Vu Thanh Minh Nguyen Dieu Quynh October 4 2022 State Bank of Vietnam amends Circular 39 on lending transactions of credit institutions and foreign bank branches LNT & Partners | Banking & Financial Services - Vietnam Vu Thanh Minh, Nguyen Dieu Quynh Banking & Financial Services IntroductionNotable amendments under draft circularCommentIntroductionCircular 39/2016/TT-NHNN on the lending transactions of credit institutions and/or foreign bank branches with customers is a foundational document for customer-lending activities of credit institutions. After more than five years since its implementation, Circular 39 has shown its role in making lending operations safer, more transparent and more effective. However, in light of the economy's development demands, some provisions under Circular 39 have exposed impediments that must be reviewed and amended properly.Therefore, on 16 June 2022, the State Bank of Vietnam published the draft circular amending Circular 39. This draft is intended to make the legal system for lending activities more viable, effective and compatible with market conditions.Notable amendments under draft circularNew provision on e-banking operationsThe most significant change under the draft circular is the addition of a new provision on lending activities through electronic means. Accordingly, credit institutions are permitted to conduct electronic know your customer (e-KYC) in lending activities under article 24a. The provision does not specify a limit for e-KYC loan transactions, which means that credit institutions have the authority to conduct e-KYC for all customer-lending transactions. This is considered an important new regulation for credit institution operations. Given that credit extension is one of the essential functions of a credit institution, however, the state bank of Vietnam currently only provides e-KYC instructions for the opening of a payment account with a credit limit of up to one hundred million dong per customer each month (with a few exceptions), according to Circular 16/2020/TT-NHNN.Under the draft circular, this regulation contributes to the comprehensiveness of the legal framework for the operation of digital banks in Vietnam. However, to complete the legal basis for lending activities conducted through electronic means, the state bank also needs to amend and supplement regulations on risk control when the entire lending business process is automated, as the current regulations on the internal control system of credit institutions in Circular 44/2011/TT-NHNN and 13/2018/TT-NHNN lack specific guidance on requirements to ensure independence between departments when a process is carried out via fully automated electronic methods.Expanding rejected loan demandsThe draft circular proposes to abolish loan demands that request:proof of borrowers' financial capability in a civil transaction relationship with a third party;capital contribution and investment cooperation, whether or not the contributed capital forms the charter capital of the party receiving the contributed capital, capital contribution or investment cooperation;the payment of a deposit to perform future transactions that are not eligible to perform as prescribed at the time of the deposit; anda recompense of the equity or return loan to acquire real estate or goods.It is difficult to control loan risks under such loan demands, which should be the reason why the draft circular proposes that such demands be prohibited. If such provisions take effect, the approach to loans of borrowers shall be narrowed down significantly. Specifically, businesses will not be allowed to borrow capital for the purposes of contributing capital, purchasing shares or returning equity in real estate transactions.Consequently, domestic investors may need to mobilise long-term offshore loans, as current regulations on medium and long-term offshore loans still allow investment and businesses projects, including the contribution of capital contribution or the purchase of shares, real estate and goods.Revise rejected loan demandsSeveral cases of rejected demands under Circular 39 have been revised under the draft circular. Most notably, the draft circular allows the loan that is intended for refinancing if:the loan term does not exceed the residual loan term of an older loan; andat the time of loan review, that loan is categorised as debt in groups one and two.This is one of the tools available to help enterprises restructure their financial situations, particularly during the post-covid-19 economic crisis.Clarifying participation of households, co-operative groups and other non-juridical persons in lending transactionsCircular 39 stipulates that only individuals and legal entities are the subject of borrowing activities and is silent on any instructions regarding lending to organisations that are not legal entities. The draft circular, however, mentions the lending to facilitate the demand of entities without legal status, such as private companies or households.But it should be noted that the subjects of borrowing activities do not change under the draft circular and include only individuals and legal entities. The draft circular includes a clause clarifying that the subject acting as the borrower in case of lending for the purpose of entities that are not legal entities shall be either the members of such entities or the authorised representative of such members, which means individuals shall be the borrower in such cases. Although such a provision on the subject of transaction with the participation of households, co-operative groups and other non-juridical persons corresponds verbatim to article 101 of the Civil Code 2015, it is necessary that the draft circular mentions this provision in order to avoid any misunderstanding on the subject.Control over loans related to real estate transactions The recent legislative tendency is to put stricter control on loans associated with real estate transactions. Under the draft circular, this policy is reflected through three points:Information about consumer loans related to real estate, specifically "plans and projects to serve the living purpose for the purchase of a house; construction and renovation of a house; transfer of land use rights to build a house" must be addressed in the plan to use a borrowed fund.Internal rules on the lending of the credit institutions must add the content on "control loans for securities business investment; real estate trading; investment projects in the form of public-private partnership, or loans for life's necessities of great value".Loans for recompensing equity or a returning loan to acquire real estate (or to pay a deposit to perform future transactions that are not eligible to perform as prescribed at the time the deposit is rejected) must be addressed. In reality, deposit agreements are usually used by real estate developers to call for funds applied to projects on real estate formed in the future. With this regulation, channels to call for funds with real estate projects are narrowed or paying a deposit to perform future transactions that are not eligible to perform as prescribed at the time of deposit is rejected. In reality, deposit agreements are usually used by the real estate developers to call for funds applied to projects on real estate formed in the future. With this regulation, channels to call for funds are narrowed down.CommentThe guidance on electronic loan transactions are new contents introduced for the first time under the draft circular. In addition, the revision of rejected loan demands and control on loans associated with real estate transactions, capital contribution and share purchase are notable content that companies should pay attention to. Regarding the purpose of loan demands, enterprises may need to find a way to mobilise capital from medium and long-term offshore loans. Allowing loans when certain conditions for refinancing are met as specified is a procedure specified under the draft circular and is also a tool to assist businesses in reorganising their finances to overcome challenges in the post-covid-19 period.For further information on this topic please contact Thanh Minh Vu or Nguyen Dieu Quynh at LNT & Partners by telephone (+84 28 3821 2357) or email ([email protected] or [email protected]). The LNT & Partners website can be accessed at www.lntpartners.com.