Introduction
New provision on e-guarantee
Restrictions on guarantee for issuance of enterprise bonds
Comment
Bank guarantees significantly contribute to promoting the activities of buying and selling goods as well as providing services in general, creating trust for the parties entering into contracts. Circular 07/2015/TT-NHNN (Circular 07), amended and supplemented by Circular 13/2017/TT-NHNN (Circular 13), has created a relatively complete legal framework for bank guarantees. However, the implementation of Circular 07 in the last few years has revealed some limitations in relation to the regulations governing guarantees for off-plan housing, the lack of regulations governing guarantees on digital platforms and nonconformity with other legal documents, such as the Civil Code 2015 or the Law on Real Estate Trading 2014. To make the real estate market transparent and guarantee bond market security, the government has introduced new rules, regulations, standards and restrictions relating to real estate transactions and bond issuance. On 30 September 2022, the Governor of the State Bank of Vietnam issued Circular No. 11/2022/TT-NHNN on Bank Guarantee (Circular 11), which will come into force on 1 April 2023 and replace Circular 07 and Circular 13.
This article discusses the amendments to the regulations under Circular 11 that relate to e-guarantees and guarantees for the issuance of enterprise bonds.
Electronic guarantee (e-guarantee) is one of the most notable supplementations of Circular 11. Accordingly, credit institutions and clients will be allowed to perform bank guarantee transactions utilising electronic means and e-guarantee will be automatically performed through pre-established information systems. The usage of automated services, such as electronic know-your-customer (e-KYC), contract signing, transaction execution, and settlement, is therefore permitted for customers. However, the ceiling for these e-guarantees is 4 billion for individuals and 45 billion for companies, unless there are specific exceptions, such as customers who already have digital signatures in line with legal laws or when the client is a credit institution.
Currently, the State Bank only imposes specific restrictions on e-KYC and limits if implementing e-KYC in creating payment accounts. Therefore, this new regulation on guarantee is one of the new initiatives to enable Vietnam's legal framework for digital banks be completed.
Restriction on guarantee for issuance of enterprise bonds
According to the provisions in article 11, credit institutions and foreign bank branches are not permitted to:
- guarantee bond payment obligations of issuers to restructure the debt of the issuing enterprise itself;
- contribute capital and purchase shares in other businesses; or
- increase the amount of working capital.
Accordingly, this legislation would restrict how businesses raise cash by issuing corporate bonds, a recent hot commodity. Bonds with a bank guarantee are often desirable to creditors and inspire trust in creditors, since a bank, as a respected institution, will repay if borrowers fail to fulfil their commitment to pay back debt. Under this clause, banks will not issue a guarantee if the goal of raising money through the issuance of bonds is to restructure debts, contribute funds to acquire shares or increase the amount of operational capital – which are all usual goals in the present bond market. Companies must employ their assets or use third-party funds to secure bond loans. However, even if it is a priority under bankruptcy law, enforcing the security assets once the business has already declared bankruptcy is far more challenging than just submitting a letter of guarantee and demanding payment from the bank.
The current draft circular on foreign loans also restricts foreign loans for share purchases and capital contributions. Consequently, a businesses' options for raising capital to invest in other companies have become much more limited.
The restriction on the ability of credit institutions to purchase corporate bonds that are issued to reorganise the debt of the firm itself will also limit the circumstances in which credit institutions infuse capital to enterprises in their backyards through the provision of guarantees.
As a result, these regulations are considered to shortly become barriers to the corporate bond issuance market in Vietnam.
The covid-19 pandemic not only creates specific challenges for the banking sector but also promotes and "forces" banks in Vietnam to enter the digital transformation process to survive and develop. In actuality, Vietnamese banks are actively engaged in digital transformation initiatives. Banks must implement digital transformation to compete successfully and grow sustainably in the 4.0 era. The introduction of Circular 11/2022/TT-NHNN is expected to significantly contribute to promoting the digital transformation of banking activities in bank guarantee activities. At the same time, the government hopes that regulations on guarantee restrictions relating to corporate bonds and specific rules on guarantee standards for real estate business activities related to housing projects will contribute to transparency and better control of capital flows into these markets, so protecting the interests of investors and creditors. However, from the perspective of businesses, these new laws also represent a barrier, as they block one of the capital mobilisation avenues that have produced resources for the real estate and corporate bond market expansions thus far.
For further information on this topic please contact Thanh Minh Vu, Anh Thu Le or Dang Thuy Linh at LNT & Partners by telephone (+84 28 3821 2357) or email ([email protected], [email protected] or [email protected]). The LNT & Partners website can be accessed at www.lntpartners.com.