Credit institutions are not allowed to lend to customers to prove their financial capacity.

The State Bank has just issued Circular No. 06/2023/TT-NHNN amending and supplementing a number of articles of Circular 39/2016/TT-NHNN dated December 30, 2016.

Accordingly, in order to contribute to ensuring safety, efficiency, limiting risks arising in lending activities of credit institutions to customers, controlling customers' use of loans for the right purposes, improving credit quality, but still ensuring compliance with actual needs, Circular 06 supplements regulations on a number of capital needs that credit institutions are not allowed to lend, and for these capital needs for lending in the past, the State Bank has also issued warning documents to credit institutions.

Specifically, credit institutions are not allowed to lend money to deposit money. The State Bank said that in practice, through inspection and supervision, there have been cases where credit institutions have provided loans to prove the financial capacity of borrowers when working or studying abroad in the form of borrowing money to deposit savings or customers mortgaging foreign currency savings books to borrow VND to deposit savings.

Regarding this issue, the State Bank has issued a warning to credit institutions. Accordingly, the nature of savings deposits and financial proof transactions of customers must be formed from the customers' own money sources; not money borrowed from credit institutions. Therefore, Circular 06 supplements the regulation that credit institutions are not allowed to lend capital for deposits in order to ensure control of the use of borrowed capital for the right purpose and control of loan risks as well as ensure consistency with the nature of savings deposits and the nature of financial proof transactions.

The Circular also clearly stipulates that credit institutions are not allowed to lend to pay for capital contributions, purchase, or receive transfers of capital contributions of limited liability companies or partnerships; contribute capital, purchase, or receive transfers of shares of joint stock companies that are not listed on the stock market or have not registered for trading on the UPCOM trading system.

According to the State Bank, this regulation only applies to the purpose of paying for capital contributions, purchasing, receiving transfers of capital contributions of limited liability companies and partnerships; contributing capital, purchasing, receiving transfers of shares of joint stock companies that are not listed on the stock market or have not registered for trading on the UPCOM trading system. For the purpose of contributing capital, purchasing, receiving transfers of capital contributions at listed joint stock companies, credit institutions shall provide loans in accordance with regulations.

The capital contribution in a limited liability company or partnership is the company's charter capital on the financial statements, so if it is formed from borrowed capital, it will not accurately reflect the company's financial capacity.

At the same time, recent practice shows that credit institutions lending for this capital need in many cases has potential risks because this is a capital need that is difficult to control the purpose of using the loan because the credit institution cannot control the use of capital by the capital recipient, there is no basis for regular assessment of the financial situation, operating situation, debt repayment ability of the capital recipient and this is one of the forms that customers can use to conceal the form of mutual ownership.

Regarding customers and the use of loan capital: The customer's source of debt repayment depends entirely on the source of money from the investor (repaying contributed capital and interest); the loan value is quite large, the borrower can be a newly established enterprise, with no other source of debt repayment, or if there is another source of debt repayment, it is insignificant compared to the loan amount.

In fact, the capital recipient uses the customer's capital contribution loan at the credit institution mostly for business/exploitation projects; while these projects are not yet guaranteed legality, not yet qualified for implementation according to the provisions of law. In case of risks, due to the project not being guaranteed legality, the handling of collateral assets will arise many problems and be difficult to handle.

In addition, credit institutions are not allowed to lend to pay for capital contributions under capital contribution contracts, investment cooperation contracts or business cooperation contracts to implement investment projects that do not meet the conditions for putting into business according to the provisions of law at the time the credit institution decides to lend.

This provision only applies to investment projects that do not meet the conditions for putting into business according to the provisions of law. For investment projects that meet the conditions for putting into business according to the provisions of law, credit institutions shall continue to consider lending to customers to pay for capital contributions according to capital contribution contracts, investment cooperation contracts or business cooperation contracts according to the provisions.

At the same time, to ensure risk control, in case of lending to customers for this capital need, Circular 06 supplements the regulation that credit institutions must have measures to check, monitor, and evaluate the financial situation and debt repayment sources of customers, ensure the ability to fully recover the principal and interest of the loan on time as agreed, and control the use of loan capital for the right purpose.

According to the State Bank, recent practice shows that lending for these capital needs to implement projects, while the projects do not meet the conditions for putting them into business according to the provisions of law, is potentially risky because business cooperation and capital contributions have fixed capital contribution periods and capital contribution returns, not depending on the production and business performance of the capital recipient; and the source of debt repayment depends entirely on the investor's source of money, and the borrower has no other source of debt repayment or if there is, it is insignificant compared to the loan amount.

If the project does not ensure legality and conditions for implementation (for example, documents showing that the investor is allowed to mobilize capital according to the provisions of law or documents showing that the investor is allowed to implement the project such as Investment Certificate, Land Handover Minutes, Land Use Rights Certificate, Construction Permit, etc.), there will be risks when the project has no source of revenue, affecting the customer's ability to repay debts and causing problems in handling secured assets.

Circular 06 also stipulates that credit institutions are not allowed to lend to compensate for financial losses. According to Circular 06, lending to compensate for financial losses is when a credit institution lends to a customer to compensate for expenses that have been paid or spent using the customer's own capital, capital borrowed from individuals or organizations (not credit institutions) to implement a business plan or project or a plan or project to serve living needs.

Lending to customers to compensate for financial problems poses risks in the use of borrowed capital due to the difficulty in assessing the suitability between the loan demand and the financial value of the customer who has borrowed, the authenticity of the transactions. For example, there are no reliable records or documents proving the customer's loan plan, many cases of lending to compensate for living needs such as to pay for transactions that arose long ago (5 years, 10 years ago) and the documents are handwritten documents borrowing money between individuals to buy real estate/goods, usually with a fairly large amount of money... credit institutions find it difficult to determine the source of money that the customer has advanced, and cannot control the customer's use of the loan disbursed amount...

However, in reality, there are some legitimate needs for compensatory loans, so Circular 06 has added permission for credit institutions to continue lending in this case to create conditions for enterprises to maintain production and business activities, ensure project implementation progress, thereby increasing enterprises' access to credit capital.

The Circular takes effect from September 1, 2023.

According to VNA