In brief

In late September 2021, the State Bank of Vietnam (SBV) issued a draft circular to replace Circular No. 07/2015/TT-NHNN dated 25 June 2015 on bank guarantees and Circular No. 13/2017/TT-NHNN dated 29 September 2017 amending Circular No. 07/2015/TT-NHNN (together referred to as "Circular 07").

Once the draft circular is officially issued and effective, parties will need to continue to perform existing guarantee issuance agreements and guarantee commitments until the end of the guaranteed obligations. However, any amendments or supplements that may be made to these guarantee agreements or commitments after the draft circular has become effective will need to be carried out in accordance with the terms of the circular.

Key takeaways

The draft circular proposes the following key amendments and supplements:

  • Guarantees created electronically will have equal value as traditional guarantees and must be made in accordance with the SBV's instructions on risk management, electronic transaction regulations and related legal documents.
  • For guarantees over residential property to be constructed, the guarantee issuance agreement must clearly set out that the guarantee obligations of the commercial bank toward the buyer will only arise after the buyer receives the guarantee commitment issued by the commercial bank to the buyer. The draft circular also defines the agreement on guarantees over residential property to be constructed and provides for the rights and obligations of the bank, the developer and the buyer where a guarantee over a residential property to be constructed is granted.
  • The guaranteed sum (issued to the customer by the issuing bank) will only be calculated upon the guarantee commitment becoming effective. For guarantees over residential property to be constructed, the guaranteed amount for the buyer will be the aggregate of (i) the money that the developer has received in advance from the buyer after the commercial bank issued the guarantee commitment to the buyer in accordance with the agreed schedule before the handover of the residential property, and (ii) any other money incurred that the developer must return to the buyer if the developer fails to hand over the residential property as agreed.
  • A guarantee commitment does not need to include certain mandatory content, provided that it is in a form required under specific laws.
  • The draft circular proposes some changes to the provisions on guarantees for nonresident customers. Essentially, the provisions remain similar to the current regulations. Specifically, credit institutions and branches of foreign banks can only provide guarantees to nonresident customers that are legal entities. Branches of foreign banks can only provide guarantees in foreign currency to customers that are foreign legal entities where the beneficiary of the guarantee is a resident. When providing a guarantee in foreign currencies to customers that are foreign legal entities, credit institutions and branches of foreign banks must, among others, be permitted by the SBV to conduct basic foreign exchange activities in the domestic market (where the beneficiary is a resident) and conduct basic foreign exchange activities in the international market (where the beneficiary is a nonresident).
  • There are certain amendments to the period for the performance of the guarantee obligations, the currency for mandatory debt undertakings, and the obligations of counter-guarantors in repaying guarantors.

In more detail

1. Electronic guarantees

The draft circular supplements the provisions on electronic guarantees. Banks can choose to provide a bank guarantee electronically or in writing, which have equal value.

An electronic guarantee will be as agreed between the parties, the security of data and information confidentiality in accordance with the SBV's instructions on risk management, electronic transaction regulations and related legal documents.

In the case of electronic guarantees (including guarantees via the international communications information network between banks), both the guarantee issuance agreement and the guarantee commitment must be certified in accordance with the laws on electronic documents and signed with the credit institution's or foreign bank branch's e-signature, or in accordance with international practice.

2. Guarantee over residential property to be constructed

2.1 Definition of agreement on guarantees over residential property to be constructed

The draft circular defines the agreement on guarantees over residential property to be constructed as a commercial bank's guarantee issuance agreement to guarantee the developer's obligation in the sale and purchase leasing of residential property to be constructed. The agreement can be made between a commercial bank and a developer and other relevant parties (if any), or between a commercial bank and the counter-guarantor of the developer. This definition should help minimize any confusion between the guarantee agreement, which is a form of guarantee commitment, and the agreement on guarantees over residential property to be constructed.

2.2 More clarity regarding the effectiveness of a bank's guarantee obligations

The draft circular requires that guarantee agreements over residential property to be constructed must provide that the commercial bank's guarantee obligation toward the buyer will only become effective after the buyer receives the guarantee commitment issued by the commercial bank to the buyer.

Likewise, the draft circular requires the guarantee commitment to clearly provide that the commercial bank will only guarantee the advance payment made by the buyer to the developer after the buyer receives the commercial bank's guarantee commitment (i.e., the bank will provide the guarantee commitment to the developer who will then send the buyer the same).

2.3 The rights and obligations of the bank, the developer and the buyer in the guarantee over residential property to be constructed

The draft circular supplements the rights and obligations of the bank, the developer and the buyer in relation to guarantees over residential property to be constructed, some of which are highlighted below.

Where the bank terminates a guarantee agreement in respect of residential property to be constructed before the guarantee agreement is due, the bank must disclose this information on its website and notify in writing the relevant housing management authority of the same. In such a case, the developer must also disclose on its website information on the early termination of the guarantee agreement over residential property to be constructed.

The buyer has the right to, among others, require the bank to issue the guarantee commitment to the buyer if it has not received the bank's guarantee commitment from the developer within 15 business days from the date of signing of the house sale/purchase-lease agreement.

3. Determination of guaranteed balance

For the issuing bank, the draft circular expressly provides that the guaranteed balance for the customer (i.e., issued to the customer) will only be counted from the time the guarantee commitment becomes effective.

For guarantees over residential property to be constructed, the guaranteed amount for the buyer (which will be notified to the commercial bank by the developer) will be the total amount of the following:

• The money the developer has received in advance from the buyer after the commercial bank issued the guarantee commitment to the buyers in accordance with the agreed schedule before the handover of the residential property

• Other incurred funds (if any) that the developer must return to the buyer if the developer fails to hand over the residential property as agreed

4. Mandatory content of a guarantee commitment

The draft circular requires a guarantee commitment to indicate its form (whether unconditional, irrevocable or conditional).

However, a guarantee commitment in a form required under specific laws does not need to include the following contents:

• The applicable laws

• The number and form of the guarantee commitment (whether unconditional, irrevocable or conditional)

• How the beneficiary can check the authenticity of the guarantee commitment

5. Guarantee for nonresident customers

The draft circular proposes some changes to the provisions on guarantees for nonresident customers. While the provisions remain the substantially similar to the current regulations under Circular 07, certain changes are proposed:

• Credit institutions and branches of foreign banks can only provide guarantees to nonresident customers that are legal entities (referred to as foreign legal entities). Guarantees made to foreign legal entities (other than offshore credit institutions) must satisfy one of the following conditions:

• The customer is an enterprise that is established and operating overseas, and has its capital contributed by a Vietnamese enterprise in the investment form prescribed under Article 52.1(a)(c) of the Investment Law or other form of outbound direct investment in accordance with the laws where the investment is made.

• The customer has deposited 100% of the guarantee value in escrow.

• The beneficiary is a resident.

• Branches of foreign banks can only provide a guarantee in foreign currencies to customers that are foreign legal entities when the beneficiary is a resident.

• When providing guarantee in foreign currencies to customers that are foreign legal entities, credit institutions and branches of foreign banks must, among others, be permitted by the SBV to conduct basic foreign exchange activities in the domestic market (in case the beneficiary is a resident) and conduct basic foreign exchange activities in the international market (in case the beneficiary is a nonresident).

6. Others

The draft circular also proposes the following amendments:

• Parties can agree on the period for performance of the guarantee obligation from the date of (the bank's) receipt of the complete and valid dossiers, but such period must not exceed 30 days. If there is no agreement between the parties, the period for performance of the guarantee obligations will be five business days.

• In case of payment in a foreign currency, the party making payment on behalf of the customer (e.g., the guarantor on behalf of the guaranteed; the counter-guarantor on behalf of the guaranteed; the guarantor on behalf of the counter-guarantor; or the confirming guarantor on behalf of the guarantor, as applicable) must agree with the customer that the customer will assume mandatory debt in Vietnamese Dong or the foreign currency in which the authorized payment is made. The payer also commits to sell foreign currency to the customer for repaying the mandatory debt if the customer does not have foreign currency income.

• In case of a counter-guarantee, when performing the guarantee obligation towards the beneficiary, the guarantor will concurrently send the dossier as agreed in the counter-guarantee commitment to request the counter-guarantor to repay within the same day the amount that the guarantor has paid for the guaranteed party. Correspondingly, the guarantor has the right to immediately debit the counter-guarantor when the counter-guarantor does not conduct or insufficiently conducts the committed obligation.