Supplement regulations on lending activities: Credit barriers or tighter risk control?

VCN - At the end of June, the State Bank of Vietnam (SBV) issued Circular No. 06/2023/TT-NHNN (Circular 06), amending and supplementing some provisions of Circular 39/2016/TT-NHNN dated December 30, 2016, which regulates lending activities of credit institutions (CIs) for customers. With the additional provisions on certain capital needs that CIs are not allowed to lend to, there are concerns that it may create "credit barriers" for the lending stream.
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NHNN asserted that Circular 06 contributed to ensuring safety, effectiveness, and limiting risks arising in lending activities.
SBV asserted that Circular 06 contributed to ensuring safety, effectiveness, and limiting risks arising in lending activities.

Ensuring alignment with actual needs

The VNDirect Securities Company's banking sector analysis report has just stated that the issuance of Circular 06 was necessary to accurately reflect the credit quality, promote companies to go public on the stock market, and direct credit capital towards healthy projects/purposes with high economic value. However, with the tightened lending regulations, VNDirect evaluated that Circular 06 might slow down credit growth in the short term.

Meanwhile, the HCM City Real Estate Association (HoREA) has just submitted a letter of recommendation to amend and supplement some provisions in Circular 06. According to the HoREA, the provisions in Article 1, Section 2 of Circular 06 have added four additional cases where customers with capital needs are not eligible for credit lending. This could create further barriers, making it more difficult for businesses to access credit than before.

In response to these concerns from the business community, the SBV has issued a statement asserting that Circular 06 was issued to contribute to ensuring safety, effectiveness, and limiting risks in credit lending activities of CIs for customers, controlling customers' proper use of borrowed capital, and enhancing credit quality while still aligning with actual needs. Circular 06 supplements regulations on certain capital needs that are not eligible for credit lending, which were warned by the SBV previously.

For example, Circular 06 stipulates that CIs are not allowed to lend for deposit purposes. The essence of savings deposits and customers' financial transaction proofs must come from their own sources of money, not from borrowed funds from CIs. Therefore, the SBV's addition of this provision aims to ensure control over the proper use of borrowed capital and avoid loan risks, while remaining consistent with the nature of savings deposits and financial transaction proofs.

Limit risks and control the purpose of borrowed funds

Another provision added is that CIs are not allowed to lend for the purpose of paying capital contributions, purchasing, receiving the transfer of capital contributions in limited liability companies, or partnership companies; contributing capital, purchasing, receiving the transfer of shares of unlisted joint-stock companies on the stock market or unregistered for trading on the Upcom trading system. According to the SBV, the capital contributions in limited liability companies or partnership companies represent the company's charter capital in the financial statements. Therefore, if formed from borrowed funds, it would inaccurately reflect the company's financial capacity.

In fact, lending by credit institutions for such capital needs poses potential risks in many cases because it is difficult to control the purpose of using the borrowed funds as CIs cannot monitor the use of capital by the receiving parties. There is no basis for regular assessment of the financial situation, operating situation, and debt repayment ability of the receiving parties, and this is one of the methods customers can use to obscure ownership forms between each other.

Regarding the provision that CIs are not allowed to lend for the purpose of paying capital contributions under capital contribution contracts, investment cooperation contracts, or business cooperation contracts to implement investment projects that are not eligible for business according to the law at the time of the credit institution's lending decision, the SBV affirmed that, except for the above cases, for investment projects that are eligible for business according to the law, CIs would continue to consider lending to customers.

Furthermore, to ensure risk control in cases where CIs lend to meet these capital needs, Circular 06 supplements provisions requiring CIs to have measures to inspect, monitor, and evaluate the financial situation and debt repayment capability of customers. This is to ensure full and timely recovery of principal and interest according to the agreement, and to control the use of borrowed funds for the intended purpose.

According to the SBV, in the case of business cooperation and capital contribution with a fixed period and fixed returns not depending on the business operations of the receiving unit, the repayment source entirely relies on the investor's funds, and the borrower has no other significant source of repayment or none at all. If the project is not legally secured or conditions for implementation are not met, there may be risks arising when the project lacks income, affecting the borrower's repayment ability and causing complications in handling collateral.

Additionally, Circular 06 also prohibits CIs from lending for financial compensation due to potential risks when it is difficult to evaluate the suitability between the borrowing needs and the financial value that customers have borrowed, as well as the authenticity of the transactions.

However, the SBV stated that in fact, some compensation borrowing needs were justified, such as in the case of businesses applying for long-term loans to carry out business projects. During the time before the long-term loan is approved, businesses may need to pay certain costs related to the project, which have been included in the loan utilization plan, and as a result, they may have to use their own funds in advance to ensure the project progress. In such cases, after the long-term loan is approved, CIs disburse the amount that the business has previously used to advance the project. Furthermore, CIs continue to consider disbursing funds to carry out the project if the business still needs it.

Therefore, Circular 06 has added provisions allowing CIs to continue lending in such cases to facilitate businesses in maintaining production and business operations, ensuring project progress, and thereby increasing their access to credit.

By Huong Diu/ Ha Thanh

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