THE LEGAL REGULATIONS ON CONDITIONS FOR BORROWING BY COMMERCIAL BANKS

MINISTRY OF EDUCATION AND TRAINING
HO CHI MINH CITY UNIVERSITY OF LAW
COMMERCIAL LAW FALCUTY


DO THI ANH THU

THE LEGAL REGULATIONS ON CONDITIONS
FOR BORROWING BY COMMERCIAL BANKS

BACHELOR’S THESIS
Major: Commercial Law

HO CHI MINH CITY – 2011

1


HO CHI MINH CITY UNIVERSITY OF LAW
COMMERCIAL LAW FALCUTY


BACHELOR’S THESIS

THE LEGAL REGULATIONS ON
CONDITIONS FOR BORROWING BY
COMMERCIAL BANKS

Student: Đỗ Thị Anh Thư
Course: 32 MSSV: 3220175
Guide teacher: Phan Thị Thành Dương

HO CHI MINH CITY - 2011

2


COMMITMENT
Author declares this thesis is the study of individual author. All information, data, and
arguments raised in this thesis is completely honest from author’s synthesis, analysis
with the instruction of Dr. Phan Thi Thanh Duong- lecturer in Faculty of commercial
law, not completely copy from any precious works. The author is responsible for this
commitment.

ABBREVIATION

Asia Commercial Bank

ACB

Civil Code 2005

CC 2005

Credit Information Center

CIC

East Asia Bank

DongABank

Law on Credit Institutions 2010

LOCI 2010

Mekong Housing Bank

MHB

Military Bank

MB

Private Credit Information Center

PCIC

Regulations on lending

ROL

Saigon Commercial Bank

SCB

Technology Commercial Bank

TechcomBank

Vietnam Joint Stock Commercial bank For Industry And Trade VietinBank

3


TABLE OF CONTENTS
COMMITMENT
ABBREVIATION
PREFACE
CHAPTER 1: THE LEGAL INSTITUTIONS ON THE CONDITIONS FOR
BORROWING BY COMMERCIAL BANK .............................................. 6
•

Overview of commercial bank and lending activity of commercial bank ............... 6

•

The general of commercial bank .............................................................................. 6

•

Lending activity of commercial bank ....................................................................... 8

•

The concept of lending activity .......................................................................... 8

•

The principles of lending activity ....................................................................... 9

•

Classification of lending activity ...................................................................... 12

•

The risks in lending activity and the need to build conditions for borrowing .. 13

•

Conditions for borrowing by commercial bank ..................................................... 15

•

The concept and meanings of conditions for borrowing ....................................... 15

•

The concept of conditions for borrowing ......................................................... 15

•

The meanings of conditions for borrowing....................................................... 17

•

The contents of statutory conditions for borrowing ............................................... 17

•

The required conditions .................................................................................... 19

•

The capacity of clients ...................................................................................... 19

•

Financial capacity to repay loans ...................................................................... 24

•

Lawful purpose for utilizing the loan capital .................................................... 25

•

The optional conditions..................................................................................... 30

•

Effect of using loans ......................................................................................... 30
4


•

Implementation of security for loans ................................................................ 32

CHAPTER 2: APPLICATION OF THE LEGAL REGULATIONS ON
CONDITIONS FOR BORROWING BY COMMERCIAL BANK

AND SOME RECOMMENDATIONS ..................................................... 39
2.1. Application of conditions for borrowing .................................................................... 39
2.1.1 Situation of loan at present commercial bank .......................................................... 39
2.1.2 The implementation of conditions for borrowing .................................................... 41
2.1.2.1. Conditions for borrowing formed by commercial bank ....................................... 41
2.1.2.1.1. Group of conditions of borrowers ..................................................................... 41
2.1.2.1.2. Group of conditions of security for loans .......................................................... 43
2.1.2.2. Statutory conditions for borrowing ...................................................................... 47
2.2. Recommendations for improving the law .................................................................. 57
2.2.1. Strengthen credit information .................................................................................. 58
2.2.2. Strengthen monitor of use borrowed funds activities .............................................. 60
2.2.3 Improving regulations on security for loans............................................................. 61

CONCLUSION

5


PREFACE
1. Urgency of the subject
For more than 20 years of innovation, from XIth National Party Congress, our
country’s economy has made great progresses from a backward centralized economy
level move to a dynamic market one. Along with economic progresses, the financial
intermediary institutions are introduced to serve the growth. Commercial bank is a
kind of them. As a financial intermediary, commercial bank raises the idle capital and
redistributes to areas in need through using many forms of credit, satisfy the capital
demands for production and business of organizations and individuals in society.
Today credit activities have had developments both in quality and quantity. Lending is
the most exciting and crucial activity. It is playing an important role in providing
timely funds for organization and individuals to serve the demands of production and

consumption. Othewise this work contains many risks when borrowers cannot repay
principal and interest at maturity. Conditions for borrowing are the rules that
borrowers must satisfy when they want to borrow money from commercial banks. As
a “first gate” that the borrowers must “pass” when they want to access to bank loans,
and the period before signing credit agreement, conditions for borrowing are really the
factor that may promote or limit lending activity of banks. Having such a significant
role, but now the law of conditions for borrowing does not promote totally its role
which is to identify customers as those who can use loans effectively, pay principal
and interest on time, form which commercial banks can prevent credit risks and
contribute to economic development. The conditions for borrowing which are not
appropriate with the actual situation have restricted capital accessibility of forces of
production and consumption while there are careless implementations of conditions
lead to loss of capital of banks.
Therefore author has chosen the theme “THE LEGAL REGULATIONS ON
CONDITIONS FOR BORROWING BY COMMERCIAL BANKS” as my thesis
with desire that the studying and understanding will be able to reflect the
implementation of law on conditions for borrowing by the commercial banks, thereby
contributing some small measures to improve the processing of these legal regulations
and efficiency of lending activity of commercial banks.
2. Research situation

6


The legal regulations on conditions for borrowing by commercial banks include
conditions: the capacity of clients, financial capacity to repay loans, lawful purpose,
effect of using loans, and implementation of security for loans in accordance with law.
At the present the legal regulations on conditions for borrowing by commercial banks
have not been studied systematically and deeply in view of legal aspect through
thesises, dissertations as well as reference books or academic journals. Works now

stop at the study of each specific issue in the conditions for borrowing, also studied
them in many different aspects, and not focus on legal aspect. Namely the problems of
financial capacity to repay, lawful purpose, and effect of using loans (investment
projects and business and production plans) are mainly studied under economic
aspects. Only the condition of security for loans is quite specific researched in view of
the law. Author can cite to research projects such as bachelor’s thesis “The security
measures in bank loans. Current status and solution to complete” by Huynh Tuong
Long (1998); bachelor’s thesis “The legal regulations on mortgage in lending
activities of credit institutions” by Doan Thi Kieu Oanh (2009)… These articles and
academic journals also spent a lot of “land” to discuss about security for loans such as
“Risks of mortgage savings” by lawyer Truong Thanh Duc in Banking Review out of
Dec 23th, 2008, or article “The mortgage assets in ensuring the implementation of
credit activities by Nguyen Van Hoat in The State and Law Review No. 126 May
10/1998...,and many studies of other authors cannot be described here on security
measures for loans. But in all the works mentioned above, the condition of the security
measures for loans is considered independently as measures to ensure the
implementation of civil obligations, not be considered as a condition for borrowing by
commercial banks. Thus it can be seen that conditions for borrowing by commercial
banks have not been studied adequately as a system of conditions through independent
and fully comprehensive view with its significance in view of the law.
In the thesis, author will attempt to clarify the legal provisions on this subject based on
personal knowledge as well as reviewing the relevant precious works, compared to
practical applications of the law to make an overall picture about the conditions for
borrowing by commercial banks today.
3. The scientific meanings and practical applications
Studying deeply and systematically the subject “The legal regulations on conditions
for borrowing by commercial banks” will allow us to thoroughly discuss this issue.

7

This thesis is to clarify contents and meanings of legal provisions on conditions for
borrowing by commercial banks, figure out how to correctly understand and apply the
provisions of this law in real situations. At the same time the thesis also reviewed the
applications of the provisions on the conditions for borrowing by banks. It considered
the effect of lending activities of banks and the borrower’s accessibility to the loans
prescribed through the performance of conditions for borrowing, from which
recognized whether the legal regulation on conditions for borrowing were appropriate
or not, the provisitions should be specified differently or in greater detail or not, found
problems if any, and think given towards improving the conditions for borrowing by
commercial banks.
This thesis can also be a document for review to appreciate the system of conditions
for borrowing set out by law in practice, which banks have been basing on to
determine whether a borrower is lent money. Research is necessary to devise criteria
and other mechanisms for how lending activity by commercial banks is still able to
avoid the risk efficiently but customers can access to the loans timely.
Other than materials has been cited, this thesis is studied in a systematic way of
conditions for borrowing in the commercial banks. The contents of the thesis focus on
analyzing the conditions for borrowing in view of legal and practical application
aspect. It can be useful for anyone wanting to study the lending operations of
commercial banks.
4. The aims and tasks of research
The purpose of this thesis is to study deeply law provisions on conditions for loans of
commercial banks, which provides solutions to improving the legal regulations on
conditions for borrowing.
For that purpose, the tasks of this thesis are:
- Research and evaluate the contents prescribed by the law on conditions for
borrowing by commercial banks with the relevant legal documents, clarify how to
understand correctly these regulations. Also indicate the meanings of the law on
conditions for borrowing of banks today.

- Study conditions for borrowing which a number of commercial banks now form to
apply in its lending activity, compared with provisions of law to consider the
differences.
8


- Identify the current status of implementation of regulations on conditions for
borrowing of banks today and propose recommendations to perfect the legal
regulations on conditions for borrowing of banks.
5. The scope of research
In this thesis, the author only focused on contents relating to regulations on conditions
for borrowing by commercial banks. For specific conditions for borrowing, the author
studied only law aspect, how to understand the law, not study economic aspects of
conditions through specified in detailed data.
In addition, the author also studied the conditions for borrowing by represented
commercial banks in the area of Ho Chi Minh City to compare bank’s application of
legal provisions on conditions for borrowing with others’s.
7. Research methods
In this thesis, the author mainly used methods such as: statistics, analysis, comprison.
- In chapter one, statistics and analysis were used to clarify contents of conditions for
borrowing described by the law.
- In chapter two, comparison was used essentially to specify the status of
implementation of legal provisions on conditions for borrowing.
8. Lay out thesis.
Besides the preface, list of references, list of acronyms, this thesis consists of two
chapters:
Chapter 1: The legal institution of conditions for borrowing by commercial banks.
Chapter 2: Application of legal regulations on conditions for borrowing by
commercial banks and recommendations.

9


CHAPTER 1
THE LEGAL INSTITUTION OF CONDITIONS FOR BORROWING BY COMMERCIAL
BANK

1.1.

OVERVIEW OF COMMERCIAL BANK AND LENDING ACTIVITY
OF COMMERCIAL BANK
1.1.1. The general of commercial bank

In economy of any nations, the credit institution has always played as an important
role. In society there are always organizations and individuals owning an amount of
idle capital but for some reason they don’t use in profit-making business. Besides,
there are organizations and individuals engaging in production, business and
consumption demand for capital. However, these two entities hardly see each other
directly. Even despite having seen each other, it is very difficult to form their
borrowing relationship because of lack of belief and capacity to draft a close credit
contract to protect the interest of both parties, thus contributing to stabilization of the
economy. 1
The credit institutions which are financial intermediaries have raised idle capital in the
society and redistributed into the sectors needing capital for development. The
concepts of commercial bank are stipulated as follows: “Commercial bank shall mean
a credit institution to conduct all banking activities and other related business
operations in accordance with this law for profit-making purpose.” 2. Following this
provision, the commercial bank is a kind of credit institutions, so it must ensure to
complying with all legal provisions which impose on credit institutions on the
establishment, registration, activities, reporting…

A very specific feature of the commercial banks is that commercial banks operate for
profit-making purposes. This is the factor to distinguish commercial banks with other

1

Prof, Dr Le Van Tu (1997), Monetary, Credit and Bank, Statistics Publishing House, Ha Noi,
page194.
2

Vietnam Law on Credit Institutions 2010, Art.4 (3)

10


kinds of banks which do not operate for profitable target such as banks for social
policies. This feature also determines criteria and mode of operations of commercial
banks, which are autonomous and self- responsibility in their business activities.
Commercial banks have been performing primary activities including capital
mobilization, lending and other banking services such as payment services, collecting
and paying of customers, preserving valuable documents, papers, maintaining and
purchasing securities on behalf of clients, foreign currency trading, gold, silver,
financial adviser, help companies to issue shares, bonds…Among them lending
activity is the most important one of commercial banks. Stemming from the nature of
commercial bank is borrowing to lending, so the business object of banks is currency
called capital. Capital that banks use for business is raised capital; capital owned by
bank is for only a small percentage. Commercial banks convert deposits into loan
capital to borrow in order to provide funds for production and business activities of
the economy. By this way commercial banks can find out major income source for
themselves, refund deposit to customers, offset the expense of business and create
profit 3. The main business of banks is monetary credit activity to satisfy the borrowing

requirements of many entities in society. Loan capital is used primarily to provide
monetary credit for many objects so that the risks will be dispersed. However, the
commercial banks have to face to risks that will be varied and at different levels.
Activities of commercial banks are also overseen by the State Bank. This comes from
the commercial banks are the financial intermediary institutions in the economy with
main activities consisting of mobilizing idle capital of organizations and individuals in
society and redistributing into areas that need capital through other forms of credit. So
when the activities of commercial banks have problems, it will easily lead to chain
collapse, destabilization of economy and serious consequences. Therefore the
supervision of The State Bank for credit institutions is necessary and suitable for
international practice.
In summary commercial bank is a financial intermediary playing an important role in
the economy. By monetary lending activity for profit, commercial banks have been
redistributing idle capital into areas in need, contributing to motivate production and
social life. Besides, lending activity of commercial banks also contains many risks
3

Essay on analysis of the consumer lending in Asia Bank, Da Nang on website
/>
11


leading that it must be subjected to supervision and management of the State banks
through the law.
1.1.2. Lending activity of commercial bank
1.1.2.1. The concept of lending activity
The concept of lending activity is specified in two legal documents with the following
contents: “Lending is a form of credit in which lender commits borrower to give a
sum of money to be used for identification purposes in certain period of time agreed
upon repayment of both principal and interest.” 4. Regulations on lending by credit

institutions to clients issued with Decision 1627/2001/QD-NHNN of the Governor of
the State Bank dated 31/12/ 2001 and Decision 127/2005/QD-NHNN dated
03/02/2005 by the Governor of the State Bank of amending and supplementing some
articles of the Regulations on lending issued together with the Decision
1627/2001/QD-NHNN (hereinafter called the ROL) also has a provision stipulating
lending activity as follows: “Lending means a form of the extension of credit whereby
a credit institution provides a client with an amount of money to for a certain purpose
and a fixed period of time as agreed on the basis of the principle of repayment of both
principal and interest.” 5 Thus lending activity of commercial banks is a work which is
based on the confidence of banks for their clients. Lending is that commercial bank
transfers a sum of money to customer to use in a certain period of time, when the time
gone by, customer must pay to the bank both principal and interest. When lending,
banks have not been received an equal compensation, just as consumers had already
repaid both principal and interest, the banks achieved their purpose of this operation.
So the banks must have trust in that customers will make payment of debt obligations
on time then they lend money to clients. Customers wanting to make trust for banks
must prove that they have capacity of timely repayment of principal and interest
through satisfying the conditions for borrowing. Therefore the conditions for
borrowing are bases for banks to have trust in customers, then they decide whether to
lend or not. Lending based on trust in customers, which is determined by satisfying

4

Vietnam Law on Credit Institutions 2010, Art.4 (15).

5

Decision No. 1627/2001/QD-NHNN on issuing regulations on lending by credit institutions to
clients, Art.3 (1)

12


the conditions for borrowing; have meaning that banks have bases for lending that
limit the most risks.
In fact, besides conditions for borrowing, if this is the first time borrower has
borrowing elationship with bank, bank’s trust for borrowing stems from borrower’s
healthy and effective business, the reputation in the market and especially through the
evaluation loan files meeting the requirements of the banks.
1.1.2.2. The principles of lending activity
As the above analysis, lending is the most important and main activity of commercial
banks. Capital which commercial banks mainly use to lend is raised from
organizations and individuals in society. So the most significant issues all commercial
banks concern are how to preserve their capital and generate revenue to sustain the
internal system. Derived from this reason, in their lending activity, commercial banks
must comply with a number of principles.
 The first principle: the principle of use loans in accordance with purposes
agreed in the credit agreement. When individuals or organizations want to
borrow money from banks, the first mandatory requirement is that they have to
present their purpose. Credit institutions will base on the loan purpose along
with other factors such as financial capacity, the security for bank loan,
production and business plans, economic feasibility and engineering
feasibility…to decide whether customers are lent 6. During use of loans period,
the borrowers must use the loan capial in accordance with the purposes
committed in the credit contracts to ensure effect of use of loans and to repay
the principal and interest on time.
But this principle is not applied to all forms of lending. Some specific kinds of
lending such as overdraff, issuing, credit reserves and banks cannot control the
use of loans so they should not need to comply with this principle 7.

6

Ho Chi Minh City University of law, Faculty of commercial law (2007), Banking Law Curriculum,
Vietnam National University Publishing House, Ho Chi Minh City, pp 223.

7

Ho Chi Minh City University of law, Faculty of commercial law (2007), Banking Law Curriculum,
Vietnam National University Publishing House, Ho Chi Minh City, pp 224.

13


This principle allows banks to ensure that bank loans are used for proper
purposes agreed since then limit the credit risks for banks. When lending,
banks have to base on lawful purpose for utilizing bank loans, capacity of
profit-making from this purpose, since then determine solvency of customers.
If customers do not use the bank loans for these purposes without notifying or
agreement of banks, in all likelihood bank loans can be used wastefully and
customers are insolvent.
 The second principle: the principle of timely repayment of both principal and
interest.
Capital of banks is mainly mobilized as mentioned above. Banks have
responsibility to repay to depositors upon maturity or upon their request. If the
banks cannot repay to the depositors because of insolvency of clients,
consequences will be very serious as mentioned above. Otherwise commercial
bank is an economic organization operating on the principle of autonomy and
responsibility for its business activities with the goal of profit. This profit is the
interest 8. With the above analysis, we can see if the customers perform
obligation of repayment on time, this will help banks to preserve their loan

capital, carry out obligations to depositors, achieve the purpose of their
operation, and find out areas which is the best investment. Besides, on the
client side the obligation to pay timely principal and interest will push
customers to use loans effectively, responsibly, carefully in compliance with its
obligations.
From the point of view of law, this principle secures civil rights and civil
obligations to comply with the law. Civil Right is the bank’s right to be
received principal and interest on time. A civil obligation is the borrower’s
obligation to repay both principal and interest due. If this principle is
implemented seriously, that will avoid disputes relating to borrower’s
insolvency occurring in the lending relationship between banks and customers,
therefore reducing the civil disputes in this field then contribute to stabilizing
the economy.

8

Ho Chi Minh City University of law, Faculty of commercial law (2007), Banking Law Curriculum,
Vietnam National University Publishing House, Ho Chi Minh City, pp 225.

14


 The third principle: the principle of avoiding risk. The risk is that customers do
not repay on time principal and interest.
This principle stems from the nature of the lending activity of commercial
banks. Lending is a very risky activity. The customer’s repayment of principal
and interest to the bank entirely depends on the repayment capacity of clients.
But the repayment capacity of clients is a factor which is difficult to predict
accurately though the banks have built their own process of consideration and
approval of lending. If the bank runs the risks of lending activities, it may lead

to chain bankruptcy as has been said above. Even there were more serious
problems when the bank went bankrupt. Because banks borrow money from
organizations and individuals in society, if the banks go bankrupt, the
consequence is that a series of depositors will fall into bankruptcy 9.
Avoiding risk is interpreted as commercial banks preserve their loan capital by
avoiding all cases of lending which can likely lead bank not to be repaid capital
and interest on time such as not lending those customers who unable to repay
timely principal and interest, for those who have the right to decide to lend at
commercial banks in accordance with the Law on Credit Institutions 2010
(hereinafter called LOCI 2010), not lending without security for loans or with
preferential terms and the total amount of loans is 5% of equity of commercial
banks for a number of objects prescribed in LOCI 2010. Also to avoid the risk,
banks must not lend money to a borrower more than 15% of equity of banks for
one client.
To implement this principle, banks should be cautious in their lending
decisions by through appraisal process to make lending decisions. Banks must
determine carefully that whether clients are get loans or not, credit limit,
preferential conditions.
From the awareness above, the bank’s strictly implementation principle of avoiding
risks is an extremely important part in ensuring the safe of operations of banks and
healthy system of credit institutions.

9

Ho Chi Minh City University of law, Faculty of commercial law (2007), Banking Law Curriculum,
Vietnam National University Publishing House, Ho Chi Minh City, pp 228.

15

In summary each principle has its own meaning, but all have a relationship of mutual
interaction. Implementation of this principle is the prerequisite for the implementation
of other principles. The principle of using loans in accordance with purposes agreed in
the credit agreement to ensure that customers use the loan capital for the effective
purposes committed. Since then customers may gain profit and repay to the banks at
maturity. This means banks comply with the principle of avoiding risks. The first and
second principles have a role to ensure that borrowers comply with civil obligations
which are use bank loans for agreed purposes and timely repayment. All three
principles are specified in the provisions of the LOCI 2010 and ROL. In summary
three principles of lending by commercial banks have an interactive relationship. This
principle is the premise of others. The all three principles aim at ensuring that the
obligations in credit contract are done and helping banks to preserve their loan capital
for lending.
1.1.2.3. Classification of lending activity
There are many criteria for the classification of lending activities of commercial
banks: based on the loan terms, the forms of guaranteed loans, purposes of using loan
capital, forms of value of loans… The following is some typical criteria to classify
lending activities, which may affect conditions for borrowing:
 Based on the purposes of using loan, lending activities of commercial banks are
divided into:
- Consumer credit: lending activity in order to meet demand of individuals, families,
and society, contribute social life’s improvement. In consumer credit, commercial
banks often develop products such as student loans, loans to buy the house, apartment,
car loans, travel loans, loan application before personal account…
- Production and circulation of goods credit: lending to meet capital needs for
individuals, organizations and enterprises engaging in production and business. For
this type of credit commercial banks often develop diverse products such as additional
loans for working capital, lending additional fixed capital, lending support export
loans.
 Based on the loan terms:

- Short-term loans: loans with a duration of 12 months.
- Medium-term loans: loans with a duration of over 12 months to 60 months.
16


- Long-term loans: loans with a duration of over 60 months.
 Based on the forms of security for bank loans:
- Loans secured by the property: the establishment of legal basis for the commercial
banks to have second lawful sources from specific assets apart from the official debt
collections.
- Loans not secured by the property: the form of lending which mainly is based on
reputation of the individual customers, or guaranty of socio-political organizations
whose members are borrowers. Each bank has own method to identify and select.
1.1.2.4. The risks in lending activity and the need to build conditions for
borrowing
Lending is an activity which contains many risks. Risk in lending activity is not to
recover the loan and interest that become due. The risk in lending activity of banks is
very diverse. It is latent during loaning period. It stems from many different causes. It
outside manifestations are overdue debts, bad debts, loss of capital ... Here the author
only refers to the risk caused by the subjective causes, which means the risk caused by
humans, and humans can overcome it.
The following is some popular causes of risk in lending activity of commercial banks:
First customers did not use loans effectively, which means that the investment
projects, and business plans were not feasible, did not bring economic efficiency and
leaded to loss-making. Second other reasons are that the borrowers did not use
borrowed funds for purposes committed when borrowing at the banks, or used for
unlawful purposes, did not put into production and business activities, did not make
profit from the loans. All of them caused losses and wastage of loan capital from
which the debts could not be recovered. Third the customers even were not careful
when using loans, especially customers were not asked for participation of their own

capital in investment, or security for loans. When the borrowers could not loss
anything, they would not be cautious and careful as making a business investment,
which lead to loss of capital 10. Fourth in the case of consumer credit, while borrowers

10

te/Thong tin bat can xung trong hoat dong tin
dung tai Viet Nam (TS. Huynh The Du - DH Kinh te TP. HCM).pdf

17


had had no steady source of income, it could easily make the banks at risk. When the
commercial banks could not recover principal and interest due, they would liquidate
the secured properties. If value of secured property had decreased, banks also could
not recover fully principal and interest, and get damage. Fifth another cause of risks is
that from the beginning borrowers intended to appropriate the money of the banks by
forging files, documents and, or by entering into collusion with credit officials in the
banks to overcome appraisal process of loan records of banks. At that time the banks
did not appraise loan files carefully. Sixth banks loaned for those who are forbidden to
borrow money from these banks in accordance with the LOCI 2010. Or banks loaned
without security for loans or with preferential conditions or equity exceeding for the
objects that the LOCI 2010 Law does not allow like this. Then the loan could be
approved non-transparently, do not fully comply with conditions for borrowing, which
lead to the formation of bad debts. Besides when the banks had lent borrowers a large
amount of money, and clients fell into one of these cases above, these bank loans
could become bad debts.
To avoid the risks that can happen, right from the start, before deciding to lend, banks
should thoroughly check that whether borrowers use loans effectively or not, for
lawful purposes or not, can repay principal and interest on time or not and whether

have security properties are sufficient to repay the loans… Stemming from these
purposes, the construction of conditions for borrowing is very necessary for banks to
determine customers who have capability of efficient use of capital and repay
principal and interest due. At that time lending activity of banks achieves efficiency.
Recognizing this, legal regulations on conditions for borrowing are stipulated as
foundation rules for banks to build the conditions for their particular loans.
1.2.

CONDITIONS FOR BORROWING BY COMMERCIAL BANK
1.2.1. The concept and meanings of conditions for borrowing
1.2.1.1. The concept of conditions for borrowing

The conditions for borrowing of the commercial banks are the requirements that
customers must meet when they want to borrow from commercial banks. These
requirements may be required on customer status, credit file... Meeting these
conditions is a requisite for banks and customers to signing credit agreement and form
loan relationships between banks and borrowers.

18


With such an important role, conditions for borrowing by commercial bank have been
legislated into content in the banking law. Specifically Article 7 of ROL has
provisions on conditions for borrowing.
However, because commercial banks are business organizations operating under
autonomy and self-responsibility, and the purpose of profit, so the law has promoted
the autonomy of the credit institutions which commercial banks in particular:
“1. Credit institutions, foreign bank branches have autonomy in their business and
responsibility for the results of their operations. No organization or individual may
illegally intervene in the business of credit institutions and branches of foreign banks.

2. Credit institutions, branches of foreign banks may refuse to grant the credit request,
provide other services if found ineligible, ineffective, inconsistent with the provisions
of the law.” 11
In addition, Article 93 of the Credit Institutions Act 2010 also stipulates:
“1.Pursuant to the provisions of this Code and other provisions relating to law, credit
institutions must construct and promulgate regulations for the internal operations of
credit institutions, ensure control mechanisms, internal audit, strengthen internal risk
management process associated with banking operations process and plans to handle
emergencies.
2. Credit institutions must issue internal regulations following:
a) Regulations on credit, loan management to ensure the correct use of the loan
purpose…”
Article 28 of ROL has stipulated as follows "1. Credit institutions and borrowers shall
be responsible for implementation of these Regulations. Based on these Regulations
and the provisions of relevant legal instruments, credit institutions shall issue specific
guidelines for loan business in accordance with their own conditions, characteristics
and charter.”
Based on the three provisions above, it can be inferred that the conditions for
borrowing specified in ROL are compulsory patternable provisions for commercial

11

Vietnam Law on Credit Institutions 2010, Art.7

19


banks to construct their internal regulations on lending complying with criteria and
credit policies of each bank. Internal regulations on lending of commercial banks must
not be contrary to the provisions of the conditions for borrowing set out in the ROL

above.
That the law hands authority over to commercial banks for stipulating provisions of
conditions for borrowing in the autonomy is completely justified. Because banks are
also business owner, it must be recognized and protected their free business by the
law 12. However, because of the specific activities of commercial banks as noted
above, the freedom of business of commercial banks is protected at lower levels than
other usual enterprises. In addition to adjusting applyed to all enterprises by the law,
banks are subjected to direct regulation of the State Banks when performing
operations such as gold and foreign exchange, lending... through requirements of
increasing or decreasing the required reserve ratio, other financial instruments, and
legal documents. The freedom of business of commercial banks is shown to be selfdetermination; customer choice, choice of the form of loans or credit decisions within
the framework made by the law, and shall bear all on their business results by
themselves. If the law limits this power of commercial banks, this restriction may lead
to shrinking market share and make it difficult for commercial banks to provide
capital to the economy 13.
1.2.1.2. Meanings of conditions for borrowing
The application of conditions for borrowing by commercial banks in process of
consideration and approval of lending will help banks to identify customers with the
capacity to use loans effectively, make profit, from which to repay principal and
interest to banks on time. Conditions for borrowing by commercial bank is a way for
banks to filter customers immediately after receiving the credit files, to avoid the
customers who do not have the capacity to use loans can lead to bad debts for banks.
From the point of view of law, customers need only meet the conditions for borrowing
of commercial banks when asking for bank loans. But because of the freedom of

12

Nguyen Van Tuyen (2000), Learning about Banking Law-Theory and Practical exercises, The
People’s Public Security Publishing House, Ha Noi, pp 104.
13

Nguyen Van Tuyen (2000), Learning about Banking Law-theory and practical exercises, The
People’s Public Security Publishing House, Ha Noi, pp 104.

20


business as stated above, although clients had already met the conditions for
borrowing, banks could decide not to lend if the loans werw not deemed suitable for
their credit policies.
1.2.2. The contents of statutory conditions for borrowing
Conditions for borrowing are stipulated by the law in Article 7 of ROL as follows:
“1. The client has civil legal capacity and capacity for civil acts and bears civil
responsibility as stipulated by law, in particular:
In the case of a borrower being a Vietnamese legal entity or individual:
- A legal entity must have civil legal capacity;
- An individual or an owner of a private enterprise must have civil legal capacity and
capacity for civil acts;
- A representative of a household must have civil legal capacity and capacity for civil
acts;
- A representative of a co-operative must have civil legal capacity and capacity for
civil acts;
- A partner of a partnership must have civil legal capacity and capacity for civil acts;
(b) In the case of a borrower being a foreign legal entity or individual, it must have
civil legal capacity and capacity for civil acts under the laws of the country of which
the legal entity holds nationality or of which the individual is a citizen, if the foreign
law is required to be applied by the Civil Code of the Socialist Republic of Vietnam or
is referred to in an international treaty to which the Socialist Republic of Vietnam is a
signatory or participant;
2. It must have a lawful purpose for utilizing the loan capital;

3. The client must have the financial capacity to ensure repayment of the loan within
the time-limit undertaken;
4. It must have an investment project or plan for production, business and services
which is feasible and effective or it must have an investment project or a feasible plan
to service living conditions which complies with the law;

21


5. It must comply with the regulations of the Government and the guidelines of the
State Bank of Vietnam on security for loans
1.2.2.1. The required conditions
Required conditions are known as conditions that all customers wanting to borrow
from commercial bank must satisfy. They include the capacity of customer, financial
capacity to repay loans and lawful purpose. These conditions are required because
they are the basic conditions to ensure that using loan capital is legal and minimal
capacity of insolvency of the customers.
1.2.2.1.1. The capacity of clients
Following the Article 7 of the ROL, customers of commercial banks include:
institutions, Vietnamese individuals and organizations, foreign individuals and
organizations:
“1.The clients have civil legal capacity and capacity for civil acts and bears civil
responsibility as stipulated by law, in particular:
In the case of a borrower being a Vietnamese organization or individual:
- An organization must have civil legal capacity.
- An individual or an owner of private enterprise must have legal capacity and
capacity for civil acts;
- A representative of a household must have legal capacity and capacity for civil acts;
- A representatives of a co-operative must have legal capacity and capacity for civil
acts;

- A partner of a partnership must have legal capacity and capacity for civil acts;
In the case of a borrower is foreign individual or organization, it must have legal
capacity and capacity for civil acts under the laws of the country where the
organization holds or in which individual is a citizen, if the foreign law is required to
be applied by the Civil Code of the Socialist Republic of Vietnam or is referred to in
an international treaty to which the Socialist Republic of Vietnam is a signatory or
participant.”

22


 The first is the conditions of the borrowers who are organizations and
individuals in Vietnam: Individuals and sole proprietorship owners, representatives of
households, co-operative groups, and partners of a partnership must have legal
capacity and capacity for civil acts. The civil legal capacity of individuals is
prescribed in Article 14 of the Civil Code 2005 (hereinafter called CC 2005). It can be
understood as individual civil rights and civil obligations prescribed by law from birth
out to the die. The law is the same for everyone without discrimination. Capacity for
civil acts of individuals is prescribed in Article 17 of CC 2005. This is the capability
of individuals to establish and perform civil rights and obligations through their acts.
According to the provisions of Articles 18, 19 and 20 of CC 2005, individuals under
age of six have no capacity for civil acts, from the full of age of six to under age of
eighteen have insufficient capacity for civil acts, the full eighteen and older will have
the capacity for civil acts except lost (Article 22 CC 2005) or limited capacity for civil
acts (Article 23 CC 2005). Another point to note is that the civil law also has
provisions for the full of age of fifthteen to under age of eighteen who have had
sufficient personal property to ensure implementationof obligations. They may be
granted bank loans in accordance with law (Clause 2 of Article 21 of CC 2005). But
there are almost no commercial banks which grant to the full of age of fifthteen to
under age of eighteen for loans because the conditions for borrowing also include

other conditions that are difficult for people from age of fifthteen to under age of
eighteen to satisfy.
The next problem is that the private enterprise owners, representatives of household
and co-operative are the legal representatives in accordance with the law. It means the
representatives must comply with Chapter 7 of CC 2005 including procedures and
scope of representation. This problem is posed because when asking for loans at
commercial banks, the private enterprise owners, representatives of household and cooperative will be on its own behalf for loans, but the property responsibility for
payment (if being loaned) would include the assets of private enterprises, family
households, co-operatives. Therefore, new rights and obligations to the organizations
are arisen only when the legal representatives of the organizations stand out to
borrowing for purposes of their activities. Legal entities are on its behalf despite
through their representatives. The legal entities are responsible for the property (if
being loaned) by all their own assets. The legal representatives are only considered
when signing the credit agreement. The purpose of determining private enterprise
owners, representatives of family households, co-operative is to determine whether
23


loans will be used for production and business activities or use for private purposes of
owners of private enterprises, representatives of family households and co-operatives,
on that basis, identify bank’s debt colletions.
Apart from the provisions on the capacity of clients which considered in the
conditions for borrowing mentioned above, according to the author, the customers
wanting to borrow from commercial banks must have to satisfy a condition that ROL
has not stipulated yet. This is circumstances in which lending is not permitted
prescribed in Clause 1 of Article 126 of the Credit Institutions Act 2010. Accordingly,
although borrowers had already met the conditions of legal capacity and capacity for
civil acts, but felt into these circumstances, they shall not be lent at commercial banks.
The cases are not granted credit by the law just mentioned include: Members of Board
of Directors, members of Council, members of the Controller Committee, General

Director (Director), Deputy General Director (Deputy Director) and equivalent
positions of commercial banks; parents, spouses and children of members of the
Board, the Controller Committee, general directors (directors) and similar titles...
When these objects demands loans at commercial banks, the banks are not allowed to
lend.
Vietnamese organizations wanting to ask banks for loans need to have conditions of
civil legal capacity. It is understood that scope of activities that the organization is
done. For example economic organizations such as limited liability companies, joinstock companies, their legal capacity is the business, employing workers, factory... in
compliance with activities recorded in the certificate of business registration of
enterprises.
As well as for individuals, if the borrowers are legal entities banned borrowing as
prescribed in provisions in clause 1 and 4 of Article 126 of the Credit Institutions Act
2010, which is that legal entities are shareholders whose representatives of contributed
capital as members of Board Director, members of the Controller Committee of
commercial banks which are joint stock companies; legal entities are limited partners
or owners of commercial banks which is Limited liability companies (state-owned
commercial bank was established in the form of a limited liability company members
having a 100% state owned) enterprises operating in the securities business which
commercial banks are controlled 14. If the borrowers are legal entities and enterprises
14

Vietnam Law on Credit Institutions 2010, Art.126 (1a)

24


in one of the cases above, despite meeting the condition of capacity of clients or all
other conditions for borrowing, they will not be granted loans by commercial banks.
These circumstances in which lending are not permitted are very important because
they are to prevent internal lending. Internal lending is very dangerous for transparent

operation of the banks. If the banks lend money to objects who held key management
positions in banks, or to individuals having tie relevance to those who have right to
decide to lend, it will easily lead to dispersed assets of the banks, personal gain. Even
some banks will be established aimed at fraud because the banks’ loan capital is
mainly raised. These banks lend to conduct these cases will be dealt according with
the law. Specifically defined in Clause 2 of Article 25 of Decree 202/2004/ND-CP
regulations on administrative sanctions in the field of monetary and banking activities,
banks will be fined from 5,000,000 VND 12,000,000 when lending to the following
objects: Providing loans to members of Board of Directors, members of Controller
Committee, General Directors (directors), deputy general director (deputy directors)
of credit institutions, loans for persons who evaluate and approve of loans, finance
leasing, loans for parents, spouses and children of members of Board Director,
members of Controller Committee, General Director (Director), Deputy General
Director (Deputy director) of credit institutions, except the cases that the laws has
different provisions.
 The second content of the capacity of clients is the capacity of foreign
organizations and individuals. As stipulated in Article 7 of ROL, the capacity of
foreign individuals and institutions are defined as follows: "In the case of a borrower
is foreign individual or organization, it must have legal capacity and capacity for civil
acts under the laws of the country where the organization holds or in which individual
is a citizen, if the foreign law is required to be applied by the Civil Code of the
Socialist Republic of Vietnam or is referred to in an international treaty to which the
Socialist Republic of Vietnam is a signatory or participant. " This provision above is
absolutely right with the provisions of civil law but have not completed yet. CC 2005
issued after the ROL had added the important content in the Part 7 stipulating
regulations on civil relations involving foreign elements.
- First under Article 761 of CC 2005, foreign individuals have civil legal capacity as
citizens of Vietnam unless the Vietnamese legislation contains different provisions. In

25