Welcome changes, but further guidance required

On 28 June 2023, the State Bank of Vietnam (SBV) issued Circular 06/2023/TT-NHNN (Circular 06) to amend Circular 39/2016/TT-NHNN (Circular 39) on lending activities of credit institutions and foreign bank branches in Vietnam. Circular 06 will take effect from 1 September 2023.

Circular 06 introduces various significant changes to onshore lending activities by credit institutions and foreign bank branches (together credit institutions) to Vietnamese borrowers who are not credit institutions.

This Insight covers key changes in relation to:

• the permitted borrowing purposes
• the order of collection for overdue debt
• lending via electronic means
• other noteworthy changes.

Key takeaways

• Circular 06 signifies the SBV's intention to tighten its control over the borrowing purposes of onshore loans by introducing new prohibited borrowing purposes. In particular, credit institutions will no longer be able to extend loans to acquire or subscribe for shares in a joint stock company unless shares of such company are listed or registered for trading on the Unlisted Public Company Market (UPCOM). Loans for purchase of, or contribution into, charter capital in limited liability companies and partnerships are also prohibited.

• In a welcoming move, Circular 06 incorporates new regulations on extending credit via electronic means, including provisions on infrastructure requirements, Electronic Know Your Customer processes (e-KYC) and loan agreements in electronic format. However, further guidance on implementation is still needed to facilitate credit institutions' compliance with this mode of lending.
• Circular 06 also includes changes that may impact consumer loans, including introducing the requirement to submit a living needs servicing plan for certain consumption purposes. Supervising loans performance is now an obligation of credit institutions, which demonstrates the SBV's clear intention to prevent credit institutions from extending loans without a proper system to control their performance.

Permitted borrowing purposes

Loans for refinancing

Under Circular 39, a refinancing loan can only be extended if the following conditions are met:

1. the existing loan (which can be either a foreign loan or a domestic loan) is used for business activities of the borrower;
2. the term of the new loan does not exceed the remaining term of the existing loan; and
3. the existing loan's repayment schedule has not been restructured.

Circular 06 has excluded deferred payment foreign loans from the category of prohibited refinanced loans and removed condition (a) above. This implies that, from 01 September 2023, credit institutions may now extend onshore loans to refinance (i) foreign loans in the form of deferred payment, and (ii) onshore loans that are not used for business activities (such as consumer loans) if such onshore loans satisfy conditions (b) and (c) above.

Acquisition financing and loans for investment

This newly minted restriction signifies the SBV's recent change in approach toward lending for acquisition financing. Previously, neither regulations on onshore loans (ie Circular 39) nor those on cross-border loans expressly restricted acquisition financing. However, for onshore loans, Circular 06 now cements the SBV's change in approach toward lending for acquisition financing for investment in unlisted shares and shares not registered for trading on UPCOM. In particular, Circular 06 further prohibits the following borrowing purposes:

• contributing charter capital in, or acquiring charter capital of, a limited liability company or partnership;
• subscribing for, or acquiring shares of, joint stock companies that are unlisted or have not been registered for trading on UPCOM; and
• contributing capital (under either a capital contribution contract or a BCC) for implementation of an investment project that is not yet eligible to be put into business.

Loans to finance the acquisition/subscription of listed shares or shares registered for trading on the UPCOM are still permitted if the loans fit into the category of 'loan for business and operating purpose' and are justified by an appropriate business plan.

Other restrictions

Circular 06 also excludes the following from the permitted borrowing purposes:

• for placing deposits at credit institutions;
• for financial reimbursement (ie to cover expenses the borrower has advanced using its own fund), except where the loans have satisfied the following conditions:
  • the borrowers have advanced their own funds to pay the expenses for project implementation, and these expenses were incurred less than 12 months before the credit institutions decide to extend the loan; and
  • expenses were paid with the customer's own capital for the purpose of implementing a project or business activity, or were paid using the loan of credit institutions in accordance with a loan use plan sent to the credit institutions to be considered for medium and long-term loans to implement such project or business activity.

On the other hand, certain prohibited borrowing purposes which were proposed in the first draft of Circular 06 are ultimately not included in the issued version, including (i) deposit for transactions in the future that, at the time of deposit, have not met the legal requirements for execution, and (ii) proof of financial capability in transactions with third parties.  

Order of collection for overdue debts

Circular 39 requires that, for any overdue loan, the lender will collect the overdue principal debt first, and the overdue interest later. Circular 06 retains this requirement but further provides that for debt having one or some overdue repayment instalments and the borrower is incapable of repaying the entire loan principal, the lender will collect debt in the following order:

Lending via electronic means

In line with the Government's policy to accelerate the digitisation of the banking industry, Circular 06 introduces new provisions to facilitate credit institutions extending credit via electronic means. However, this is subject to the following conditions:

• The electronic lending information system must adhere to regulations on ensuring information system security at level 3 or above.
• Credit institutions must have measures and technology to conduct e-KYC, assume responsibility for any associated risks and ensure (at a minimum) the following requirements:
  • the e-KYC must ensure accuracy and consistency between the customer's KYC and biometric information and the corresponding biometric information as required by the law on anti-money laundering and personal identification data authenticated by the competent authority or organisations;
  • credit institutions must develop a process for risk management, control and assessment to prevent fraud and verify customer identification. This risk management and control process must be regularly reviewed and completed based on updated information and data; and
  • credit institutions must store and preserve in full and in detail customer identification information and customer biometric data, sound, images, video recordings, sound recordings, phone numbers to perform the transaction and a transaction log during the lending process.

Circular 06 nevertheless provides that the e-KYC provisions above shall only apply to individual customers who apply for consumer loans and start a relationship with the credit institution, and not for other types of customer and lending forms.

• The loan agreement must be made in writing. If made in the form of an electronic contract, such electronic contract must comply with the law on electronic transactions and must contain the minimum contents of a loan agreement prescribed at law.
• The outstanding loan amount extended to an individual borrower for day-to-day consumption purposes who was subject to e-KYC must not exceed VND100,000,000 at a credit institution.

This is a very welcome change given the current banking industry landscape and the SBV's digitalisation plan. However, apart from Circular 39 and its subsequent amendment, when using electronic means to grant credit, lenders must also comply with other applicable regulations. It is therefore recommended that lenders stay updated with other legislations on electronic transactions, eg the regulations on personal data protection and the Law on E-transaction, as well.

Other changes to note

Currency of repayment

Unlike Circular 39, Circular 06 permits borrowers to repay the loan in a different currency subject to the agreement between the borrower and the lender and the applicable laws.

Obligation to monitor and supervise the use of loan proceeds and repayment

Circular 39 gives lenders the right to supervise how the borrower uses the loan proceeds. Circular 06 goes one step further and makes supervision of the use of proceeds the lenders' obligation as well. Such supervision must be carried out in accordance with the lenders' internal policy, which generally entails the supervision of the overall lending process, and the borrower's use and repayment of the loan.

From the lenders' perspective, in some cases it may be undesirable to routinely supervise each individual consumer loan, especially those used for daily consumption purposes, in the same way as loans for business activities, as it will increase unnecessary operational cost while the credit risk or the lender's exposure would typically be low. It may be difficult also for the borrower of a consumer loan (again, especially where such loans are used for daily consumption purposes) to produce evidence for every expense made using the consumer loan proceeds. Further guidance on this point is needed.

Plan for use of loan proceeds extends to consumer loans

Circular 39 does not require a borrower of a customer loan to prepare any loan use plan. However, Circular 06 provides that borrowers of consumer loans must submit a living needs servicing plan, or for a project to purchase housing, build or renovate housing, or receive a transfer of land use right to build housing. However, Circular 06 does not specify what constitutes 'housing' (eg whether the property purchase must be for a full-time residence, or if a vacation house would still be considered as housing) or whether such a plan or project would be required for consumer loans obtained not related to housing (eg to purchase motorbikes for medical purposes). Further guidance on this point is also required.

Contact for further information

Linh Bui, Partner, Ho Chi Minh City
Tel: +84 28 3822 1717

Ngoc Anh Tran, Partner, Ho Chi Minh City
Tel: +84 28 3822 1717

Linh Chi Dang, Senior Associate, Hanoi
Tel: +84 24 3936 0990