New circular on sale of bank loans: an overview (Practical note)
On July 17, 2015, the State Bank of Vietnam (the SBV) released Circular No. 09/2015/TT-NHNN regulating debt purchase and sale by credit institutions and foreign bank branches (Circular 09), with effect from September 1, 2015. This Circular replaces Decision No. 59/2006/QD-NHNN of the SBV Governor dated December 21, 2006, on the same (Decision 59). Overall, this new regulation appears to aim only at preventing new non-performing loans and thus is unlikely to give a fresh impetus to the distressed debt market.
Stricter rules on debt purchase and sale by credit institutions
Circular 09 sets out further obligations of credit institutions and foreign bank branches wishing to buy and/or purchase debts. Indeed, a credit institution or foreign bank branch may only purchase debts if (i) its bad debt ratio is below 3%, and (ii) after the SBV has provided consent to such activity in the license for establishment and operation of the credit institution or in the establishment license of the foreign bank branch (the license). This means that if debt purchase does not figure in their license, they must apply for an amendment with the SBV before engaging in such transaction(s).
Furthermore, the credit institution or foreign bank branch must (i) issue internal rules on debt purchase and sale; and (ii) establish a council for debt purchase and sale prior to buying and/or selling distressed debt.
In addition, in principle, a credit institution may not sell a debt to its subsidiary and a debt and asset management company being the subsidiary of a credit institution may only purchase debts of other credit institutions and foreign bank branches when its parent company has a bad debt ratio below 3%.
The credit institution or foreign bank branch must conduct accounting for loans it has purchased separately from those provided from its activity of granting credit.
Finally, it should be borne in mind that Circular 09 does not impose any special requirements on other categories of purchasers of debts (i.e. individuals, non-banking enterprises operating in debt purchase and sale and other non-banking entities).
Transfer mechanisms: lack of flexibility
The substance of the sale of a loan under Circular 09 remains the same, compared to the old regulation under Decision 59: such sale is a novation. Indeed, it entails a transfer to the purchaser of all rights and obligations of the seller as well as the seller’s interests in any security held for the loan. In other words, this is the substitution of a new contract for the old one with the purchaser in the place of the seller as the original lender.
In practice, offshore banks frequently ask whether it is possible under Vietnamese law to transfer rights in loan contracts through other methods such as assignment or funded and risk sub-participations which are widely recognized in their jurisdictions.
An assignment only transfers rights to the assignee and not obligations. It is noteworthy that transfer of rights in a contract generally is provided in Article 309 et seq. of the Civil Code.
Funded and risk sub-participations do not transfer or create any direct rights in relation to the borrower but shift to the transferee (the grantee or participant) the risk of default by the debtor. This is achieved by a contract between the grantor (the original lender) and the grantee which mirrors performance of the principal transaction. The legal relationships under the loan agreement remain untouched, but any benefits and losses are passed by the original lender to the grantee.
It is sad that Circular 09 appears to reiterate that Vietnamese banking law recognizes novation as the unique method for buying and selling distressed debt!
Notices to borrowers: risk of paying twice
Pursuant to Circular 09, the seller must send written notice to the borrowers and other related parties (e.g. securing parties) of the sale no later than five business days after the execution of the debt purchase and sale contract or from the date of amending this contract.
However, the regulation does not mention the legal value of such notice (as a condition of validity of the debt purchase and sale contract or for ensuring enforceability of the sale against the borrower or validity of the automatic transfer of the seller’s interests in any security in favor of the purchaser), as well as remedies in case of breach of such obligation to notify. It is clear that such legal gap is unfavorable to the borrower since the latter may pay the seller when it has not received notice from the seller and risks of having to pay twice.