New substances of Circular No.39/2016/TT-NHNN and Circular No.43/2016/TT-NHNN

The issuance of these two Circulars aims at creating new legal framework for lending activities of credit institutions, foreign bank branches and finance companies to their customers. Main new substances of the two Circulars are as follows:

1. Regulations on implementing 2015 Civil Codes and guiding the implementation of Decree No. 39/2014/NĐ-CP

Circulars 39 and 43 are issued to implement Civil Codes 2015 and guide the implementation of Decree No. 39/2014/NĐ-CP as follows:

1.1. About borrowers

According to Civil Codes 2015, participants of civil relations only include legal entities and individuals. In order to implement this new regulation of Civil Codes, Circular 39 (Item 3 Article 2) stipulates that customers borrowing capital from credit institutions are legal entities and individual. Specifically, participants without status of legal entity such as households, collectives and other institutions not having the status of a legal entity) are not included as eligible borrowers of credit institutions. In case of loans for business and other activities, individual borrowers can borrow to meet capital demand of theirs and of business households and private enterprises which are owned by themselves.

At the same time, Circular 43 also stipulates that individuals are permitted to borrow capital for the consumption purposes of themselves and their family.

1.2. About interest rate

On the basis of regulations in Articles 466, 468 of Civil Code 2015 and regulation in Article 91 of Law on Credit Institutions 2010, Circular 39 stipulates lending interest rate as follows:

a) Credit institutions and foreign bank branches (herein after called as credit institutions) and their customers make agreement about lending interest rate in line with capital supply and demand in the market, demand for borrowing capital and credit rating of the customers, excluding the case of short-term VND loans of which agreed interest rate not exceeding the maximum lending interest rate decided by the SBV Governor for each period in order to meet a number of capital demands. Hence, the regulation on ceiling interest rate is only applied to short-term VND loans for priority fields as stipulated in Circular 39.

b) Circular 39 supplements regulation on obligations of paying interest rate charged on overdue paid interest, specifically, in case that clients fail to pay interest on time, they shall have to pay interest of overdue interest at a ratio fixed by credit institutions but not exceeding 10% p.a on the remaining overdue interest paying amount and time of overdue paying.

c) Circular 39 also stipulates that in case of debts which are move to overdue debts, borrowers must pay interest rate for overdue principal outstanding for delayed period; interest rate is calculated on the basis of the agreement, but does not exceed 150% of lending interest rate at the time of changing into overdue debts.

1.3. About loan term

Implementing regulations on calculating loan term as stipulated in Civil Codes 2015, Circular 39 stipulated that loan term is calculated from the following day when credit institutions disburse capital to their customer until the day when those customers pay off principal loan and interest in line with agreement between customers and credit institutions. In case that the last day of loan term is a holiday or weekend, that day is transformed to the next working day. For loan term lasting below 1 day, it is implemented in accordance with regulation on the starting time for loan term.

1.4. About publication of contract in form and general conditions of lending activities

Implementing regulations in Articles 405, 406 of 2015 Civil Codes, Circular 39 stipulates that in case of using contract in form or general conditions of transactions for lending agreement, credit institutions are required to implement following substances:

a) Publicizing contract in form and general conditions of lending activities in their head offices and post those substances on their website;

b) Providing customers all information concerning with contract in form and general conditions before signing and get confirmation of being provided all relevant information from customers.

1.5. About consumption loan

Circular 43 also stipulates specifically definition of consumption loan provided by finance companies is: (i) a loan in VND; (ii) The borrowers are individuals; (iii) Purposes of borrowing: to meet the demand for purchasing, using goods and services for the purpose of consumption of those customers or customers’ family, including demand for purchasing of means of transportation and home appliances; fees for studying, medical treatment, culture and sport; costs for housing repair; (iv) Total consumption loan to a customer by finance companies does not exceed VND 100 million (excluding consumption lending for the purpose of buying car which is utilized as collateral of that loan in accordance with laws).

2. Regulations on simplifying procedures of lending activities, ensuring transparency of lending activities and rights of borrowers

2.1. Circulars 39 and 43 simplify a number of dossiers and procedures of lending activity: such as abolishing loan request form of loan request procedure; simplifying requirement on making plan of loan utilization and etc.

2.2. In order to ensure the transparency of lending activities and legitimate rights of borrowers, Circulars 39 and 43 stipulate responsibilities of credit institutions as follows:

a) Credit institutions are responsible for providing customers all relevant information before signing loan agreement such as: lending interest rate; principles, criteria and time to define and calculate loan interest rate for loans with adjusted interest rate; interest rate applied to overdue principal outstanding; interest rate applied to overdue paid interest; methods of calculating lending interest rate; types of fees and fee level applied to loans; criteria of classifying customers borrowing capital in line with lending interest rate.

b) Loan agreement contract must include substances concerning with agreement about lending interest rate and methods of calculating loan interest rate. In case that the lending interest rate is not quoted as an annual percentage rate or not calculated on the outstanding of loans, so the loan contract shall have to include the substance on loan interest rate quoted as an annual percentage rate (one year is 365 days) and that is calculated on the basis of real outstanding of loan and true time of remaining that outstanding loan.

In case of loans with adjusted interest rate, credit institutions and customers shall make agreement about principles and factors to define adjusted interest rate and the time of adjusting loan interest rate. In case of factors of defining adjusted interest rate resulting in different lending interest rates, credit institutions apply the lowest lending interest rate.

For consumption loan interest rate, Circular 43 stipulates that finance companies quote interest rate for consumption loan for each period, of which including maximum and minimum lending interest rates for each consumption loan.

c) Credit institutions are responsible to notify customers when moving their principal loans to overdue loan group. The content of notification at least includes overdue principal outstanding loan, the time of classifying overdue loan transfer, and interest rate for overdue principal outstanding loan.

Concurrently, while implementing the right of terminating the lending, collecting debt before maturity as agreement, the credit institutions must inform customers about the termination of lending, debt collection before maturity with substances on the date of terminating lending, debt collecting before maturity; the maturity of repayment the principal loan, the date of overdue loan transfer and the applicable interest rates.

d) As regard to the consumption lending activities of consumption financial companies, Circular 43 promulgates several substances on the internal regulations on consumption lending of financial companies, including:

(i) Methods to collect debt in accordance with the particularity of customers and in line with laws, in which, the time of loan payment reminding must be agreed and written in the contract, however, it must be lasting 7.00 to 21.00 and with any threat is allowed to pose to the borrowers.

(ii) The responsible units and methods of receiving and handling recommendations, feedback and complaints from customers.

3. Regulations to tackle errors incurring in the progress of implementing the Decision 1627

3.1. About the purpose of borrowing

According to the lending regulation No.1627, the borrowing purpose are focused on meeting the capital demand on production, business, services, investment and life. The Circular 39 doesn’t limit the lending purpose as the previous regulation, and divides borrowing demand into 2 groups: (i) lending for living demand; and (ii) lending for production, business and other activities except for the borrowing demands which are not allowed by laws. The Circular 39 also adds regulations on lending activities for living demand and for production, business and other activities in line with the characteristic of each type of lending (including plan of capital using, method of lending, duration of lending and recordkeeping)

3.2. The capital demands for which credit institutions may not provide loans

Circular 39 abolishes regulations on rollover loan as stipulated in Decision No.1627 and stipulates several specific provisions on the rejected borrowing demands in order to strictly control the credit quality in line with the practical requirements, including:

a. Borrowing to pay loans to credit institution who is the owner of his/her previous loans, except for borrowing demand to pay interest rate occurred in the process of construction with interest cost has been estimated in approved construction estimation plan in accordance with laws.

b. Borrowing to pay debt lended by other credit institution and to pay debt borrowed from overseas, except for borrowing purpose to pay pre-matured loans that sufficiently meet following requirements: (i) loan to serve for business activities; (ii) the duration of loans is not exceeding the remaining mature of the old loan; (iii) payment term of the loan has not been rescheduled.

3.3. About fees relating to lending activities

Circular 39 inherits regulations in Circular 05/2010/TT-NHNN on fees, adding a type of charge namely “withdrawal commitment fee” from the time of the lending agreement takes effect to the date of first disbursement. This type of fee is charged by credit institutions in accordance with international practices to compensate the credit allocation cost to avoid the case that customers signed lending agreement, and credit institutions have allocated funds but customers don’t make disbursements.

3.4. About method of lending

Circular 39 adds several methods of lending in line with the fact of credit activities (including circulation lending, bridging lending). Particularly, some lending methods are strictly regulated by conditions, such as circulation lending method merely applied for short-term loans and for those customers have no bad debts.

Circular 39 also adjusts regulations on several lending methods in line with requirement of state management including overdraft loans, to cover payment services on payment account; add valid duration of backup lending limit (no more than 1 year) for lending method of backup lending limit.

3.5. About debt collection order

Circular 39 regulates credit institutions and customers to make agreement about priority order of principal collection, interest rate collection. For overdue loans, credit institutions shall comply with order that principal loans are collected first, and the second is interest.

3.6. About the date of Restructuring Repayment Period of Loan

Circular 39 regulates the loan term restructuring must be implemented prior or within 10 days from the date of maturity, the repayment term in agreement.

3.7. About overdue loan transfer

According to the Lending Regulation No.1627, for loans that are not refunded on the date of maturity and are assessed by the credit institutions to be incapable of repayment on time, and loans are refused by credit institutions to restructure repayment period, their total principal outstanding will be defined as overdue loans. However, Circular 39 promulgates the credit institutions merely transfer to overdue loan for principal outstanding loan which is not repaid on time in accordance with the agreement, and is not approved to restructure the repayment period of loan.

4. Systemize the lending regulations

Circular 39 systemizes the substances of eight current legal documents into one Circular to regulate overall lending activities of credit institution for customers. Concurrently, Circular 39 promulgates the principles of legal application in lending activities, particularly:

a. Lending activities of credit institutions have to comply with the regulations of Law on Credit Institutions, Circular 39 and relevant laws.

b. The specific lending activities regulated by separate documents issued by the Government, Prime Minister and the SBV, are implemented in accordance with the regulations of the Government, Prime Minister and the SBV.

c. Those lending activities in the separate documents by the Government, Prime Minister and the SBV are referred regulations to apply Circular 39, or substances relating to lending activities which are not regulated in the separate documents, comply with relevant regulations in Circular 39.

In conclusion, regulations in Circular are the general provisions on lending in application of Regulations in the separate documents on specific lending activities (including Regulations in Circular 43 on consumption loans of financial companies, Circular 42/2011/TT-NHNN on syndicated loans; Circular 24/2015/TT-NHNN foreign currency loans, etc.) shall prevail over the Circular No.39.

Legal Department, the State Bank of Vietnam

Translated by Le Hang – Le Thoa