How does consumer credit work in Vietnam? What rules apply? We navigate this linchpin of Vietnam's modern economy.
1) What is the consumer credit business?
At its basic level it's when a credit institution--commercial bank or a form of consumer finance company--lends Vietnamese dong to an individual, so she can purchase consumer goods and services. The loan can be in cash or in the form of a credit line.
We will discuss only consumer finance companies--microfinance organizations ("MFO"), and non-bank credit institutions ("NBCI"). Both require a license.
The regular extension of loans or credit is considered "banking activity" under the Law on Credit Institutions ("LCI").1 An NBCI and an MFO are both non-bank lenders and both must be licensed under the LCI.
To become an MFO is particularly difficult for a foreign investor–even though the capital required is quite modest. However, it is an option, and we discuss the requirements – however, the focus of our discussion will be NBCIs and some alternative structures.
In this article we will discuss some alternatives to MFOs and NBCIs and their strict licensing requirements. Some consumer lending, for example, revolves around the use of pawn shops. This structure is not under the same rigorous protections imposed by the LCI. Pawnshops are licensed to issue short term loans, as long as collateral is received from borrowers. Under the pawnshop structure, the property which purchased with the borrowed funds may serve as collateral for the loan. Some investors stretch the boundaries of what was originally intended as a form of modest amounts of credit. As such, we do not discuss this alternative in detail other than to mention it.
2) How to obtain a Microfinance Organization license?
An MFO provides financial services, especially in the form of microloans, and this form of credit is primarily intended to serve impoverished individuals and groups, often in poor and developing regions.
General requirements in respect of an MFO2:
- Can be established as a limited liability company ("LLC")3;
- Charter capital of VND5 billion (approximately US$220,000)4 or above;
- Managers, directors, and members of its Supervisory Board must meet certain qualifications5;
- Charter follows requirements of the Law on Credit Institutions; and
- There is an appropriate establishment plan and business plan which cover the first three years of operation.
Specific conditions to establish and MFO:
- If the MFO is established as a multi-member LLC:
- At least one founding member must be a political organization or socio-political organization (this applies whether or not there is foreign ownership);
- At least one founding member must have managed a microfinance program/project safely for at least 3 consecutive years before the application is submitted.
- If there is a foreign member it must:
- be a foreign bank;
- not have committed serious banking violations in its host country during the 5 years before submission of the application and up to the date the license is issued;
- not be a founding shareholder, founding member, controlling owner, or strategic shareholder of any other credit institution in Vietnam;
- have sufficient resources to invest in the incorporation of the MFO and commit not to use trust funds, raised funds, or loans from other entities; and commits to provide financial assistance if the MFO has liquidity problems.
NON-BANK CREDIT INSTITUTIONS
3) How to obtain an NBCI license?
We outline permitted forms, including foreign ownership limits, and primary requirements in order to establish an NBCI.
General requirements to establish an NBCI6:
- No restrictions on foreign ownership – foreign investors can own 100% of a single member LLC7, or be a member in a multiple member LLC.
- Total ownership of a single investor (including related persons) in a multiple member LLC is capped at 50%. This restriction applies both to Vietnamese and foreign investors.
- Charter capital of at least VND500 billion (approximately US$ 22 million) is required.
- Managers, directors, and members of the Supervisory Board must meet certain qualifications (such as education, experience) under the LCI.
- The NBCI must have an appropriate establishment plan and a feasible business plan.
- A foreign investor's activities in its home country must be consistent with the registered activities and the proposed activities of the NCBI.
Specific conditions for both foreign investors and Vietnamese investors:
- Total charter capital (equivalent to owners' equity) of the LLC must be at least VND500 billion (approximately US$ 22 million)8. Contributions must be made within 90 days of issuance of the ERC;
- Must be in good standing, have sufficient finances to contribute capital to the NBCI, and satisfy the SBVN's financial safety requirements;
- Commit to provide support in terms of finance, technology, governance, administration and operation of the financial company, and must guarantee the company preserves the actual value of its charter capital not lower than the legal capital of at least VND500 billion and observe LCI regulations on safety assurance;
- Have at least US$10 billion in total assets at the end of the year preceding the year in which the application for the license is submitted;
- Not have committed serious violation of banking or other regulations in its home country for five consecutive years preceding the year in which the application for the license is submitted;
- Have experience of international transactions, be rated "stable" or better by international credit rating organizations, be able to fulfill financial commitments and normal activities even under unfavorable economic conditions;
- Be evaluated by competent agencies of its home country as able to ensure capital adequacy ratio and other safety ratios, comply fully with regulations of the home country on risk management and establishment of provisions for risks the year preceding the year in which the license application is submitted, and through submission of the application for the license;
- Not be a strategic shareholder, owner or founding member of any other credit institution established and operating in Vietnam;
- If the owner or a founding member is a leasing company, the balance for finance leases and provision of loans must account for at least 70% of the company's total assets; and
- During the five years following the date on which the license is granted, the owner or the founding members must retain 100 % ownership of the charter capital of the company.
Specific requirements for a foreign investor:
- Must be licensed to carry out banking activities in its home country; and
- Must be profitable for at least the three years preceding the investment.
There is an additional requirement. The appropriate authority in the foreign investor's country must sign an agreement with the SBVN on consolidated oversight, specifically of the foreign credit institution's operations applying international practices. This includes a written commitment on the exchange of information on banking safety oversight.
4) Is there a maximum government interest rate or fee to charge customers – NBCIs and MFOs
No maximum interest rate applies to an NBCI's or MFO's consumer loans9. The Civil Code generally provides for a 20% interest rate cap for loans, but this maximum interest rate does not apply to loans made by credit institutions (ie, NBCIs and MFOs). NBCIs and their customers may agree contractually on interest rates and fees. NBCIs must post an interest rate schedule for consumer loans -- including the highest and lowest interest rates for each product.
There are several active lenders in the market with fees from 100 to 200% APR. Interest is often inaccurately shown as service fees. High rates and fees can certainly attract negative attention from the public and the authorities, even when such interest rates are consistent with Vietnamese law.
5) Loan limits
The total unpaid balance of any consumer loan provided by an NBCI to a borrower is limited to VND100 million (approximately US$4,400). The one exception is where the consumer loan is used to purchase a car and the car is collateral for the loan. An MFO may provide loans to a "microfinance client" in an amount not to exceed VND50 million (approximately US$2,200), and up to VND100 million to "other clients"10.
6) Are there any specific income affordability checks which need to be done by an MFO or NBCI in order to grant a loan to a private person? For example, is it allowed to give a loan to a person who does not have income?
There are no such income affordability checks.
But, Vietnamese law does require an NBCI to develop its own internal rules regarding its activities. These internal rules include rules on the extension of credit, management of loans, risk management, etc. Generally speaking, the NBCI should conduct appropriate income affordability checks prior to granting a loan to a private person.
Different rules apply to MFOs. Microfinance clients are required to deposit a minimum "compulsory savings" amount, as prescribed by the MFO. The MFO must provide regulations and publish its compulsory savings amount and interest rate.
POSSIBLE ALTERNATIVE STRUCTURES To MFOs and NBCIs
Partnering with a bank or existing NBCI:
If the investor is not a bank, the conditions to establish an NBCI are often difficult to satisfy. Some investors have found it more convenient to partner with a licensed entity which has already been approved to issue credit in Vietnam. Foreign Fintechs, for instance, might instead seek to establish partnerships with local banks and NBCIs in order to bypass the NBCI licensing process. In such a case, the foreign investor, for example, would first set up a foreign-owned entity in Vietnam licensed to conduct general business activities, such as "management consultancy services", or "information technology services and other services related to computers". The foreign-owned entity will cooperate with local partners (ie, a bank or NBCI). The foreign-owned entity will operate the tech side of the business (ie, running the platform, etc) while the financial side of the business will be undertaken by the local partners. There are specific operating permits for the foreign-owned entity in this model, such as obtaining an e-commerce license before operating its platform. The e-commerce license will permit it to operate a platform where borrowers are connected to appropriate lenders. The licensing requirements of the foreign entity are much less restrictive.
Investing in an existing licensed entity:
Another alternative is to invest in or to acquire an existing licensed entity. Foreign investors can invest in an existing NBCI. Foreign ownership restrictions and requirements are discussed above in our response to Question 1. We remind that 100% ownership of the charter capital of an NCBI must be retained by the founding members during the five years following the date on which the license was granted.
A foreign investor's investment into, or acquisition of an existing NCBI must be approved by the SBVN, and the approval process depends on the target NBCI's corporate form. However, there is no clear process for SBVN approval, and the SBVN will largely consider applications case-by-case. In practice the SBVN approval process can be expected to be similar to the licensing of a new NBCI.
The law does not require any lock-up period for a new foreign investor to invest in or acquire a stake in an existing NBCI organized as an LLC. That is, after the initial five-year lock-up period imposed on founding members has elapsed, a new foreign investor may acquire a stake and is not subject to any such lock-up period. In addition to the SBVN's approval, a foreign investor may need to obtain a separate approval for the investment/acquisition from the local Department of Planning and Investment, after the SBVN approval is issued. An approval by the DPI is much less formidable.
1. Law No. 47/2010/QH12 on Credit Institutions ("Law on Credit Institutions"), see article 4.12.
2. Circular 03/2018/TT-NHNN of the SBV on Licensing, Organization and Operation of Microfinance Organizations, amended in part by Circular 13/2019/TT-NHNN of the SBV, Articles 7 and 8.
3. Law on Credit Institutions, Article 87.1
4. Decree No. 86, Article 2.7.
5. Circular 03/2018/TT-NHNN
6. Circular No. 30/2015/TT-NHNN of the State Bank of Vietnam ("SBVN") on Regulations on Issuance of Licenses, Organization and Operation of Non-Bank Credit Institutions, as amended, supplemented by Circular No. 15/2016/TT-NHNN and Circular No. 17/2018/TT-NHNN.
7. Schedules of Vietnam's Commitments on Services to the World Trade Organization upon accession (which are implemented as part of the Vietnamese legal framework for foreign investment), and Circular No. 30/2015/TT-NHNN.
8. Decree No. 86/2019/ND-CP of the Government on Legal Capital of Credit Institutions ("Decree 86"), see Article 2.5.
9. Vietnamese law only provides a maximum interest rate concerning loans which support the agricultural and rural development sector, implement export business plans, financing business activities of small and medium-sized enterprises, developing ancillary industries, and financing business operations of high technology application enterprises.
10. See Circular No. 03/2018/TT-NHNN. A "microfinance client" means an individual living in a poor household, near poor household, an individual representing a poor household, near poor household, or microenterprise as per the law". An "other client" means an individual living in a household or representing a household that used to be a microfinance client but rose out of poverty or near poverty.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.