Regulations on Lending Practices of Credit Institutions and Branches of Foreign Banks

On 30th December 2016, the State Bank of Vietnam promulgated Circular 39/2016/TT-NHNN regulating lending practices of credit institutions and branches of foreign banks (“Circular 39”) in order to reconcile and enumerate regulations of the conditions and requirements of loans from credit institutions and branches of foreign banks in Vietnam (hereinafter referred to as “CI”).

Borrowers and loan purposes

A borrower from a CI is defined as (i) a legal entity established and operated in Vietnam, (ii) a legal entity established overseas and lawfully operating in Vietnam, (iii) an individual of Vietnamese nationality, or(iv) an individual of foreign nationality. Any entity which is not a legal entity shall not qualify as borrowers.

An individual borrower may borrow for (i) personal expenditures of the individual and the individual’s family; and (ii) business and other activities, such as for capital requirements of such individual and the family’s household or the private enterprise which the individual owns.

A legal entity may borrow to satisfy its capital requirements.

Circular 39 also sets forth the following impermissible loan purposes:

  1. For the payment of expenses or the satisfaction of financial requirements of transactions or other conduct prohibited by law;
  2. To any business investment activities in an industry or trade in which the law prohibits;
  3. For the purchase or use goods or services in an industry or trade in which the law prohibits;
  4. For the purchase of gold bars;
  5. For the repayment of a financial credit extension which a CI made, except for a loan to make payment of interest arising during the process of building construction works where such interest costs were included in the total investment amount for construction which the competent level approved in accordance with law;
  6. For the repayment of a financial credit extension made by another CI or a repayment of a oversea loan unless the repayment satisfies the following conditions:
    • It was a loan to serve business activities;
    • The term of new loan does not exceed the residual term of that old loan;
    • The term for repayment of an old loan has not yet been restructured.

Loan interest rate

The CI and the borrower shall reach an agreement on the interest rate of credit that is based on the market supply and demand of capital, the credit amount and credit rating of the borrower. Except for short term credit in VND currency, the interest rate as agreed must not exceed the maximum credit interest rate defined by the Governor of State Bank during the loan period.

A borrower who fails to make timely interest payments shall be subject to a late payment fee at the rate agreed between the CI and the borrower. However such rate shall not exceed ten per cent (10%) per annum calculated at the period upon which the payment of interest is late.

If the debt becomes delinquent, the borrower must pay interest of the delinquent debt in the period of which payment was late, and such interest rate shall not exceed one hundred and fifty per cent (150%) of the interest rate applicable as at the time the debt becomes delinquent.

Loan term

The CI and borrower shall reach an agreement on the terms of the loan of which terms shall be based on (i) the business cycle, (ii) the time taken to recover capital, (iii) the repayment capacity of the borrower, (iv) the capital lending sources and (v) residual operational term of the CI.

However, the loan term shall not exceed (i) the lawful operational duration of the legal entity; and (ii) the permitted period of residency in Vietnam of the foreign individual.

Transfer of delinquent debts

A CI shall only consider an existing loan debt to be delinquent if it is an outstanding principal amount which the borrower is unable to repay at the agreed time, and the CI and borrower fail to restructure the repayment terms of the loan.

Circular 39 took effect officially from 15 March 2017.