Circular 06/2023/TT-NHNN amending regulations on lending activities of foreign bank branches

On June 28, 2023, the State Bank of Vietnam issued Circular 06/2023/TT-NHNN to amend and supplement Circular 39/2016/TT-NHNN of the State Bank of Vietnam on lending activities of credit institutions and foreign bank branches to customers.

Basic information of Circular 06/2023/TT-NHNN amending regulations on lending activities of foreign bank branches

Contents of Circular 06/2023/TT-NHNN amending regulations on lending activities of foreign bank branches

Some new concepts

Circular 06/2023/TT-NHNN has added point c, clause 6, and clause 12 of Article 2 to explain terms related to capital support plans, specifically:

• According to the old regulations at point c, clause 6, Article 2 of Circular 39/2016/TT-NHNN, one of the plans required for capital usage was a business plan or project (excluding capital needs for living purposes).
• Recently, there has been a situation where some credit institutions lent to individual customers for consumption and living purposes related to real estate with large sums of money, posing potential risks if there were fluctuations in the real estate market. Therefore, Circular 06/2023/TT-NHNN has added business plans or projects, or plans or projects serving living needs for buying houses; constructing or renovating houses; and acquiring land use rights for building houses.
• The addition of these regulations aims to control the risks associated with loans for living needs related to real estate, requiring stricter regulations (procedures, conditions, documentation, loan usage plans, repayment plans, etc.) for loans to meet living needs for buying houses; constructing or renovating houses; and acquiring land use rights for building houses.

Circular 06/2023/TT-NHNN has also added clause 12 on financial compensation loans, which is when a credit institution lends to customers to compensate for expenses already paid by the customers themselves or borrowed from individuals or organizations (not credit institutions) to implement business plans or projects or plans or projects for living needs. The addition of this regulation aims to be consistent with the provisions of Chapter VI of the Civil Code and Decree 116/2018/NĐ-CP.

Capital needs that are not eligible for loans

Circular 06/2023/TT-NHNN has amended and supplemented Article 8 of Circular 39/2016/TT-NHNN with the following specific details:

• Amendments and additions to clauses 1, 2, and 3. These adjust the capital needs that are not eligible for loans to align with the Civil Code and the Investment Law (restricted industries for investment as specified by the law, not by general legal provisions).
• Amendment and addition to clause 5: This aligns with the practical reality, changing the regulation from only applying to the need to pay loan interest incurred during construction to include loan interest costs calculated in the construction budget approved by the competent authority according to legal regulations.
• Amendment and addition to clause 6: This adjusts to reflect practical circumstances, instead of only applying to loans serving business production needs, specifically:
• Foreign loans in the form of deferred payment for goods purchases to align with market practices and the nature of international trade activities;
• Bên cạnh đó, tạo điều kiện cho Tổ chức tín dung (tổ chức tín dụng) được vay để trả nợ khoản vay phục vụ nhu cầu đời sống.

Furthermore, the regulation specifies that at the time of loan consideration, the loan must be classified as Group 1 or Group 2 debt according to the most recent debt classification results, and the off-balance sheet commitments of the customer provided by the Vietnam National Credit Information Center to prevent bad debt concealment. Simultaneously, it addresses difficulties for individuals and businesses in the context of the Covid-19 pandemic, where loans have had their repayment terms restructured according to Circular 01/2020/TT-NHNN (as amended and supplemented)

• Additional Clause 8 due to difficulties in controlling the purpose of capital use, posing potential risks
• For loans contributing capital or business cooperation that does not form the charter capital of the recipient unit:
• Assessing the feasibility of the plan and the customer’s repayment ability is very difficult because the effectiveness of the plan is determined by fixed returns promised by the capital recipient, independent of the recipient’s business performance. The customer’s repayment source is entirely dependent on the capital recipient’s funds;
• Ensuring the loan is used for its intended purpose is controlled by monitoring the funds transferred to the capital recipient. However, after disbursement into the capital recipient’s account, some credit institutions cannot control the recipient’s use of the funds, nor do they regularly assess the financial status, operations, or repayment ability of the capital recipient.
• For loans contributing capital or business cooperation that forms the charter capital of the recipient unit:
• In reality, some cases involve investors or capital-receiving units being newly established enterprises; these enterprises lack experienced personnel, machinery, and fixed assets for management and business operations. Investors receiving capital contributions may lack the financial capacity and ability to execute projects or plans. Meanwhile, credit institutions may inadequately assess, decide on loans, and monitor the use of loan funds.
• For loans to reimburse self-financed capital:
• These loans pose risks regarding the use of loan funds and the authenticity of transactions financed by credit institutions in practice;
• Credit institutions may be unable to control how customers use the disbursed funds.
• For loans to pay deposits::
• Credit institutions provide credit to customers for deposits aimed at companies transferring real estate to be formed in the future. However, most real estate projects to be transferred do not meet the legal requirements.
• After credit institutions grant credit to customers, the investor and customer may cancel the deposit contract due to the failure to complete legal procedures for the transfer contract.

The amendments and additions have partially tightened the control over the purpose of loan capital usage by customers. However, they are not entirely reasonable and do not completely mitigate credit risks, but instead show signs of credit tightening..

Currency for loans and repayments

Circular 06/2020/TT-NHNN introduces new regulations regarding the currency used for loans and repayments as follows: The repayment currency must be the same as the loan currency. If repayment is made in a different currency, it must be agreed upon between the credit institution and the customer following relevant legal regulations. This regulation aims to ensure strict and clear guidelines as a basis for credit institutions to implement uniformly.

Loan interest rates

Circular 06/2023/TT-NHNN amending regulations on lending activities of foreign bank branches amends and supplements clause 2 of Article 13, restructuring it to avoid the interpretation that it is a loan condition and to ensure compliance with clause 1 of Article 94 of the Law on Credit Institutions (credit institutions must require customers to provide documents proving the feasibility of the capital use plan, their financial capability, the lawful purpose of the capital use, and the measures to secure the loan before deciding to grant credit).

Additionally, point d of clause 2 is revised to regulate the maximum short-term loan interest rate to meet the capital needs of high-tech enterprises as stipulated in the Law on High Technology and its guiding documents, as well as Resolution No. 138/NQ-CP dated December 31, 2017.

Repayment of principal and interest

Clause 4 of Article 18 in Circular 39 previously stated that credit institutions and customers should agree on the order of principal and interest repayments. For overdue loans, the principal was to be collected first, followed by interest.

Article 18, as amended and supplemented by Circular 06, specifies that credit institutions and customers should agree on the order of principal and interest repayments. For overdue loans, the credit institution will collect the principal first, then the interest. For loans with one or more overdue repayment periods, the credit institution will follow this order: overdue principal, interest on overdue principal, due principal, and interest on due principal. These amendments are based on suggestions from credit institutions and aim to protect customers.

Internal regulations

Circular 06/2023/TT-NHNN amends and supplements clause 1 and points a, b, c, e, and g of clause 2 of Article 22. These changes provide a basis for appraisal officers to perform their duties and for inspection officers to review and make decisions. They also aim for stricter management of loans for securities investment and trading, real estate purchases and trading, public-private partnership investment projects, and large-value personal loans as assessed by the credit institution.

Loan agreements

Amendments and additions to point b of clause 4 of Article 23 specify that loan agreements must provide complete information about the contract template and general transaction conditions to the customer before entering into the loan agreement. The customer must confirm that the credit institution has provided all necessary information. This ensures clarity and consistency in the implementation by credit institutions.

Loan usage monitoring

Circular 06/2023/TT-NHNN amends and supplements clause 2 of Article 2, granting credit institutions the right and obligation to monitor and supervise the use of loan capital and repayment by customers under legal regulations and internal procedures specified in point c of clause 2, Article 22. These amendments align with clause 3, Article 94 of the Law on Credit Institutions.

Lending Methods

The Circular amends and supplements clauses 1, 4, and 5 of Article 27 as follows:

• Clause 1: Specifies that for individual loans, each loan requires the credit institution and the customer to complete the lending procedures and enter into a loan agreement. The Circular clarifies this to ensure consistency in implementation by credit institutions.
• Clause 4: Amends and supplements the regulations for limit-based lending to avoid confusion. In practice, credit institutions and customers sign a limit-based loan contract to meet the customer’s regular needs. Requiring the credit institution to perform individual lending procedures for each disbursement under this limit would create unnecessary procedures for both parties.
• Clause 5: Amends and supplements the regulations for standby credit lines, requiring credit institutions to commit to being ready to lend to customers within the agreed standby credit limit. The institution and the customer must agree on the validity period of the standby credit line, which should not exceed one year. This amendment clarifies the distinction between this method and regular limit-based lending as requested by many credit institutions.

For legal consultation on state banking laws or laws related to credit institutions, please contact Viet An Law Firm for the best support.