Nguyen Van Minh
Shinhan Bank Vietnam
A transaction bureau of Shinhan Bank in Hanoi__Photo: Internet
The State Bank of Vietnam (SBV) has recently issued some new regulations guiding lending activity of credit institutions and branches of foreign banks (credit institutions), including Circular 39/2016/TT-NHNN dated December 31, 2016, regulating lending activity of credit institutions (Circular 39) and Circular 14/2017/TT-NHNN dated September 29, 2017, providing methods of interest calculation for deposits received from and credit loans granted by credit institutions to customers (Circular 14), which contain some fresh instructions on lending interest.
These regulations have a significant effect on lending activity of credit institutions. Enacted to address the limitations of the precedent regulations, they also have some unclear points which might limit their effect. This article analyzes regulatory issues relevant to interests on loans of credit institutions.
Late charge interest on interest and overdue interest
More explicit provisions
Article 13.4 of Circular 39 stipulates that depending on specific agreements in credit contracts of each credit institution, the borrower that breaches the repayment obligation may bear the following kinds of interest:
(i) Interest on unpaid principal (normal interest).
(ii) Interest on unpaid normal interest (late charge interest on interest).
(iii) Interest on overdue loan principal which the credit institution decides to convert into overdue debts (overdue interest).
In general practice, in case a borrower falls insolvent, the credit institution usually files a lawsuit to the court for debt collection. However, in many cases the court has not accepted late charge interest on interest imposed by the credit institution. The court usually applies Articles 305.2 and 474.5 of the 2005 Civil Code to rule that there is no ground for imposing a late charge interest on interest because these articles mention only normal interest and overdue interest in case of debt payment obligation breach of the borrower.
From the effective date of Circular 39 (March 15, 2017), the late charge interest on interest is no longer debatable. However, its rate must not exceed 10 percent.
As per Articles 13.4.c and 2.11 of Circular 39, the overdue interest is also provided more clearly with two kinds: overdue interest on unpaid principal installment and overdue interest on total principal balance of the loan.
Several provisions that need to be more specific
Overdue interest rate
According to Article 13.4.c of Circular 39, the overdue interest rate must not exceed 150 percent of the normal interest rate “at the time of conversion of the loan into overdue debt”. Customers can wonder whether the overdue interest rate is a fixed rate or a variable rate for a given period as currently applied by credit institutions?
This is because almost all credit institutions are currently applying the floating interest rate to determine the normal interest rate in a given period (normally, interest rate is to be adjustable every three, six or nine months) for normal loans. In addition, Article 16.1 of Circular 39 stipulates that a credit institution is obliged to notify its customers of “principles and factors for, and time of, determining the loan interest rate in case an adjustable (variable) interest rate is applied to the loan”. Articles 5.2.a and 5.2.b of Circular 14 also mention the obligation of credit institutions to provide their customers with transparent information about interest rate adjustment. In other words, both Circular 39 and Circular 14 allow credit institutions to apply variable interest rates.
However, Article 13.4.c of Circular 39 can easily be misunderstood if the provision thereof is just literally interpreted whereas the credit institution that decides to convert the whole principal balance into an overdue debt is not entitled to apply the variable interest rate on the loan. We recommend this provision should be revised as “If the loan is converted into an overdue debt, the customer must pay interest on such overdue debt for the period for which the payment is delayed, and such interest rate must not exceed 150 percent of the normal interest rate” in order to avoid any misunderstanding.
Lending termination and premature collection of debt
Under Article 18.3 of Circular 39 which stipulates: “If the customer is unable to make full or partial payment of the principal and/or interest of the loan at the due time, the credit institution shall consider rescheduling the debt payment under Article 19 or converting the loan into an overdue debt under Article 20 of this Circular”, when the customer (borrower) breaches the obligation to pay the loan principal and/or interest, the credit institution may only execute either of the following methods: (i) rescheduling the debt payment, and (ii) converting the loan into an overdue debt. This provision is silent about the right of the credit institution to terminate the lending agreement and prematurely collect the debt.
Such right is, however, provided separately in Article 21.1 of Circular 39: “The credit institution has the right to terminate the lending agreement and prematurely collect the debt in accordance with the agreements with the customer when finding out that the customer provides untruth information or breaches provisions of the loan agreement and/or loan security contract”. So, can we construe that the right of the credit institution to terminate lending and prematurely collect the debt is applicable only when the borrower commits a breach other than the breach of the obligation to pay the loan principal and/or interest?
It seems that the issuer of Circular 39 does not deny the right of the credit institution to terminate the lending agreement and prematurely collect the debt. However, such right is vaguely mentioned and might lead to confusion. Article 18.3 of Circular 39 should therefore be like “If the customer is unable to make full or partial payment of the principal and/or interest of the loan at the due time, the credit institution shall consider rescheduling the debt payment under Article 19 or converting the loan into an overdue debt under Article 20 of this Circular or terminating the lending agreement and prematurely collecting the debt under Article 21 of this Circular, and concurrently applying another debt settlement method in accordance with the parties’ agreements and law.”
Obligatory notification of interest by credit institutions
Firstly, during the negotiation for a credit contract, under Article 16 of Circular 39, the credit institution is obliged to provide the customer with all information about loan interest. Secondly, in the course of performance of the credit contract, when converting the loan into an overdue debt or deciding to terminate the lending agreement and prematurely collect the debt, credit institution is obliged to notify such to the borrower. Thirdly, under Articles 5.2.a and Article 5.2.b of Circular 14, in case the credit institution applies an adjustable/variable interest rate on the loan, then “at the time of adjustment, the credit institution is obliged to notify in writing the customer of the adjusted interest rate.”
These provisions are novel compared to the lending regulations previously issued by SBV under which the notification is not an obligation of credit institutions and, in our opinion, aimed to protect the borrower as the disadvantaged party in credit relations. They also help credit institutions avoid disputes with borrowers who, when falling into the non-performing status, usually claim that they have not been notified of overdue debts or interest rate adjustment.
More specific provisions still needed
Two questions might be raised about what is the form of notification by credit institutions and what is legal repercussion of breaching the notification obligation?
Regarding the form of notification, SBV answers in Official Letter 1576/NHNN-CSTT dated March 14, 2017, as follows: “The form of provision of information under Article 16 of Circular 39 by credit institutions to their customers must comply with internal regulations of such credit institutions”. However, it should be noted that Article 16 of Circular 39 prescribes only the notification obligation in the stage of negotiation for contract signing. In the stage of contract performance, particularly for the notification of interest rate adjustment, Articles 5.2.a and 5.2.b of Circular 14 stipulate that “at the time of interest rate adjustment, the credit institution is obliged to notify in writing the customer of the adjusted interest rate”. As for other notifications, such as notification of conversion of loans into overdue debts, notification of termination of lending agreement and premature collection of debt, which regulatory grounds, internal regulations of the credit institution or common legal texts, must be complied with? In our opinion, it is unreasonable to apply internal regulations of the credit institution in this stage because a principle set out in Article 4.1 of Circular 39 requires the lending activity to be carried out under agreements between parties and law but not internal regulations of the credit institution. Therefore, as per Article 4.1 of Circular 39, it seems to be more legally reasonable if the notification is to be made under agreement between the credit institution and the customer.
As Circulars 39 and 14 remain silent about legal repercussion of breaching the notification obligation, we do not know whether a credit institution may convert a loan into an overdue debt if it fails to notify in writing the borrower of such conversion. To protect legal benefits of borrowers, there should be specific guidance on this obligation.
365-day period for annual interest calculation replaces 360-day period
Article 13.3 of Circular 39 and Article 4.1 of Circular 14 change the time base for per annum interest calculation from current 360 days to 365 days, with a view to conforming to the full-year time of 365 days prescribed in the Civil Codes of 2005 and 2015.
Credit institutions are “puzzled” by this change which is not simply a change in the interest calculation formula in credit contracts but also leads to a change in the entire core banking system of credit institutions which manages customers’ loans. Such a system change might be a hard time-consuming process, especially for credit institutions using the core banking system with a closed-source code. Quite apart from the fact that the concurrent application of the two interest calculation methods based on 360-day period (for loans granted before the effective date of Circular 39) and 365-day period (for loans granted after the effective date of Circular 39) is complicated and error-prone.
Articles 5.2.a(ii) and 5.2.b(ii) of Circular 14 allow credit institution to reach agreement with their customers on interest calculation method different from that prescribed in Article 5.1 though their provisions remain unspecific “the credit institution shall clearly state the annual interest rate calculated by the interest calculation method prescribed in Clause 1 of this Article.”
It remains questionable about whether a credit institution may apply both interest calculation methods to borrowers with a formula for conversion between two time bases. To us, the above provisions can be understood that (i) the credit institution must apply the time base of 365 days to calculate and collect loan interests and the time base of 360 days (if agreed upon) is just for reference, and (ii) the credit institution may apply the time base of 360 days as agreed with borrowers to calculate and collect loan interests and the time base of 365 days is just for reference. Obviously, this issue needs further guidance from the SBV for uniform application.- (VLLF)