In an effort to address recent challenges in the economy and banking environment and breathe new life into the capital market, the State Bank of Vietnam has promulgated Circular No. 06/2023/TT-NHNN (“Circular 06”) to amend Circular No. 39/2016/TT-NHNN (“Circular 39”) on prescribing lending transactions of credit institutions and foreign bank branches with customers. This Circular shall come into force from September 01, 2023.

Key takeaways of Circular 06 are discussed below:

Loan for personal and living expenses

Circular 06 adds the requirement for a plan for utilization of the loan proceeds in lieu of waiving such plan for personal or living purpose such as house purchase, house construction or renovation or land use right purchase.

Loan for reimbursement

Loan for reimbursement is newly defined under Circular 06 to reimburse that customer’s own funds or funds borrowed from another individual or organization (other than a credit institution) for paying or covering its costs incurred from a plan or project serving business purpose or living purpose.

Unloanable cases

An onshore loan for refinancing an offshore loan (excluding foreign loans granted in the form of deferred payment) or repaying a credit extension amount at Vietnamese credit institutions is prohibited unless such onshore loan used for making early repayment of the existing loan that fully satisfies the requirements that (i) The term of the new loan must not exceed the remaining lifetime of the existing one and (ii) the existing loan has yet to be rescheduled.

In addition, Circular 06 supplements 04 unloanable cases as below:

• Loans used for depositing or savings.
• Loans used for making capital contribution, purchasing capital contribution portion in a limited liability company or a partnership; or shares of a joint-stock company which are not listed or registered for trading on the UPCOM.
• Loans used for making capital contribution under capital contribution contracts, investment cooperation contracts or business cooperation contracts for executing investment projects that have yet to qualify for sale or for business operation as prescribed by laws.
• Loans used for reimbursement with the exception that, such lending purpose will only apply to project execution expenses which have been incurred less than 12 months before the lending decision date and already been listed in the business plan submitted to the credit institution for borrowing.

Currency for loan repayment

Circular 39 stipulates that the currency used for loan repayment must be the currency of the loan. However, Circular 06 permits credit institutions and their customers to agree on different currencies in conformity with Vietnamese laws.

Clarification on installment repayment of loan

Similar to Circular 39, Circular 06 stipulates that credit institutions and their customers agree on the order of collection of loan principal and interest. For overdue loan, credit institutions must collect principals first, then interests.

Circular 06 also clarify on loans with one or several overdue installments of which the payment sequence will be: (i) overdue principal, (ii) interest on the overdue principal, (iii) due principal, and (iv) interest on the due principal.

Loan as security interest?

If the loan is used to secure the performance of an obligation, the credit institution must block the loan proceeds until the secured obligation is terminated. The advent of this concept is giving rise to a lot of confusion in the banking community, further explanation by SBV will be needed.

Digital lending

Circular 06 stipulates regulations on lending activities by electronic means between credit institutions and their customers. It adds in a set of provisions related to digital lending such as digital lending rules; identification of customers, verification of customer identification information; outstanding loan balance; loan application; assessment of loan applications and issuance of lending decisions; loan agreement; retention of loan dossiers; and payment facilities used for disbursement of borrowed funds. These provisions stipulate and promote lending transactions through electronic means in order to improve the legal framework, facilitate the digital transformation and promote technological applications in the lending operations in Vietnam. Also, the State Bank expects with the deployment of technology in lending en masse can help ensure safety and efficiency in line with the policy of digital transformation in the banking sector.

It is also noteworthy that the outstanding amount of loans for living purposes given by a credit institution conducting e-KYC to an individual customer shall not exceed VND100,000,000.

This article is authored by Tong Thi Khanh Linh, Do Thuy Kim and Nguyen Thanh Nghiep.