Hoang Anh Nguyen, partner of Mayer Brown JSM law firm, analyses legal and regulatory issues related to sale of non-performing loans,  a matter attracting wide attention from  foreign financial institutions.

Vietnamese banks have been struggling with a massive amount of non-performing loans. It is then expected that a secondary debt market (especially for distressed debt trading) would come into play in the near future.

Banks burdened with a huge portfolio of distressed assets would need to look for ways to clean up their balance sheet from non-performing loans (NPL).

The most common technique is a sale of loan whilst there is also other less conventional methods such as securitisation or collateralised debt obligation (CDO) that credit institutions in Vietnam can use to transfer loan assets.

Conventional loan transfer

The main method of transferring a loan asset under Vietnamese law is a loan sale by which a credit institution (the seller) transfers ownership in the loan to any other third party (the buyer) (loan transfer). A loan transfer is regulated by Decision No 59/2006/QD-NHNN of the State Bank of Vietnam (SBV) promulgating the Regulations on Purchase and Sales of Debts of Credit Institutions (Decision 59). This method can be adopted in the context of either a single loan asset or an active loan portfolio of a bank.

Synthetic transfer of loan assets

Under the existing law, there is no legal framework specifically designed to regulate synthetic transfer of loan assets such as securitisation or CDO.

A securitisation would involve a sale of a pool of loan assets to a special purpose company (SPC) which will then raise funds by way of issuing debt securities (rarely equity securities) in order to finance the purchase of the pooled loan assets. A CDO is a type of ‘synthetic’ securitisation whereby an actively managed pool of loans or bonds is used as collateral to back a new debt issue.

A securitisation or CDO requires removal of loan assets from the balance sheet of the seller bank and transfer of these assets to an SPC. One significant legal impediment under the existing law is that a company may not issue debt securities unless it has a one year operating history and a track record of profitable operations for at least one year (Decree No. 60/2011/ND-CP of the government on private offering of corporate debt securities). Therefore it is not possible for an SPC to issue debt instruments with a view to securitising underlying assets.

There are a number of legal and regulatory issues that parties to a secondary loan market transaction would need to take into consideration.

Capacity of seller and buyer

Generally speaking, the existing law does not restrict the capacity of a corporate entity or an individual (buyer) to acquire interest in the loan under a loan transfer. Similarly, there are no restrictions on credit institutions licensed to operate in Vietnam to transfer credit risks under a loan transfer (but they may need to obtain licence from the SBV to engage in debt trading business pursuant to the SBV’s policy). 

However, it is not entirely clear whether a foreign company is eligible to buy a loan to be sold by a Vietnamese creditor which is not a credit institution licensed to operate in Vietnam. It is advisable that in this case, the seller would need to obtain SBV approval for transfer of loan.

A loan transfer from a seller bank in Vietnam to a foreign buyer is subject to the registration approval of the SBV. The reason for this is that according to the regulations on foreign exchange control, a loan transaction between a non-resident (a foreign entity operating offshore) and a resident (a corporate entity incorporated and operating in Vietnam) is subject to the registration with the SBV.

Banking secrecy and data protection

The Vietnamese banking regulations imposes a strict duty of confidentiality on banks. As a general rule, a credit institution may not disclose any ‘information relating to deposits and assets’ (customer information) of customers to any third party without the customers’ consent. Customer information is, however, defined by law in a broad way to cover any information on assets, transactions or any document of the customer. Therefore, unless the loan agreement contains a blanket consent of the borrower for secondary market transfer, a transfer of a single loan asset or a portfolio of loans cannot be effected.

As a general rule, a transfer of loan asset is exempted from the value added tax (VAT), according to a recent tax ruling of the General Department of Taxation. However, the tax position of a foreign buyer purchasing a loan currently owed by a Vietnamese borrower is not entirely clear.

A foreign entity having no business presence in Vietnam under any business form pursuant to the Law of Enterprises and Law on Investments will be taxed under withholding tax regulations in respect of its income derived from any business operations in Vietnam. The scope of business operation is broadly defined and therefore it is likely that an offshore lender taking transfer of a loan borrowed by a Vietnamese borrower would be treated as carrying out a business operation in Vietnam in light of the Ministry of Finance’s regulations on withholding tax.

Source: www.vir.com.vn