The State Bank of Vietnam (SBV) issued Circular 39/2016 in late December 2016 replacing the famous Decision 1627/2001 on lending by banks and other credit institutions in Vietnam which has been in force for more than a decade. Circular 39/2016 contains the following developments, among other things:
- To terminate a loan agreement and accelerate the loan, a bank must prove that the borrower has provided inaccurate information or breached the loan agreement or the security agreements. While further clarifications are still required, this limitation may reduce the ability of a bank to call an event of default under the existing loan agreement. For example, defaults caused by a third party (e.g. a guarantor) may not satisfy the new requirement under Circular 39/2016.
- To be consistent with the Civil Code 2015, now only a natural person or a legal person (pháp nhân) can borrow from banks in Vietnam. Other types of organisations (e.g. a private enterprise or an investment fund (if it is not considered as a legal person)) are not permitted to take bank loans. In the past, these organisations may still borrow from banks.
- Interests on bank loans are calculated on the basis that a year has 365 days instead of 360 days which is the more common practice. This may cause certain technical difficulties for banks in adjusting their internal booking system.
- A bank loan now needs a plan for use of proceeds.
- Circular 39/2016 provides a detailed guidance as to how various lending regulations will apply. In particular, if a specific type of lending is regulated by separate regulations or decisions of the Government, Prime Minister or the SBV then such regulations and decisions will apply. Circular 39/2016 will apply to such specific type of lending if Circular 39/2016 is referred to in the specific regulations or decisions or the specific regulations or decisions are silent. This provision allows the SBV and the Prime Minister to approve loan agreements which are not consistent with Circular 39/2016.
- Circular 39/2016 expressly requires a bank to comply with environmental protection law when it extends loans to borrowers. However, the environment regulations do not have any clear limitation on financing activities.
- Now only lengthening a “loan repayment period” (kỳ hạn trả nợ) is considered as loan restructuring. Under Decision 1627/2001, shortening a loan repayment period is also considered as loan restructuring.
- Refinancing of certain types of existing loans are now permitted (e.g. refinancing an existing loan issued by another bank or refinancing interest payment during construction period).
- Circular 39/2016 prohibits financing of “investment activities”, “transactions”, “activities”, “goods and services” which are prohibited by law. The scope of prohibition is broader than Decision 1627/2001 which prohibits financing of prohibited “assets” or “transactions”.
- Under Circular 39/2016, repayment must be made in the same currency as loan disbursement’s currency.
- Circular 39/2016 seems to restrict types of fees that credit institution might charge its client. Applicable fee includes (i) early repayment fee, (ii) fee for standby credit line, (iii) arrangement fee for syndicated loan, (iv) commitment fee and (v) other types of fees relating to borrowing which are specifically regulated by relevant regulations. However, a commitment fee is only payable from the date of signing until the date of the first drawdown. This may cause difficulties for banks since based on this provision, the borrower may only withdraw a small amount of a large commitment very early to avoid paying a commitment fee.
- A bank now only has 10 days from the due date to decide whether to restructure (e.g. extend the term) of a bank loan.
- The loan agreement has to be in Vietnamese or bilingual with Vietnamese. Other relevant documents can be in a foreign language but have to be translated with proper certification upon request of the competent authority.
- Circular 39/2016 now permits roll-over loans and other types of revolving loans. However, Circular 39/2016 removes the ability of a bank to provide types of loans which are not contemplated by Circular 39/2016. In the past, Decision 1627/2001 allows a bank to provide types of loans which are not prohibited by law.
- A bank loan must specify interest rate as a percentage. This requirement seems to restrict various consumer loans, which calculate interest based on an absolute number.
- Circular 39/2016 allows banks to charge interest (but not exceed 10% p.a.) on overdue interest. However, no damages or penalty should be imposed on the borrower if the borrower fails to pay interest and the bank already charges interest on the overdue interest amount.
- If a borrower fails to repay principal and accrued interest in full, a bank is now required to use the amount repaid by the borrower to reduce the principal first and then interest. In the past, a bank usually uses the amount repaid to reduce interest first and then principal of the loan.
- Banks are required to review the credit limit at once a year during the availability period of a loan.
This post is contributed by Nguyen Hoang Duy, an associate at Venture North Law.