After Covid-19, while the economy was showing some positive signals, it was hit again by a series of local and international incidents that makes everything worse off. Economic hardship impacts customers’ financial capacity, which makes them unable to repay their loans to credit institutions. The State Bank of Vietnam has issued Circular 02/2023/TT-NHNN to pave a path for credit institutions in assisting their customers who are facing hardship. In short, Circular 02/2023/TT-NHNN allows credit institutions to restructure their customers’ loans without affecting their debt groups, which also contributes to relieving the financial pressure of credit institutions in establishing and using risk provision.  However, that seems not enough. Credit institution are seeking more ways to encourage their customers to repay their loans not only as much as possible but also as soon as possible. Amongst various viable options, relieving customers from their repayment burden by reducing or exempting loan interests or loan fees, is the most popular approach. Whereas such relief seems not to help much, credit institutions are considering a further and more aggressive step that is to also reduce the customers’ loan principals.

This gives rise to the concern that whether a credit institution may reduce principals for customers or they may not. Just in case that the law did allow a direct and straight-forward approach, we would also like clarify whether there were any other alternatives to realize this proposal or there was not.

1. Whether a credit institution – as a lending credit institution – can directly reduce the debts’ principals for the customers or it cannot (including negotiate with the customers to amend the lending contracts)

1. We opine that the credit institution is not explicitly allowed to reduce the debts’ principals because of the following reasons:

• Reason 1: The principal reduction is inconsistent with the principles of lending and borrowing. In principle, the customers must repay the debts’ principals and interest in full and on time as agreed with the credit institution.[i]
• Reason 2: The principal reduction is inconsistent with risk treatment guidelines and records. Besides, even after using provisions to resolve the risks, the credit institution must still apply debt recovery measures to adequately and thoroughly recover the risk-resolved debt. [ii]
• Reason 3: The principal reduction is inconsistent with the spirit of Circular 39. Circular 39 allows credit institutions and customers to (a) agree on the calculation of payable interest if the customer is unable to repay part or all of the loan principal and/or interest on time [iii]; and (b) exempt and reduce loan interest and fees for customers according to internal regulation [iv].But Circular 39 dose not proivide any provisions that allow credit institutions to renegotiate loan principle, or to extempt/ reduce loan principal. Therefore, Legal understands that, according to the spirit of this legal instrument, the State Bank dose not allow (a) renegotiation of loan principal, or (b) exemption/ reduction of loan princial.

2. There is a typical argument that the credit institution may reduce the debts’ principals (or negotiate with the customers to reduce the debts’ principals) because there are no laws prohibiting so, which is presumed to be intuitively derived from the Civil Code. However, we view that this statement is contestable because the lending transaction between the credit institution (as the lender) and the customers (as the borrowers) is, mainly and essentially, governed by the Law on Credit Institutions, according to which the operation of the credit institution – that is, the lending operation – must comply with this law and other related laws. [v] Conservatively speaking, if the Law on Credit Institutions contains a provision which allows reducing the debts’ principals, the credit institution must comply with such provision; and, if the Law on Credit Institutions does not contain any such provision, the credit institution does not have any provision to comply with. In other words, taking an action for which the Law on Credit Institutions does not contain any provision, can be seen as violating the principle of “… comply with this Law and other relevant laws.”

3. Given the above, we do not support the direct principal reduction because it (a) is inconsistent with the peculiar regulations on lending, and (b) can be tacitly view as not complying with the Law on Credit Institutions in the absence of a law provision for reducing the debts’ principals.

2. Whether there was any time limit at the expiry of which the credit institution – as a lending credit institution – loses the right to collect the debts

1. There are neither regulation that particularly provides a time limit at the expiry of which the credit institution – as a lending credit institution – loses the right to collect the debts, nor regulation that allows the credit institution to waive off the principal of the debts.

2. However, by interpreting Circular 11/2021/TT-NHNN, we may understand that the obligation to collect the debts terminates at the end of 5 years after the debts were written off. In particular, within 5 years upon the write-off, the credit institution must apply debt recovery measures to recover the debts adequately and thoroughly.[vi] Upon the expiry of such 5-year term, the credit institution is only required to monitor the debts in the internal system whereas the regulations do not mention anything about debt recovery or collection.[vii]

3. We take the view that the right to collect, and the obligation to recover, the debts ends at the expiry of the 5-year term upon the write-off. This means that, the credit institution is not required to aggressive follow up and recover the debts. Given this, credit institutions may reduce principals for segment of customers whose debts were removed from the off-balance sheet – which are debts delinquent for over 5 years upon the date they were written off. However, the credit institution is still required to monitor the unpaid debts in its internal system.

3. Whether the credit institution can negotiate with a customer to reduce the principal of his/her debt based on a successful reconciliation minutes

1. We opine that the successful reconciliation minutes takes legal effect unless it is protested against according to cassation procedures if there are grounds to believe that the agreement between the credit institution and the customer on the principal reduction violates the prohibition of the law.[viii] Such that, the credit institution can use the successful reconciliation minutes to explain to the State Bank.

2. Regarding the opinion that the reduction of the principal violates the prohibition of the law, there are two views which can be taken to interpret the regulations.

• View 1: The first view is that there are no explicit prohibitions under the laws which restrict credit institutions from reducing the debt principal for customers. As per this view, the credit institution may reduce the debt principals for the customers. As we understand, this view is more likely to be taken by the court. Once the successful reconciliation minutes is issued by the court, it takes immediate effect unless it is found to have violated the laws – which leads us to View 2. Such successful reconciliation minutes will likely be ineffective if it is protested against by the competent authorities according to the cassation procedures.[ix] The possibility of the successful reconciliation minutes being protested by the competent authorities, as per our experience, is less likely to happen.
• View 2: The second view is that credit institutions may not reduce the debt principal because such reduction is not guided or clearly allowed by the Law on Credit Institutions. As per this view, the credit institution cannot reduce the debt principals for the customers. As we understand, this view will be more likely to be taken by the administrative bodies (like the State Bank) rather than the court. However, assuming that the State Bank figures out the reduction of debt principal, the State Bank still cannot claim that the successful reconciliation minutes did not take legal effect – that is, the State Bank does not have the power to protest against the successful reconciliation minutes because they are not the authorities listed in Article 331 of the Civil Proceedings Code as quoted above. Such that, the credit institution can use the successful reconciliation minutes to explain to the State Bank. If the State Bank seriously wants to invalidate the successful reconciliation minutes, it must notify in writing to the competent authorities as stated above, then it must serve the court hearings. We assume that the State Bank will be less likely to go down this path as it would take enormous effort to process.[x]

3. There is a typical argument which critique View 1 above. Generally, this argument states that, even the court already recognized that the agreement of the parties is a lawful agreement, the State Bank still can disqualify such recognition by saying that the ‘principal reduction aspect’ of such principal reduction agreement is unlawful.

This argument, as far as we know, comes from the notion that the judiciary power of the court system cannot overrule the administration power of administrative bodies (like the State Bank) – the State Bank can conclude that an action is an unlawful one while ignoring that the court has recognized that such action is a lawful action. This means that, even the principal reduction agreement is considered a lawful agreement according to the successful reconciliation minutes of the court, it still can be claimed to be an illegal agreement according to an administrative act or to an administrative decision of the State Bank.[xi]

4. Logically speaking, all things being equal, the court’s recognition covers the following main aspect:

• The parties have legal right to reach the principal reduction agreement;
• The principal reduction agreement does not violate the principles of the Civil Code (e.g., mutual consents, no threats, no coercion, no violation of social norms and morals, no violation of the laws’ prohibitions, etc.); and
• The object – that is, the goal that the parties’ will focuses on – of the principal reduction agreement (i.e., reduction of principal) does not violating social norms and morals, and does not violating the prohibitions of the law.

Saying that the State Bank disqualifies the reduction of the principal means saying that the State Bank disqualifies aspect (a) and aspect (c) of the court’s recognition – that is, the State Bank says that:

• One of the parties – which is the credit institution – does not have the right to reach the principal reduction agreement; and
• The object of the principal reduction agreement – which means the parties’ will – is unlawful.

Firstly, we do not have a concrete base from the prevailing laws to justify whether the State Bank may disqualify an aspect of the court’s recognition or it may not.

Secondly, we have not yet observed any similar practice from our experience that the State Bank disqualified an aspect of the court’s recognition. Thus, there is still a hypothetical risk in respect of this situation, which the credit institution may consider taking, before moving forward.

Besides, if the credit institution does not agree with the administrative act/ decision, the credit institution – the petitioner[xii]– can file a lawsuit against such administrative act/ decision issued by the State Bank – the defendant [xiii] – according to the Law on Administrative Litigation.[xiv]

5. Notwithstanding the above, theoretically speaking, if the credit institution decides to apply this solution, the credit institution must firstly contemplate transforming the debts into lawsuits which can be legally received by the court. This would be done by either of the following ways with downsides and upsides:

• Way 1: The credit institution initiates the lawsuits against the customers. In this way, the credit institution will incur costs and efforts to prepare for the civil lawsuits. Besides, it is hard to manage the backlashes from the customers when they receive such a surprising information – that is, they are being sued. While, in fact, such move by the credit institution is inherently helping their repayment obligation instead of enforcing it. In addition, it would be unimaginable to control a large group of people (with different thoughts, views and in different contexts and life situations) to follow our direction at all times.
• Way 2: The credit institution arranges for the customers to file the civil lawsuits themselves. In this way, the credit institution is in the totally passive position to control the civil lawsuits because, though they are prepared by the credit institution (we presume), they are filed under the names of the customers. The credit institution loses most of its competence in overseeing the process. Besides, again, it will be hard to manage the communication with the customers to “convince” them to file the civil lawsuits. In addition, the credit institution might have a hard time to manage the costs which must potentially be disbursed to the customers for expenses during the proceedings. Moreover, it would be unimaginable to direct a large group of people (with different thoughts, views and in different contexts and life situations) to jointly or individually file the civil lawsuits.

6. Given the above analysis, despite that reducing the principals of the debts by obtaining the successful reconciliation minutes is possible in theory, it is extremely hard to execute it in practice. Rigorous contemplation with robust plans of attack should be made clear before the approach is put to action. From risk based approach, we do not recommend this solution. Because the downside trumps the upside as analyzed above.

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[i] Article 4.2 Circular 39 stipulates that: “2. Customers taking loans from credit institutions must ensure that they use the loan for the right purposes, repay the loan principal and interest on time as agreed with the credit institution.”

[ii] Article 16.3 Circular 11 provides that: “3. … After resolving the risks, credit institutions and foreign bank branches must monitor and take debt recovery measures to recover the risk-resolved debts adequately and thoroughly, except for the case that the risk-resolved debts are sold by a credit institution or foreign bank branch to an organization or individual, and that debt sale proceeds are fully collected according to the debt sale contracts.”

[iii] Article 21 of Circular 39 stipulates that: “4. Credit institutions have the right to decide to exempt or reduce loan interest and fees for customers according to the credit institutions’ internal regulations.”

[iv] Article 18 of Circular 39 stipulates that: “3. If the customer is unable to repay part or all of the loan principal and/or interest on time, the credit institution shall consider approving the rescheduling of the repayment term as prescribed in Article 19, or booking the unpaid amounts as overdue debts as prescribed in Article 20 of this Circular. Credit institutions and customers may negotiate the calculation of payable interest in accordance with the provisions of Clause 4, Article 13 of this Circular.”

[v] Article 3.1 of the LOCI provides that: “1. The establishment, organization, operation, special control, reorganization and dissolution of credit institutions; and the establishment, organization and operation of foreign bank branches and representative offices of foreign credit institutions and other foreign institutions engaged in banking operations must comply with this Law and other relevant laws.”

[vi] Article 16.3 of Circular 11/2021/TT-NHNN provides that: “… After resolving the risks, credit institutions and foreign bank branches must monitor and take measures to adequately and thoroughly recover the risk-resolved debts, …”

[vii]  Article 17.1 of Circular 11/2021/TT-NHNN provides that: “1. After a period of at least five years from the date of using provisions to resolve the risks and after having taken all measures to recover the debts but failing to recover such debts, the credit institution, foreign bank branches may decide to remove the risk-resolved debts out of the off-balance sheet. debts that are removed out of the off-balance sheet must be monitored in the management system of credit institutions and foreign bank branches in accordance with regulations …”

[viii] Articles 213 of the Civil Proceedings Code provides that: “1. A decision on recognition of the involved parties’ agreement takes legal effect immediately after it is issued and will not be appealed or protested against according to appellate procedures. 2. The decision to recognize the agreement of the involved parties may be protested against according to cassation procedures only if there are grounds to believe that such agreement is caused by mistake, deception, threat, coercion or violates the prohibition of the law, contrary to social ethics.”

[ix] Article 331 of the Civil Proceedings Code provides that: “1. The Chief Justice of the Supreme People’s Court and the Chief Procurator of the Supreme People’s Procuracy have the power to protest according to cassation procedures against legally effective judgments or decisions of the superior people’s courts; legally effective judgments or decisions of other courts when deemed necessary, except for cassation decisions of the Judicial Council of the Supreme People’s Court. 2. The Chief Justice of the Superior People’s Court and the Chief Procurator of the High People’s Procuracy have the right to protest according to cassation procedures against legally effective judgments or decisions of the provincial-level People’s Courts or Courts. district-level people’s courts within their territorial jurisdiction.”

[x]  Article 327.2 of the Civil Proceedings Code provides that: “2. If the Court, the Procuracy or other agencies, organizations and individuals discover that there is a violation of the law in the legally effective court judgment or decision, it must notify in writing to the persons competent to protest as specified in Article 331 of this Code.”

[xi] Article 3.1 of the LOAL provides that: “Administrative decision is a document that decides on specific administrative matters and that applies once to one or several particular objects, as issued by a State administrative authority, by an agency or an organization assigned to perform the State administrative management, or by a competent person of such agency or an organization.”; Article 3.3 of the LOAL provides that: “Administrative act means an act of performing, not performing a mission or public duty, of a State administrative authority, of a competent person in a State administrative authority, or of an agency or an organization assigned to perform the State administrative management as prescribed by law.”

[xii] Article 3.8 of the LOAL provides that: “Petitioner means an agency, organization or individual that initiates an administrative lawsuit against an administrative decision, an administrative act, a decision on disciplinary measure or dismissal, a decision on settlement of a complaint about a decision on a competition case, a decision on settlement of a complaint above State audit; …”

[xiii] Article 3.9 of the LOAL provides that: “Defendant means an agency, organization or individual whose administrative decision, administrative act, …, is sued.”

[xiv] Article 5 of the LOAL provides that: “Agencies, organizations and individuals have the right to initiate administrative lawsuits to request the court to protect their legitimate rights and interests in accordance with this Law.”

The article contains general information which is of reference value, in case you want to receive legal opinions on issues you need clarification on, please get in touch with our Lawyer at info@cdlaf.vn 

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