1. At law, general finance company is defined as a finance company, which is permitted to carry out activities under the Credit Institutions Law 2010. Under the Credit Institutions Law 2010, a finance company is permitted to raise operating capital under the following forms provided that such forms of capital raising are clearly specified in the finance company’s establishment and operation license:

1.1.1. Receipt of deposits from organizations;

1.1.2. Issuance of deposit certificates (chứng chỉ tiền gửi), promissory notes (tín phiếu), debentures (kỳ phiếu) and bonds (trái phiếu) (Valuable Papers) in order to raise capital from organizations; and

1.1.3. Borrowing from both domestic and foreign credit institutions and financial institutions, and from the State Bank of Vietnam (SBV) in the form of refinancing.

1.2. Except as discussed in 1.5, in all other cases, the finance company can only raise capital from organisations. There are also some further restrictions imposed on the finance company’s capital raising activity, including:

1.2.1. investment funds cannot make a deposit with the finance company but can buy Valuable Papers issued by the finance company only (Circular 98 of the Ministry of Finance dated 16 November 2020 (Circular 98/2020));

1.2.2. the term of deposits from other credit institutions at the finance company must be no longer than 3 months (Article 28.3 of Circular 21 of the SBV dated 18 June 2012, as amended (Circular 21/2012));

1.2.3. the term of deposit certificates, promissory notes and debentures held by credit institutions or foreign bank branches must be less than 12 months (Article 4.4 of Circular 01 of the SBV dated 31 March 2021 (Circular 01/2021));

1.2.4. loans from other domestic credit institutions can only be less than one year and be used to cover temporary deficits in compulsory reserves, ability to make payment and conduct capital business, on the basis of balancing their capital sources and using their capital, ensuring business efficiency and the safe operation of such finance company (Article 9 of Circular 21/2012);

1.2.5. the finance company cannot borrow loans from securities companies or securities investment funds because (i) loans granted from securities companies are used for purpose of trading securities only while the finance company is not allowed to conduct the securities trading, and (ii) the securities investment funds are not allowed to use capital and assets of its funds for lending (Article 86.1 of the Securities Law 2019, Article 27 of Circular 121 of the Ministry of Finance dated 31 December 2020, and Circular 98/2020);

1.2.6. fund management companies are not permitted to use its capital to lend any entities (including finance companies) in any forms but it can use the entrusted capital to lend to the finance company if the trustor is a foreign individuals or organization that has agreed for the fund management companies to lend; or the trustor is also owner of trust assets (Article 11.6(d) and 16.4(d) of Circular 99 of the Ministry of Finance dated 16 November 2020);

1.2.7. though the Insurance Business Law 2000 suggests that insurance enterprises or insurance brokerage enterprises can carry out the lending activity, due to the lack of further guidance on this lending right of the insurance enterprises and insurance brokerage enterprises, it is not clear if this can be implemented in practice; and

1.2.8. there are interest rate caps on deposits or Valuable Papers issued by the finance company with term of less than six months. For instance, the current maximum interest rate applicable for term deposits in Vietnamese dong (including Valuable Papers) of the organizations (except for credit institutions) is 0.2%/year for a term deposit less than one month, and 4.0%/year for deposits with the term from one month to less than 6 months (Article 1.1 of Decision 1729 of SBV dated 30 September 2020). The interest rate applicable for term deposits in USD is 0% (Article 1 of Decision 2589 of SBV dated 17 December 2015).

1.3. If the parent company of the finance company is a public joint stock bank, the parent bank is still permitted to lend to the finance company subject to some conditions. For instance:

1.3.1. the loan granted to the finance company must have security which must not be the shares of the finance company or of such lender (Article 126.5 and 127.1(e) of Credit Institution Law 2010);

1.3.2. the loan proceeds must not be used for investing and trading in corporate bonds and shares (Article 11.2(dd) and Article 12.2(e) of Circular 22 of SBV dated 15 November 2019); and

1.3.3. the total balance of credit extension to the finance company must not exceed 10% of the equity of the lender (Article 127.5 of Credit Institution Law 2010).

1.4. When issuing valuable papers being bonds, the Finance Company must satisfy and follow the requirements and procedures for issuance of private bonds or public offer of bonds under the Securities Law 2019.

1.5. Under Circular 30 of the SBV dated 6 November 2014, as amended (Circular 30/2014), subject to the scope of activities specified in the finance company’s establishment and operation licence, the finance company may receive entrustment capital from individuals and organisations for investing in business and production projects, lending or finance lease, as the case may be.

1.5.1. Technically, entrustment of capital is not a form of capital raising but this business allows the finance company to receive funds from individuals (who are willing to enter into the arrangement).

1.5.2. However, although the law is not entirely clear, the State Bank in practice does not consider that a credit institution such as the finance company could receive entrustment capital from individuals and organisations for lending. This is because from the SBV’s point of view, lending is a business activity which can only be conducted by credit institution. Other organisations and individuals cannot conduct such business.

This post is written by Le Minh Thuy, Tran Kim Chi and Hoang Thi Thanh Thuy.

Vietnam Business Law