Counsel Than Trong Ly

Senior Associate Tasneem Kanthawala  

Paralegal Cao Le Ngoc Anh

The key takeaways of this article:

-     Four new loan purposes are added to the list of purposes which credit institutions are prohibited from granting loans to Vietnam-based borrowers, including: (i) deposits; (ii) payments of capital contribution in companies; (iii) purchase of shares in unlisted companies; and (iv) financial offsetting.

-     Inadeqacies and effects Circular 6 on the real estate.

In the midst of the current economic difficulties, the issuance of Circular 06/2023/TT-NHNN by the State Bank (“SBV”) on 28 June 2023 (“Circular 06”) amends and supplements a number of articles of Circular No. 39/2016/TT-NHNN (“Circular 39”) regulating lending activities of credit institutions (“CI”),  and specifiying some funding requirements not allowed to be lent[1] was quickly met with controversial opinions from the public, mostly from the real estate associations and enterprises[2].

After an urgent meeting on 17 August 2023, under Prime Minister Pham Minh Chinh’s direction to study and amend Circular 06 on the removal of the obstacles and difficulties for enterprises before Circular 06 takes effect on 01 September 2023, the SBV has issued the Circular No. 10/2023/TT-NHNN on 23 August 2023 (“Circular 10”) to suspend the implementation of Articles 8.8, 8.9 and 8.10 of Circular 39 (supplemented by Article 1.2 of Circular 06).

Circular 06

Circular 06, which comes into effect on 1 September 2023, aims to regulate lending practices, address specific lending purposes, and establish stricter conditions on lending certain types of loans. Some key points to note in Circular 06:

1.    Prohibited Lending Purposes: Circular 06 introduces new scenarios when Banks are prohibited from providing loans. These situations include: (i) making savings deposits, (ii) paying for capital contributions of limited liability companies or partnerships, (iii) acquiring shares in joint stock companies, which are unlisted or unregistered for trading on upcom, (iv) making capital contributions to implement investment projects which do not satisfy conditions for commercial operation at the time of the lending decision; and (v) repayment of offshore or onshore loan (except offshore loan in the form of deferred payment and some other specific cases).

2.    Refinancing of Existing Loans: Circular 06 relaxes restrictions on the refinancing of existing loans. It clearly carves out the refinancing of foreign loans borrowed in the form of deferred payment sale and purchase of goods’ contracts from the list of prohibited lending purposes and eliminates the requirement that existing loans must be for business purposes only. This allows Banks to provide loans for various lawful purposes, including living expenses.

3.    Loan Repayment Currency: Circular 06 permits borrowers to repay loans in a currency different from the loan currency, subject to agreement between the Banks and their borrowers, and applicable laws.

4.    Lending via Electronic Means: Circular 06 permits Banks to provide loans via electronic means, subject to conditions such as information system security, KYC processes, and limits on loan amounts to individual customers.

Addition of Prohibited Loan Purposes

The current list of loan purposes which credit institutions are prohibited from lending to Vietnam-based borrowers include six categories (this list is given in Article 8 of Circular 39). Circular 06 adds four prohibitive purposes mentioned in Article 1.2 of Circular 06 namely:

a.    Loans for deposits [with a third party];

b.    Loans for payments of capital contribution to or acquisition of equity in limited liability and unlisted joint stock companies;

c.    Loans for payments of capital contribution with another partner(s) via the form of capital contribution agreement in projects which are legally illegible to implement; and

d.    Loans for financial offsetting. A loan for financial offsetting is defined in Article 1.1(b) of Circular 06 as “loan to a customer to offset that customer’s own funds or funds borrowed from another individual or organization (other than the credit institution) used for paying or covering its costs incurred from a plan or project serving business purpose or living purpose.” with an exception mentioned in Article 1.2 of Circular 6 which is applicable to a loan which meets the conditions: (i) the borrower has advanced his/her/its money to pay the expenses for the project of the borrower, which are incurred less than 12 months from the time which the credit institution decides to grant the loan (including medium- and long-term loans only); and (ii) the expenses have been considered by the credit institution in granting the loan; and

e.    As one may notice, the additional purposes are aimed at preventing loans which have been causing risks to the banking and financial sectors of Vietnam. More specifically, the new prohibitive purposes may help to reduce the issues of overusing loans for careless investments.

Further in this article are highlighted the unreasonable points and adverse effects of Circular 06 on the real estate market, thereby showing the urgency of the demand to abolish or amend this Circular.

From the point of view of the SBV

From the perspective of the policy-makers and with the aim of regulating the macro-economy and ensuring the safety of the CI system, the SBV affirms that Circular 06 was issued with the intention of ensuring the safety of the credit system in funding activities, directing cash flow into practical production and business activities, limiting funding to risky areas, and at the same time controlling the use of loans for the right purposes, improving credit quality. Accordingly, in the four additional schools banned from lending under Circular 06, the funding mentioned in Articles 8.8 and 8.9 of Circular 39 (amended and supplemented by Article 1.2 of Circular 06) were added limitations for borrowers, especially real estate enterprises – the potentially risky area according to the assessment of SBV.

Specifically, according to Article 8.8 of Circular 39, CI is not allowed to lend money to “pay for capital contribution, purchase, receive and transfer capital contributions of limited liability companies or partnerships; contribute capital, purchase, receive and transfer shares of a joint-stock company that has not been listed on the stock market or registered for trading on the Upcom trading system”.

The SBV explained that this restriction only applies to limited liability companies, partnerships and unlisted joint stock companies. For listed joint stock companies, CI is still allowed to lend according to the regulations. The SBV also believes that the capital contribution in limited liability companies and partnerships, if formed from loans, will not accurately reflect the financial capacity of the company. In addition, this is also a funding requirement that is difficult to control the loan use purpose because the CI cannot manage the use of capital by the capital contributor as well as has no basis for regular assessment of the financial situation, activities and debt repayment capacity of the party receiving the contributed capital. Therefore, many enterprises will find ways to circumvent the law to get bank credit to finance projects that are not yet legally guaranteed through capital contribution, share purchase or investment cooperation.

Regarding the restriction specified in Article 8.9 of Circular 39 (amended and supplemented by Circular 06), the SBV does not allow CI to lend to “pay for capital contribution under capital contribution contracts, investment cooperation contracts, or business cooperation contracts for the implementation of investment projects that are not eligible to be put on the market”. This regulation is to deal with the situation that a number of large enterprises borrow capital to contribute capital, invest, and cooperate in enterprises and projects that have not yet met the conditions for direct loans from CI. Through this restriction, the SBV wants to screen and gradually remove from the market incompetent investors, and at the same time prevent unhealthy activities, taking advantage of credit capital for real estate speculation.

Inadequacies that need to be removed for enterprises

From the perspective of the management agency, the SBV has their reason to introduce the above limitations, but invisibly, it creates new bottlenecks and barriers for the economy which is facing many difficulties, especially for enterprises who are struggling with legitimate needs for loans.

Firstly, the authors believe that the above regulations of the SBV are not consistent with the policy and direction of the Government in Resolution No. 33/NQ-CP dated 11 March 2023 on implementing a number of solutions to solve the difficulties in order to unclog credit flow for the sustainable real estate market through creating favorable conditions for enterprises and investors in accessing credit sources with preferential interest rates (“Resolution No. 33”). Circular 06 also shows the deviation and inconsistency with relevant laws in some aspects as follows:

i.    Circular 06 arbitrarily restricts the freedom of enterprises to do business. The above provisions of Circular 06 may infringe upon the business freedom of individuals and organizations in accordance with the provisions of the Constitution, the current Law on Enterprises and Law on Credit Institutions (the “Law on Credit Institutions”). Accordingly, enterprises have the right to freely do what is not prohibited by law[3]. Since the Law on Credit Institutions does not prohibit the demand for loans as prescribed in Circular 06, it can be said that Circular 06 has arbitrarily restricted the business freedom of enterprises, contrary to the provisions of the Constitution and the relevant laws; and

ii.    Circular 06 also contradicts the provisions of other laws. Specifically, Circular 06 is incompatible with the provisions of the Civil Code 2015, which recognizes the right of “Individuals, legal entities to establish, exercise, and terminate their civil rights and obligations on the basis of freely and voluntarily entering into commitment and/or agreement. All commitments and agreements that do not violate the prohibition of the law and are not contrary to social ethics shall be bound by contracting parties and must be respected by other entities”[4]. Compared with the Law on Investment 2020, Article 8.8 of Circular 39 (amended by Circular 06) is also inconsistent, according to which “investment to contribute capital, buy shares, buy contributed capital” is also a form of investment[5] and is not limited on the type and listing status of the target company[6]. In addition, Article 8.9 of Circular 39 (amended by Circular 06) is also inconsistent with relevant provisions of the Law on Real Estate Trading 2014[7], accordingly, the Law on Real Estate Trading only requires the real estate projects to satisfy certain conditions such as having a written notice from the provincial housing management agency that the house is eligible to be sold, rented or purchased and must have a guarantee from a commercial bank so that they can be put on the market and mobilize capital from buyers. Thus, the Law on Real Estate Trading does not prohibit or restrict forms of capital contribution, share purchase, contributed capital or other forms of cooperation for projects that are legally qualified but not yet eligible to be put on the market.

The authors suppose that the above regulation was issued because the SBV has not been able to separate the concept of “real estate projects that are not eligible for business/open for sale" and "projects that do not satisfy legal conditions”. At a certain point in the project implementation stage, a real estate project may be legally eligible but not eligible for sale. This is when the investors feel the greatest need to call for funds from the market and other entities because if the project has satisfied all standards for commercial sale, investors would not opt for bank loans over non-interest funding from buyers obtained through the sale of off-plan houses and buildings. Therefore, the application of Circular 06 to real estate business really puzzles the real estate enterprises.

Secondly, Circular 06 restricts M&A activities, an effective method to remove difficulties for the real estate market. Through M&A activities, investors can transfer their contributed capital and shares in the project company to have an additional channel to manage the source of money. As a result, suspended projects have the opportunity to restart, creating more supply in the market. However, the provisions of Circular 06 are likely to cause major obstacles to M&A activities because it is impossible for investors to access credit capital in this way.

Although the SBV said that this regulation only applies to unlisted companies, it should be noted that in Vietnam’s market, the number of unlisted enterprises accounts for a much higher proportion than the listed ones. The right to access loans of unlisted enterprises is also legitimate and needs to be supported. Hence, it is necessary to recognize M&A as a normal and effective form of business operation, especially in the difficult context of needing to unclog capital flow for the real estate market as advocated by the Government in Resolution No. 33.

In conclusion, the SBV seems to have been hasty and has not studied thoroughly when issuing Circular 06 with potentially adverse effects on the real estate market. Therefore, Circular 06 should be quickly amended or replaced with another Circular to remove the above-mentioned shortcomings in accordance with the policy set by the Government which would certainly require extensive research and consideration. The promulgation of Circular 10 is a reasonable step of the SBV at the present time, which also promises the issuance of a legal document that is appropriate, effective and harmonizes the interests of the related subjects in the near future.