In Vietnam, since the COVID-19 pandemic has been under control, the demand for bank loans has rapidly increased this year. Banks are forecast to expand credit in the third and fourth quarters of 2022. Lending conditions may be relaxed to attract more customers to access credit. In addition, with a view to supporting enterprises in their recovery from the adverse effects of the pandemic, the government issued Decree No 31/2022/ND-CP to grant 2% interest rate support from the state budget for loans to eligible enterprises, co-operatives and business households. The aim of this is to assist businesses in need and help promote the demand for loans.

The COVID-19 pandemic has had a serious impact on countries around the world in general and Vietnam in particular. In response to the difficulties faced by several enterprises, lenders have offered a number of measures, including lowering their interest rates, amending the repayment schedule, reducing charges and fees or restructuring outstanding debts.

In comparison with 2021, the high-yield market has been on the decline due to its high-risk nature and increasingly tightened control and supervision by the state authorities. Despite this, financing terms and structures have not been significantly affected since credit institutions’ conventional financing is still a highly favoured option among the alternatives available.

The Vietnamese market has seen rapid growth in the development of alternative credit providers, especially for the purpose of offering services to individuals, such as online lending and P2P lending. Nevertheless, alternative credit is currently at an early stage of development in Vietnam and the ecosystem is still in the process of completion. As such, this sector faces many challenges and risks such as legal loopholes, security risks, confidentiality and fraud. On another note, credit institutions remain the dominant credit providers for transactions performed by enterprises.

Adapting to the financial needs of individuals and SMEs, platforms for financing instruments, such as P2P lending and crowdfunding, have emerged in the market and appear to be more approachable than the conventional credit institutions. Nonetheless, these instruments are relatively new in Vietnam and the competent authorities have been closely observing how they operate, while the drafting of the relevant regulations is still in progress.

The State Bank of Vietnam (SBV) has been maintaining strict and close control, lending in sectors such as real estate, securities, build-operate-transfer (BOT) projects or corporate bond issuance. In the meantime, the legal framework for P2P lending or crowdfunding is being constructed to facilitate the development of the finance sector.

Since the concepts of ESG and sustainable lending are relatively new in Vietnam, lawmakers have not yet issued the legal framework to meet these trends. However, several banks have adopted global ESG and sustainability principles in their financing policies, creating great opportunities for green investment projects to be funded.

Lending is defined as a form of credit extension, which is one of the banking activities subject to the Law on Credit Institutions.

In order to provide onshore lending, the onshore lender must be a credit institution or a branch of a foreign bank licensed to conduct banking operations in Vietnam. A “credit institution” is defined as being inclusive of banks, non-banking credit institutions, micro-financial institutions and people’s credit funds. Banking operations include receipt of deposits, extension of credit and provision of payment services via accounts.

Before a credit institution can be established, it must obtain not only a licence from the SBV but also an enterprise registration certificate from the provincial licensing authority. The incorporation, ownership structure and key employees of credit institutions are all subject to a number of criteria and obligations under the law.

Where lending is a cross-border transaction from outside Vietnam, the offshore lender is not required to be: (i) a credit institution; or (ii) licensed to conduct a banking operation.

Vietnamese entities that are not credit institutions are not allowed to provide loans in Vietnam on a regular basis.

In general, companies incorporated in Vietnam may take out offshore loans from credit institutions, company owners, or other companies. However, such offshore loans must follow the rules set out as below.

• For the purpose of state management and supervision, where the term of an offshore loan is more than 12 months (“medium or long-term loan”), the borrower must register and obtain approval from the SBV prior to the first drawdown of the loan. In practice, the SBV’s approval should be made a condition precedent in the loan agreement for the first drawdown of the loan.
• Loans with a term of 12 months or less must also be registered with the SBV if: (i) the term is extended, thereby making the loan a medium or long-term loan; or (ii) even where a loan has not been extended pursuant to an extension agreement, the principal loan amount nonetheless remains outstanding after 12 months from the first disbursement, unless such principal loan amount can be settled within 10 days after 12 months have elapsed from the first disbursement.
• The borrower will need to disclose the purpose of the loan to the SBV as part of the registration process. Under law, medium or long-term loans can only be used to: (i) implement the borrower's or its subsidiaries' production, business plans or investment projects funded by such loans; and/or (ii) restructure the borrower's offshore debts without increasing the loan expense (ie, refinancing of offshore loans).
• The total net amount of medium or long-term offshore loans in Vietnam is subject to an annual debt limit for offshore loans approved by the prime minister.
• It should be noted that the current law is silent on the registration process for offshore loans extended to a natural person borrower and, in practice, the SBV has not approved any such offshore loans.

Only movable assets such as shares, equipment, inventory and bank accounts are permitted to be mortgaged/pledged to offshore lenders. Offshore lenders are not permitted to take security interests in land-use rights and assets attached to land from an onshore borrower. However, as a matter of practice, offshore lenders will often co-operate with onshore lenders (credit institutions or branches of foreign banks in Vietnam) to provide syndicated loans to onshore borrowers and the onshore creditor will act as a security agent and take mortgage of the land-use rights and assets attached to the land for its onshore loan, while the surplus proceeds over the land will be mortgaged to the offshore creditor (acting through a security agent) for the offshore loan.

As a general rule, money is not allowed to be remitted out of the country except for the following cases: import and export of goods and services, foreign loans, direct and indirect investments, one-way payments for consumption purposes, and other similar transactions.

Except for some very limited exemptions (eg, the borrower being a microfinance institution, or a shareholder loan derived from the shareholder’s profits distributed in VND), all offshore loans must be denominated in foreign currency. Otherwise, the borrower is required to obtain special approval from the SBV.

Provided that the loan has been validly registered with the SBV (for medium or long-term loans) and made via an offshore borrowing and repayment account, Vietnamese law has no restriction on loan disbursements or the remittance of monies to a foreign lender for the repayment of principal and interest.

Short-term offshore loans must be used for the purpose of working capital. Medium or long-term offshore loans can only be used for permitted purposes: (i) to implement the borrower's or its subsidiaries' production, business plans or investment projects funded by such loans; and/or (ii) to restructure the borrower's offshore debts without increasing the loan expense (ie, refinancing of offshore loans).

The agent concept is recognised, even if it is not well regulated in Vietnam. However, the ability of a security agent to hold security on behalf of its principals remains unclear. The security interest is typically created in favour of all secured parties in offshore loan transactions, and the security agent is authorised to administer and enforce the security.

There is no concept of trust in Vietnam.

Under law, there are transfer mechanisms for onshore loans only. Offshore loans, as a matter of practice, are subject to agreement between the parties and the law of the country where the lenders are based. The borrower is required to register a change of lender with the SBV.

Vietnamese law is silent on debt buy-back by the borrower or sponsor. As a matter of practice, the debt buy-back may be workable to onshore loans only.

There is no “certain funds” requirement in Vietnam. Generally, Vietnamese laws do not have any specific regulation preventing the granting of financial assistance to a borrower seeking to acquire a company, as long as the borrower is able to satisfy in full its debts and property obligations.       

The borrower is required to withhold and pay withholding tax of 5%, applied to the interest payments, to the tax authority prior to remitting any amount out of Vietnam.

Apart from the withholding tax on interest as outlined in 4.1 Withholding Tax, there are no other taxes, duties, charges or tax considerations.

As for offshore loans, in general, the interest rates can legally be as high or as low as the parties agree. However, as a matter of practice, the interest rate may be challenged by the SBV when registering such offshore loans if it is considered to be significantly higher than the standard interest rate in the Vietnamese market.

Forms of Security

Under law, the different forms of security include pledges, mortgages, deposits, security collateral, escrow deposits, title retention, guarantees, fidelity guarantees, and liens on property. Among these forms of security, pledges and mortgages of property are the most common.

Property that can act as security is current property or future property which the law does not prohibit from being traded, such as movable assets, monies and valuable papers, land-use rights or assets attached to land, etc.

Some security interests are required to be notarised (eg, real estate), after which they will become legally effective. Otherwise, security transactions generally come into effect upon execution.

Registration

Movable assets, monies, accounts and other assets (except for certain assets that have been separately registered) may be registered with the National Registration Agency for Secured Transactions (NRAST). Registration confers priority in the event that security needs to be enforced and it provides automatic notice to third parties that a security on the assets is outstanding.

Note that registering a security interest on NRAST does not confirm enforceability – it only confers priority. In any case, it is certainly preferable for lenders to register their security interest on NRAST for priority purposes.

For immovable assets (such as land-use rights and assets attached to land), the law requires the security agreements to be notarised by a competent notary office and registered with the Land Management Office under the provincial Department of Natural Resources and Environment (DONRE). Unlike movable assets, monies, accounts and other assets, which can be registered at NRAST on a voluntary basis for priority purposes, it is mandatory for land-use rights and assets attached to land to be registered at DONRE.

There is no concept of floating charge in Vietnam. However, the mortgage of circulating goods used in the manufacturing and trading process, and the mortgage of goods in storage are available and permissible.

Unlike listed companies, which are subject to certain restrictions when providing guarantees to their shareholders or related persons, it is permissible for non-listed companies to give downstream, upstream, and cross-stream guarantees under the laws of Vietnam.

Regarding a guarantee granted by an onshore company to guarantee an offshore obligation in part or in whole, it is required by law that such guarantee be approved in advance by the prime minister of Vietnam.

Listed companies are subject to certain restrictions on granting guarantees or security or financial assistance. However, there are no restrictions on the same to non-listed companies.

Under law, only onshore licensed credit institutions, which are permitted to operate in Vietnam, are allowed to receive a mortgage on land-use rights and assets attached to the land.

For security that has been registered with a security register, such as NRAST or DONRE, the deregistration procedures should be fulfilled to ensure that the security is fully released.

Despite the fact that registration of secured transactions (other than mortgage of land-use rights and assets attached to land) are not required by law, it is strongly recommended that the secured party registers the secured transaction with the relevant authority. The time of registration determines the priority ranking of secured interests. As such, prompt registration will ensure that the secured party will prevail in a priority dispute against possible subsequent secured creditors upon realisation of the security property.

There is no concept of subordination under Vietnamese law. As a matter of practice, subordination is subject to agreement between the parties.

Secured lenders can enforce their collateral if the obligor fails to perform, or incorrectly performs, its obligations or in other circumstances as agreed by the parties in the executed agreement or as provided by law.

Depending on the type of collateral and specified security interests, the relevant aspects of handling collaterals may vary. Generally, the handling of a collateral is subject to the following basic requirements.

Notification of Enforcement of the Collateral

Prior to handling the collateral, the secured lender must provide written notice within a reasonable period of time of handing the collateral to the obligor and other jointly secured parties. If the collateral is in danger of damage, which will diminish its value or cause it to lose its entire value, the secured lender has the right to immediately enforce the security of such collateral and, at the same time, must notify the obligor and other secured parties about the handling of the collateral.

Handover and Recovery of the Secured Asset

At the secured lender’s request, the obligor or other parties who are currently controlling the secured assets are required to hand over possession of the secured assets to the secured lender within the timeline specified in the enforcement notice. In case the obligor or other relevant parties fail to do so, the secured lender can request the court to examine and physically inspect the secured assets in order to prevent the dispersal of the secured assets to ensure the enforcement of the security.

Available Mechanisms for Handling Secured Assets (Applicable to Pledge and Mortgage)

The handling of secured assets is subject to agreement between the parties through one of the following methods:

• the secured assets will be sold by auction;
• the obligor will itself sell the secured assets;
• the secured lender will receive the secured assets to replace performance of the obligation of the obligor; and
• other methods as agreed among the parties concerned.

In general, the parties are free to choose a foreign governing law for a contract, where the transaction has a foreign element (eg, either party being a foreign entity or person). This principle has limited exceptions involving real property, employment and consumer contracts. The application of foreign law will also be rejected by the courts when it is contrary to the “fundamental principles” of the law of Vietnam or when the relevant content of the foreign law is not identifiable. Note that the law provides no clear guidance on what amounts to the “fundamental principles” of the law of Vietnam.

If the dispute is settled by foreign courts or foreign arbitrations, the judgments and decisions issued by such bodies must be recognised and enforced by Vietnamese courts. Such procedures are time-consuming in practice.

For judgements and decisions issued by foreign courts, Vietnamese courts will only consider the recognition and enforcement of the following:

• judgments and decisions issued by the courts of a foreign country which, together with Vietnam, is a signatory to a common international treaty;

• judgments and decisions issued by the courts of a foreign country which is not a signatory to a common international treaty with Vietnam, but which has regulations on the recognition and enforcement of judgments and decisions of foreign courts based on the principle of reciprocity; and

• other judgments and decisions of foreign courts which are recognised and enforced under Vietnamese law.

For foreign arbitral decisions and awards, Vietnamese courts will only consider the recognition and enforcement of the following:

• an arbitral award of a foreign country which, together with Vietnam, is a signatory to an international treaty about recognition and enforcement of foreign arbitral awards; or
• foreign arbitral awards other than those specified above, which are based on the principle of reciprocity.

In addition, it is worth noting that there are certain conditions under which a Vietnamese court may refuse to recognise and enforce foreign judgements in Vietnam, specifically the condition that such recognition and enforcement must not contradict the fundamental principles of Vietnamese law. However, Vietnamese law has no explicit provisions specifying these fundamental principles. It follows that the result of a procedure on the recognition and enforcement of foreign judgments in Vietnam may likely be subject to the consideration of the relevant court of Vietnam.

If the company whose shares have been pledged or mortgaged is subject to foreign ownership restrictions/caps and the direct enforcement (leading to ownership) by the lender would result in a breach of such restrictions, then a sale to a local purchaser would likely be the only way to effectively realise the security.

By law, insolvency leads to either a declaration of bankruptcy or recovery procedures (which include, among other things, reorganisation).

Recovery procedures are generally considered after the filing of a petition with the Vietnamese court regarding the insolvency status of the company. By using business recovery processes, insolvent businesses are given the chance and circumstances to restructure their operations and emerge from bankruptcy.

In practice, the willingness of creditors to use business recovery processes is crucial, since business recovery procedures cannot be employed without the approval of creditors.

Where a bankruptcy process has been initiated, the risk to the lender would be the suspension of the outstanding enforcement process carried out by the lender under a mandatory requirement of court/competent authority. In such a case, the enforcement process would be prolonged and subject to other requirements/complicated processes which may involve the presence of the court/asset management officer, especially in a case where the relevant assets will be used in the recovery procedures of the obligor’s operation.

On a company's insolvency, creditors are paid in the following order:

• bankruptcy fees;
• unpaid wages, severance allowance, social insurance and health insurance and other payables to the debtor’s employees;
• debts arising after commencement of the bankruptcy procedures to recover the debtor’s business activities;
• financial obligations owed to the state, unsecured debts, and secured debts if the value of the secured assets is insufficient to pay all such secured debts; and
• members of the company, owner of the private enterprise or the shareholders in a shareholding company (as the case may be).

If the value of the assets is insufficient to cover the payments in accordance with the order above, each creditor at the same level of priority will be entitled to payment corresponding to a proportion of the debt owed to it.

There is no concept of equitable subordination in Vietnam.

According to the Law on Bankruptcy, the competent authority/organisation must suspend the enforcement of the mortgaged assets of an insolvent entity within five working days from the date the court initiates the bankruptcy process. As such, it is likely that lenders will not be able to proceed with the enforcement of mortgaged assets if the court has initiated the bankruptcy process against the obligor.

In recent years, finance has been largely injected into energy (including renewable energy), infrastructure, construction and real estate.

In terms of the legal framework for project finance, Vietnam does not have an omnibus of law on this but it is governed by multiple regulations, primarily including, among others, enterprise law, investment law, construction law, real estate trading law, foreign exchange control regulations, etc.

Public-private partnership (PPP) transactions are an investment form based on limited-term co-operation between the state and private investors through the signing of contracts and performance of projects in certain sectors, mostly infrastructure.

Matters regarding PPP investment are mainly set forth in the Law on PPP which was recently introduced, in 2020, to establish a legal framework umbrella for PPP projects and to attract more private investment in the development of Vietnam’s infrastructure. However, there are some obstacles, such as minimum investment requirements, removal of step-in rights for lending banks, etc, which may affect the ability of investors to raise funds for a PPP project.

As outlined in 8.1 Introduction to Project Finance, Vietnam does not have an omnibus of law on project finance. A standard project finance transaction may be required to satisfy a number of conditions under different regulations, subject to the nature of the project, such as establishment of a project entity in Vietnam, registration of an offshore loan with the SBV, etc.

Oil and Gas

Matters relating to oil and gas are mainly governed by the Law on Petroleum as amended by Law No 19/2000/QH10, Law No 10/2008/QH12 and Decree No 95/2015/ND-CP. The Ministry of Industry and Trade and its subdivisions are mainly responsible for this sector.

Power

Matters relating to power are mainly governed by the Law on Electricity as amended by Law No 24/2012/QH13, Decree No 137/2013/ND-CP and Decree No 17/2020/ND-CP. The Ministry of Industry and Trade and its subdivisions are mainly responsible for this sector.

Mining

Matters relating to mining activities are mainly governed by the Law on Minerals 2010 and Decree No 158/2016/ND-CP. The Ministry of Natural Resources and Environment and its subdivisions are mainly responsible for this sector.

When structuring deals, it is worth noting that certain restrictions imposed by Vietnamese law are applicable to foreign entities and/or foreign lenders, subject to a specific business engagement, which may have a material impact on a transaction, such as legal barriers for market entry, capital infusion, flow of capital, the foreign ownership regime, permissible secured assets, etc.

In Vietnam, bank financing appears to be the most frequently employed form of financing. Loans, usually secured loans, can be provided either by foreign or local banks.

Non-bank debt and equity finance are also popular and accessible tools for entities when it comes to capital mobilisation.

To be exported, natural resources need to be exploited in a lawful manner or have other origins that are permissible by law, and the specific kind and standard of such natural resources must be in the list of goods allowed to be exported.

In Vietnam, natural resources are regarded as property under the ownership of the people, and the state manages these natural resources on behalf of the people. Entities that wish to engage in the exploitation of natural resources are generally required to obtain relevant licences and permits from the state, or fulfil other requirements stipulated by the law applicable to the specific type of natural resources. 

In terms of environmental, health and safety laws, projects in Vietnam are mainly subject to the governing scope of multiple regulations such as the Law on Environment Protection, the Labour Code, the Law on Occupational Safety and Hygiene, etc.

The implementation of such regulations is overseen by specific ministries, such as the Ministry of Natural Resources and Environment, the Ministry of Health, the Ministry of Labour – Invalids and Social Affairs, etc.