling bad debts and new approaches for dealing with collateral composed of land use rights, as well as assets attached to land, land formed in the future, and real estate projects.
The fact that Civil Code 2015 does not mention the seizing of collateral raised concerns for credit institutions, before Resolution 42 was released, that the drafters intentionally abandoned this method for handling collateral. However, Resolution 42 clarified Article 7, and creates the right to seize the borrowers’ collateral with detailed provisions10.
Resolution 42 lists several conditions for seizing collateral, specifically: (i) a case occurs that brings it under the scope of handling collateral under Article 299 of the Civil Code; (ii) the security agreement clearly indicates the right to seize the collateral; (iii) the transaction has been registered; (iv) the collateral is not in dispute; and (v) information regarding seizing assets has been published for at least 15 days (for real estate assets)11.
There are problems, however. First, the mortgagor can prevent the mortgagee’s seizure of collateral. The mortgagor can accomplish that simply by engaging in actions which put the collateral in dispute within fifteen days of the publication of information regarding the seizure. Another problem under this rule is that only credit institutions, organizations, and companies that trade and handle bad debts are allowed to seize the collateral, while others (such as debt collection services) receive no such authorization, and only to the extent that the seizure does not violate legal prohibitions12.
Collateral composed of land use rights, assets attached to land, assets attached to land formed in the future, and real estate projects
Resolution 42 gives certain rights regarding mortgages to buyers of debts that originated from credit institutions’ bad debts. For those bad debts with the secured assets of land use rights, assets attached to land, or assets attached to land formed in the future, the buyers now have the right to register and receive the mortgages on those assets as the security property of the debt purchased13.
Additionally, Resolution 42 allows credit institutions, foreign bank branches, and organizations that trade and handle bad debts, to transfer the bad debts’ collateral if they are comprised of real estate projects. The following conditions, however, must be met: (i) the project must have been approved by the competent authority; (ii) there is a decision on land allocation and land leasing from the competent authority; (iii) the project must not be in a dispute; and (iv) the project is not being seized to ensure the enforcement of judgments or to execute administrative decisions14.
These amendments have been long-awaited by credit institutions and debt dealers alike. Creating the right to seize collateral will help enhance the handling process for collateral. In addition, Resolution 42 will bring promising changes in regulating and finalizing the legal framework for handling bad debts in general.
Circular 39 took effect on the 15th of March 2017, while Resolution 42 goes into effect on the 15th of August 2017 and lasts for five years. While both go into effect this year, it may take some time to see the impact of these improvements in practice.
1Article 2.3 Circular 39.
2Article 5 Circular 39.
3Article 13.1, 13.2 Circular 39.
4Article 27 Circular 39.
5Article 292 Civil Code 2015.
6Article 346 Civil Code 2015.
7Article 331 Civil Code 2015.
8Article 2.8 Circular 39.
9Article 14.4 Circular 39.
10Article 7.1 Resolution 42.
11Article 7.2, 7.3, 7.4 Resolution 42.
12Article 7.6 Resolution 42.
13Article 9 Resolution 42.
14Article 10 Resolution 42.