Non-bank lending violates law

by Tran Si Vy & Cam Van Nguyen Leadco Legal Counsel

Borrowing and lending among individuals is a straightforward practice recognised by the Civil Code. Among enterprises, however, it becomes more complicated since these are regulated "banking activities".

In spite of this, numerous enterprises which are not credit institutions have extended loans to other enterprises for the purposes of financing development and business expansion.

In the past, lending and borrowing between enterprises was recognised and governed under the Ordinance on Economic Contracts. A contract relationship arose when enterprises lent or borrowed from each other. The loan agreement created became an economic contract which was legally enforceable under the law.

However, since the enactment of the Civil Code on June 27, 2005, the Ordinance on Economic Contracts has been repealed, placing the right of enterprises to lend on more uncertain ground. Then, in 2010, the new Law on Credit Institutions prohibited non-credit enterprises outright from engaging in banking activities.

The Law on Credit Institutions prohibits organisations and individuals from borrowing and lending capital, reserving these "banking activities" to credit institutions. However, some provisions in the Law on Enterprises and supporting regulations remain unclear as to whether other enterprises may continue to engage in these so-called banking activities.

Clause 2 of Article 8 of the Law on Credit Institutions provides that "any organisation or individual other than a credit institution shall be strictly prohibited from conducting any banking activity, except for escrow deposit transactions and transactions for the purchase and resale of securities by securities companies."

Extension of loans is defined as a banking activity under this provision.

In order to perform a banking activity, the credit institution must meet specific conditions on legal capital, qualifications of founding shareholders and board of management, and business plan. Additionally, the credit institution must be licensed by the State Bank of Viet Nam.

When a non-credit enterprise uses surplus capital to extend loans to other enterprises, it therefore violates the Law on Credit Institutions. However, since some provisions of the law are unclear and the practice is beneficial to enterprises, some have asserted that the practice is lawful.

These people rely on Clause 12, Article 4, of the Law on Credit Institutions, which provides that "banking activities mean the regular business activity of one or more of the following services: receipts of deposit, extension of credit, and provision of payment services via accounts." The qualifying criterion in this provision is "regularity" in banking activities. They argued that if a non-credit enterprise does not extend loans to another enterprise repeatedly or frequently, then the transaction is not considered a banking activity and not subject to the law.

This interpretation, however, chooses to ignore Clause 2 of Article 8. Supporters of this view also rely on ambiguous provisions of the Law on Enterprises to assert a right to these activities.

Article 9.1 of that law states that enterprises have an obligation "to conduct business strictly in accordance with the lines of business recorded in the business registration certificate." A non-credit enterprise does not have a business line in extending loans. However, extension of loans is considered an investment and not a line of business regularly performed by an enterprise. Therefore, some believe that Article 9.1 does not prohibit non-credit enterprises from lending their surplus capital since they are not engaging in banking activities as a line of business.

Article 47.2 (d) of the Law on Enterprises describes activities of the member's council of a limited liability company with more than one member and allows the council to "make decisions on solutions for market development, marketing and technology transfer and approve agreements to provide and obtain loans." Article 64 (d) provides the same right for a single-member limited liability companies with one member, while Article 108 (g) has a similar provision for joint stock companies.

These types of ambiguities are not limited to the Law on Enterprises. Regulation on financial management of State-owned enterprises, issued under Government Decree No 09/2009/ND-CP, provides that a State-owned enterprise is allowed to provide loans to another enterprise and vice versa. Article 22.2 (b) of that decree also provides that "revenue from financial activities of enterprises includes: receipts for royalties, receipts for leasing enterprises' properties, and interest for providing loans." These provisions make a strong argument for supporters of non-credit enterprises seeking to assert a right to lend.

So, while the Law on Credit Institutions is a strict regulation on the extension of loans by a non-credit enterprise, there is no uniformity in the law on this issue.

If a dispute arises between parties to a lending contract, then the court may find the transaction invalid because of legal provisions that limit non-credit enterprises from engaging in banking activities. In this event, neither party will be protected under the law.

The Law on Credit Institutions protects both parties by restricting the banking activities of non-credit enterprises.

Banking activities should be performed by credit institutions with professional competence. In order to augment this protection, relevant legislation must be passed to clarify inconsistencies in the law.