Practice of real estate mortgage in vietnam joint stock commercial bank for industry and trade vietinbank

Although there is a legal framework for security transactions, it can not be denied that there are still many existing difficulties limit the banks' ability to protect themselves from ri

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DECLARATIONS

I declare the following:

(1) that the material contained in this master’s thesis is the end result of my own work and that due acknowledgement has been given in the bliography and references

to ALL sources be they printed, electronic or personal

(2) that unless this master’s thesis has been confirmed as confidential, I agree to

an entire electronic copy or sections of the master’s thesis to being placed on the Learning Portal, if deemed appropriate, to allow future students the opportunity to see examples of past master’s thesis I understand that if displayed on the e-Learning Portal it would be made available for no longer than five years and those students would be able to print off copies or download The authorship would remain anonymous

e-(3) I agree to my master’s thesis being submitted to a plagiarism detection service, where it will be stored in a database and compared against work submitted from this or any other School or from other institutions using the service In the event of the service detecting a high degree of similarity between content within the service this will be reported back to my supervisor and second marker, who may decide to undertake further investigation that may ultimately lead to disciplinary actions, should instances of plagiarism be detected

(4) I have read the Thesis Guidelines of Master Program on Finance, Bank,

Insurance (Viet Nam and the South East Asia) for Cohort 6, period 2014–2015 and I

declare that ethical issues have been considered, evaluated and appropriately addressed in this research

SIGNED*: _

DATE:

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ACKNOWLEDGEMENT

I am using this opportuniy to express my gratitude to everyone who supported me doing this master’s thesis I am thankful for their aspiring guidance, invaluably constructive criticism and friendly advice during the project work I am sincerely grateful

to them for sharing their truthful and illuminating views on a number of issues related to the thesis

First and foremost, I have to thank my advisor, Assoc Prof Nguyen Vu Hoang Without his assistance and dedicate involvement in everstep throughout the process, this thesis would have never been accomplish I would like to thank you very much for your support and understanding over these past six months

Secondly, I would like to thank all the lectures, tutors and staffs of International School – Vietnam National University Hanoi and University de Nantes who are always enthusiastic for helping me to gain knowledge and experience during the studying

Thirdly, I would like to show gratitude to the leaders and partners of Vietinbank for their help and supports during my studying The impact of their work on my own study

is obvious throughout this thesis

Most importantly, none of this could have happened without my family This thesis stands as a testament to your unconditional love and encouragement

Thank you!

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ABSTRACT

Currently, the economic context is stabilizing, the state's policy also has support for enterprises to solve problems, promote the development of enterprises Consequently, demand for credit is also certain developments However, the problem of bad debts at banks has not yet definitively settle, causing banks want to grow fast, but even though, they have to ensure the safety of the banking system Therefore, making security asset of borrowers become neccessary, and real estate mortgage is the most preferred

Consequently, the thesis “Practice of Real Estate Mortgage in Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank)” has been chosen to help Vietinbank overcome the obstacles and prevent itself from risks

The thesis was to clarify the role of lending with mortgages by assets in general and real estate in particular, expressed the importance of the real estate mortgage in banks’ lending actities By making comparison and poiting out the differences from the other countries’ legal framework, the thesis defined progressive outlook that should be applied in legal framework of Vietnam

Along with current situation of lending activities with real estate mortgage, the thesis shown the achievements, limitations and causes of Vietinbank’s internal regulations, thus, lead to problems need to be focused on the research

Finally, after analyzing the collected data, based on the result and Vietinbank’s orientated development, the thesis point out the solutions for changes in legal framework

of Vietnam and completion of Vietinbank’s internal regulations

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TABLE OF CONTENT

RE

VIETINBANK Vietnam Joint Stock CB for Industry and Trade

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LIST OF CHARTS

Chart 1: The Organization System of VIETINBANK 28

Chart 2: Structure and Executive Apparatus of Headquarters 29

Chart 3: Structure of The Executive Apparatus of The Exchange, Branch 30

Chart 4: Results of Operations from 2010 to The End of 2014 30

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INTRODUCTION

Security for loans is the measures applied by commercial banks in order toprevent risks, creat the legal and economuc basis for recovering loans In the current context of Vietnam’s economic integration and development, security measures are becomingly popular and play an important role within the secured transaction participants Among those measures and kinds of asset, real estate mortgage is the most preferred

Real estate is a valued property and always has been the concern of the State in managing this particular object Besides the features of a normal property, real estate has particular characteristics that other assets do not have, namely: irremovability, limit, high value and long - time use Consequently, this kind of asset is favourably chosen by the banks to prevent the risk from lending

Although there is a legal framework for security transactions, it can not be denied that there are still many existing difficulties limit the banks' ability to protect themselves from risks during the progress of applying security transactions in common and real estate mortgage in particular, such as: unrecovery situation of the economy from the recession; legal framework lacking of practice and ineed of continuous improvement; unawareness of the laws and regulations' applicants…Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) is not an exception

Founded in 1988, Joint stock commercial Bank for Investment and Development

of Vietnam now also known as Vietinbank Over the past century quarter, after the implementation of equitization according to the guidelines of the State, so far, Vietinbank has become one of the leading state-owned banks; played the key role in the economy, implemented the policy effectively the party line, policies and laws of the State in life

Up to 31 December 2014, Vietinbank has total asset of 661,131 billion dongs, equity capital of 55,013 billion dongs; charter capital is 37,234 billion dongs; total liabilities of 444,261 billion dongs; bad dept ratio of 1.00%; staff member of nearly 20,000 people; headquarter located in Hanoi; 01 exchange office; 151 domestic branches, two branches opened in the Federal Republic of Germany and the People's Democratic Republic

of Laos; 03 representative offices (two domestic and one abroad); over 1,000 exchange offices/savings office

With its important role in the banking system of Vietnam, Vietinbank is a specified object which is suitable to be chosen for doing research, finding out and giving solutions

Along with current situation of lending activities with real estate mortgage, the thesis shown the achievements, limitations and causes of Vietinbank’s internal regulations, thus, lead to the solutions for changes in legal framework of Vietnam and completion of Vietinbank’s internal regulations

Purpose of Study:

The study purpose of the thesis is that the provisions of laws and regulations relating to security measures in common and real estate mortgage in particular in Vietinbank; therefore, making conclusions, scientific evaluations about legal aspects of this matter

The thesis initially systematizes theories and practice relating to real estate mortgage in general, those of Vietinbank and Vietinbank’s internal rules in private

The results of making research will, to some extent, contribute to the quality enhancement of security measures in common and real estate mortgage in particular in not only Vietinbank, bu also another commercial banks in banking system of Vietnam

Scope of Research:

The scope of the thesis are identified in cluding hereby major issues:

- What is the differences between Vietnam and the other countries over the legal framework of the security measures in common and the real estates mortgage in particular? Making comparison and pointing out the progressive outlook that should be applied in legal framework of Vietnam

- Why real estate mortgage is the most favourable measure chosen by the banks in Vietnam to protect themselves from risks?

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- Analyse the internal regulations over the security measures of Vietinbank, including real estate mortgage So that, findind out what are the reasons leading to difficulties during the progress of applying security transactions in Vietinbank?

- How Vietinbank can complete the internal regulations over the security measures effectively and adequately?

The thesis get information from different literatures: statistic books; laws and regulations from another countries; statistic books from Vietinbank and other banks; journals; periodicals; newspaper; newsletter; reports and documents from banks; etc

Structure of the thesis:

Besides the introduction, conclusion, appendices and references, the thesis structure include 3 chapters

Chapter 1: Overview of the security measures institution and real estate mortgage

to ensure implementation of credit contract in commercial banks in Vietnam

Chapter 2: Practical implementation of the provisions of the law on real estate mortgage

to ensure implementation credit contract at Vietnam Joinstock Commercial Bank for Industry and Trade

Chapter 3: Some recommendations to improve efficiency of mortgage property to ensure credit contract in Vietnam Joinstock Commercial Bank for Industry and Trade

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Chapter 1 OVERVIEW OF REAL ESTATE MORTGAGE TO ENSURE

IMPLEMENTATION OF CREDIT CONTRACT IN COMMERCIAL BANKS IN

VIETNAM

1.1 The Overview of Real Estate Mortgage

1.1.1 Real Estate:

- According to international legal systems:

RE is a valued property and always has been the concern of the State in managing this particular object Most countries consider RE as land and related assets, inseparable from the land, determined by the geographical location of the land However, each country has different notions about property "associated" with the land is considered as RE Japanese Civil Code (2004), Civil Code of North Vietnam and the former Saigon regulates

"crops have not been harvested, fruit trees have not been pluck are RE, soared from plants are considered as personal property" Thailand Civil and Commerce Code (2005) stipulates: "RC is land and things attached to the land, including the property rights associated with the land" Russian Civil Code (1994) has its own approach, on the one hand listed in the traditional way; on the other hand, given the general term for the property: "Property is RE whose right to such property must be registered under the provisions of this Law, is the parcel of land, the underground, independent work underwater and all things attached to land in the water, but if they can not be moved without causing serious damage to their use, including housing, construction, accommodations, and room not to houses, trees and perennial plants, apartment buildings, now as a unified block assets"

Australian Land Law (2000) including ground and below ground components, including the air space above ground, including water, bottom part of the water and air space above the water, all the public construction and investment projects associated with the ground, above and below ground, or affect adjacent to use that land

Under English Land Registration in 2002, the ownership of land is not absolute, people just get ownership of RE on land; In theory, only the right to lease the land from the

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Queen, but the fact of the form long-term lease (999 years) enjoy the same benefits as the owner

- According to legal system of Vietnam:

Vietnam currently has no uniform legal system for the management of the property market The management and use of land is regulated by the Law on Land (1993, 1998,

2001, 2003, 2013); Housing management is regulated by the Law on Housing (1992, 2005, 2014); land relations, housing in civil transactions is regulated by Civil Code

Article 53 of the Constitution (2013) stipulates: "Land, water resources, natural resources and minerals, resources in the waters, airspace and other natural resources and the assets invested and managed by the State, is the public property owned by entire population and represented by the State to own and unified manage."

Land Law (2003) and Land Law (2013) further confirmed the land is under public ownership, represented to own by the State The State retains the highest disposal to land

by implementing specific powers: deciding land use purpose (through planning, plan to use), defines the term used, communication rentals, withdrawal and land valuation The State has the right to benefit from the land through financial policies: use fees and land rent; use tax, income tax on transfer of land use rights; regulate the value added from land without investment by land users bring State grants land use rights for land use through land allocation, land lease, recognition of land use rights for land use who are stable; stipulates the rights and obligations of land users Land Law 2003 further confirmed the State did not recognize claims of land has been allocated to someone else to use in the process of implementing land policies of the State through the revolutionary period

From Article 270 to 284, Civil Code (2005) provisions of other regulations on ownership such as the obligation to respect the boundaries of the property (Article 270); Ownership for the boundary markers of the property (Article 271)

Law on Housing (1991) provides: The right to housing of citizens (Article 1); Housing Fund include: Housing state owned; Houses owned by social organizations, economic organizations; Houses under private ownership (Article 2)

Properties are the material properties can not remove and exist stabilly for a term Therefore, a property is considered RE only if it meets the following factors: (i) to be possessed, managed by individuals or a community and specifically valuated; (ii) long-term survival and can not be relocated or displaced restrictions in certain conditions ensuring

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morphological, functional use Accordingly, the property can be classified into the following groups:

• Land: Property is naturally given, a resource type can not be destroyed, unless due

to natural disasters: erosion and buried This is the first natural factor and ultimately makes a RE Without land, there will not be RE and vice versa

• Buildings and construction attached to land

• Other assets attached to land, such as perennial gardens; aquaculture works, salt fields, untapped agricultural crops

Besides the features of a normal property, RC has particular characteristics that other assets do not have, namely:

• Irremovability The value of the property and interests associated with a specific location Also due to the fixed nature of RE and associated with certain positions, value and benefits are affected by regional factors and conditions: natural, socioeconomic and environmental

• RE is a form of limit size asset due to the Earth's surface area is limited The building is planned by the State locally leads to scarcity of RE In addition, the relationship between supply - demand for RE is always unbalanced in the direction: demand is less than supply, leading to RE speculation As the market rule, value of

RE in the long run tends to increase, especially in the areas with potential development

• In addition, RE is often asset of great value and long -time use at all in terms of physical and economic Land majority exists at the same time; the architectural and construction work after a period of use is improved, repaired, upgraded may exist for decades, even hundreds of years or longer

1.1.2 Real Estate Mortgage:

RE Mortgage is a kind of Security Measures preferable used in banking lending activities because of its factors mentioned above

The regulatory SM has existed since ancient times in human history and to this day,

it has been specified in the law of most countries in the world SM is an effective tool to prevent violations of the obligor, to ensure the rights and legitimate interests of the oblige Therefore, SM plays an important role in civil transactions, especially in business – trade

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relations

With the growth of international trade, regulation of the security measures has been influenced from the English - USA legal system Meanwhile, due to the particular history under the rule of colonial feudalism, the regulation in Vietnam similarities with the French legal system

Under the guidance of United Nations on International Trade Law (UNCITRAL)

Guide on Secured Transactions (2007), “SM is the transaction to deal secured benefits

Although the absolute assignment of the receivables does not secure to fulfill the obligations, to facilitate the reference, SM includes the transfer of receivables" In which,

the secured benefit is an asset benefit associated with a certain property to ensure the implementation of certain obligations

Under Article 9 Uniform Commercial Code (2010), "SM is all transactions in any

way, establishing the benefits secured on real property and things attached to RE" It can

be seen "secured benefits" are similar to "SM" Therefore, in general, law in the world are

similar about SM, despite the differences in terminology used

Worldwide, the legal system regulates the RE mortgage differently As stipulated in Article 214 France Civil Code 1895 (amended many times), mortgage is a property right to the RE and the object of the mortgage is RE only, not including personal property as in Vietnam According to France Civil Code 2118, only following new assets can give mortgage: "(i) property used in commercial activities and the minor character of the property is considered as property; (ii) the right to enjoy the yields and profits for the aforementioned RE and RE sub- items in time have the right to enjoy the yields and profits" This law defined 3 types of mortgages: by law; Justice and under the agreement

Thailand Civil and Commercial Code (2005) regulated on RE mortgage from Article 702 to Article 746 are relatively similar to the provisions in Vietnam in terms of objects, form and scope of the mortgage obligations and mortgage term However, the collateral does not cover the yields and incomes of assets

Currently, the concept of RE mortgage to secure the credit transactions at Commercial Banks in Vietnam has not been defined in any legal text However, based on the provisions of the law on the SM performing civil obligations, the features of the SM performing credit transactions at CB and the particular RE characteristics, as discussed above, we can see: due to the needs of capital for production and business of organizations

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and individuals, they have pledged or mortgaged assets at CB for loans The pledged property and mortgage are diverse and rich, but SM is most applied in RE mortgage So, in terms of economy, RE mortgages for loans from CB have an important role to promote production activities, trading in developed societies

Thereby, helping banks with business operations efficiently, credit quality is guaranteed, minimizing the risks in lending activity Mortgage RE to ensure the implementation credit transactions at CB is what banks and borrowers agree to use the property owned by the borrower or a third party to ensure the implementation of the debt repayment obligations of borrowers in banks, according to the agreement in credit transactions Where the borrower does not perform full and timely repayment obligations, the banks have the right to apply measures to handle the property to recover the debt as agreed at higher admin and the provisions of law

However, in accordance with the law, not all RE can be used as financial assets As financial assets at CB, RE must meet the conditions at the time of signing credit contract:

- Under the ownership of the mortgagor

- RE is not disputed, complainted or grieft

- The property is allowed, is not prohibited or limited transactions

- Property has economic value and liquidity

The mortgaged RE may exist or form in the future according to Article 1 Decree

No.11/2012/ND-CP (2012) including: “the property formed from loans, the property is in the formative stages or being legally established at the time of signing credit contract, RE has imaged and subject to the registration of ownership, but after the time of signing contract, that RE can be registered for ownership in the name of the mortgagor (excluding land use right) as prescribed by law”

If in pledge, the pledgor must hand over the property to the pledgee, in mortgage, the mortgagor only uses the property to ensure, not transfer to the mortgagee Accordingly, the RE maintained by the mortgagor or assigned to third parties if the parties agree The mortgagor shall be obliged to transfer all the original documents proving ownership of the property to the mortgagee to hold in the mortgage term Not transferring the RE does not affect the rights of the mortgagee, as when the violation occurred and the property must be transferred to the mortgagee or launch courts in accordance with the law

The mortgagor directly manages can continue to use and exploit the use of the

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property; gets the beneficiary, income from RE as agreed on credit contract However, the mortgagor can not transfer, donate, converse… the RE, because: all original documents proving ownership of the property is maintained by the mortgagee; on the other hand, normally RE mortgage has been registered so without informed consent unwinding of the mortgagee or the competent authority for the mortgagor has not made the shift trading venture relating to the property

Law on Credit Institutions (2010) did not make specific provisions on the order and procedures for establishing, registering credit contract, termination and disposal of RE But

in order to create conditions for the CI initiative, flexibility in business operations, the law

stipulates an open way: "Pursuant to the provisions of this Law and other relevant regulations, CI must build and issue internal regulations for the operations of credit institutions, ensure mechanisms of control, internal audit, risk management associated with each business process business, plans for dealing with the emergency" Accordingly, one of the mandatory internal regulations forces CI to issued "Provisions on risk management in the operation of CI” and credit institutions must submit to the SBV

regulations right after promulgation (Article 93)

1.2 Characteristics of Real Estate Mortgage:

In my opinion, this is a progressive regulation, represents the specialization parts of

SM, which Vietnam laws did not The third party in SM in general and in RE mortgage

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contract in particular under Vietnam laws only has a sole function: custody of assets Monitoring, notification and processing assets remain under the responsibility of the secured party; hence, rights and interests sometimes are not guaranteed by the secured party who has no management experience or not specialized in this field The law should contain provisions fully and specifically on the legal status of the security transactions managers This entity will support the market effectively and efficiently protect the interests of the disadvantaged creditors The secured transaction manager will be indicated

by the secured party to represent the secured asset management party, to control related transactions, the use of funds of the obligor, on behalf of the secured breaching notification and handling of security assets to the guarantor, on behalf of the secured asset disposal This is a necessary regulation for a business environment towards greater economic efficiency

to pay the repair" Article 318 Civil Code in 2005 stipulates: "Where the parties have agreed upon or legal provisions on SM, the obligator has to implement that securities measure”

About forms of SM, UNCITRAL Legislative Guide on Secured (2007) rules that contract can be by verbal if the secured party takes the possession of property In other cases, the contract must be made in writing Vietnam law provisions most SM must be in writing, except for margin and collateral

Donald and Calvin (1997) state that SM is not only the relationship between the secured party and the guarantor, but also related to third party; therefore, there are cases

SM must comply with certain procedures to get legal value Uniform Commercial Code (2010) introduced the concept of "perfection" (completing SM) to indicate the necessary legal procedures in order to establish with third party the privileges of secured party to the property This term or equivalent wordings are widely used in many countries and in

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international conventions relating to SM "Perfection" includes: SM registration, assets

possession/control and perfect SM default (Le Thi Thu Thuy and Do Minh Tuan, 2015)

Vietnam laws do not use the term "perfection" but also specifies the legal

procedures applicable to each SM, property type For example: Article 3 Decree

83/2010/ND-CP dated 23/07/2010 stipulates SM must register: “mortgage of land use rights, planted production forests; aircraft, ships and other transactions in accordance with law" In cases of registering under the provisions of laws, RE mortgage is effective for

third parties from the time of registration Thus, we can see the similarities between Vietnamese laws with international rules and laws of the countries on the issue of how to

SM effects against third parties, especially towards RE mortgage

Similarly, Article 325 Civil Code (2005) also apply the order of time to determine the order of priority of payment for many unsecured creditors on the same property in case all register or none of them registers Thus, priority is determined according to the registration order or the order of establishment transactions

In my point of view, this principle ensures maximum benefit of the guarantor as transparent legal status of the property and should be maintained and developed However,

in the banking and financial relations in Vietnam, the benefits of bank financing to buy assets have not been protected According to Bryan (2001), bank financing benefit defined

on assets acquired (purchase-money security interest), for example: Bank lends the

customers to buy real estate, the real estate are implicitly prioritized for debt repayment obligations of bank

In Vietnam, the order of payment priority has been established on the principle

"first time in rule", irrespective of the lending bank Benefits of the Bank in this case are

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not guaranteed if the mortgagor commits to use property as security for another obligation and establish RE mortgage before considering Bank

1.3 Procedures to Form Real Estate Mortgage:

By studying the provisions related to this field, it can be seen that the RE mortgage

to ensure the implementation credit contract should be conducted according to the following order: the RE appraisal and valuation; negotiating and concluding credit contract; notarization, authentication and registration of mortgages; termination and disposal of RE

1.3.1 Appraisal and Valuation:

Tra and Bong (2004) said that RE is an asset of great value Countries with developed market economies have focused on building RE valuation system for operation and control of RE transactions Many countries offer bulk pricing mechanism and periodically to adjust the market price for one or more of land in a geographic area For example, in Taiwan, once per 3 years, the central government conducts the batch property valuation (about 300,000 points) in the whole territory Similarly in Australia, Singapore, Malaysia, Thailand, batch valuation is performed periodically once each 4-5 years This is quite contrary to the provisions of Vietnam Although the government launched the annual land price bracket but the transactions relating to the property, including the mortgage depends on the price agreement between the parties

For CB in Vietnam, to appraise the property mortgagee, the following steps will be followed: (i) collect information related to the RE; (ii) Legally appraise the property through ownership and using certification or other legal documents in accordance with the law to determine by whom the RE is owned and used? Is it permittable to mortgage? to determine whether the assets are eligible for mortgages under the provisions of Civil Code (2005) and Decree No 163/2006/ND-CP (2006); (iii) RE Reality Appraisal through direct examination of the property to determine whether the status, location of assets are consistent with documents, or through meeting, working with the competent authority or owner, user of adjacent RE assets to determine if any dispute or located in planned areas?

or risk factors, adverse if the RE is received as security assets The evaluation may be organized by CB themselves to perform or sign contract to have professional agencies to perfom RE appraisal

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To have grounds to consider and decide the level of lending, banks must conduct the necessary measures to determine the value of the property at the time signing the contract Property valuation is understood that the valuation of the property in cash as a basis for determining the level of collateral-based lending Property valuation is one of the important processes and procedures which is indispensable in lending by banks to determine the legality of the secured assets and as a basis for making rational lending rates

Depending on the structure and operation of each CB, the valuations may be made

by credit department or independent pricing department of banks or hiring independent valuation organizations as prescribed by law Although CB executes themselves or leases, the RE process to valuate often includes the steps of: (i) Determine the property required for valuation and planning, establish a council or valuation team; (ii) Collect and analyze data and information relating to the property to serve for the valuation ; (iii) Select the method of valuation; (iv) compare the actual value and the estimated value of the property

to offer price; and (v) Complete appraisal reports to make the minutes of the pricing or valuation certificate RE is a special form of assets, having diversity and many differences compared to other asset types, so the valuation of the property requires the particular methods and determined manners There are several methods for valuing property; in which, the methods commonly used are: comparison method; cost method ; method of surplus value (residual value) and investment

1.3.2 Negotiating and Signing Contract:

Based on the results of RE pricing, if the bank determines eligibility for mortgages, the parties base on the basic principles defined from Articles 388 to 400 of Civil Code (2005) and related legal regulation to negotiate the basic content of mortgage contract On principle, RE mortgage contract must be made in writing, either in a separate document or recorded in credit contract The subject of the mortgage property relations to ensure the implementation credit contract including: the mortgagee is a lending bank and the property mortgagee can be the borrowers or third parties - the owners and users of the property Indeed, CB have set up independent RE mortgage contract compared to the credit contract, with complete specific terms by banks and security assets to agree Under the provisions of subsection III Section 5 of Chapter XVII and Chapter XXX of Civil Code (2005) and the relating legal documents, RE mortgage contract has following major contents:

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- Day, month, year and place of establishment of the contract;

- Name and address of the parties (the mortgagee and the mortgagor);

- Description of the relevant information, the value of the property Obligations guaranteed

- Property ownership papers and content agreement on the holding of RE;

- The rights and obligations of the parties to the contract;

- The agreement on how to handle the property when it occurred violations Other agreements involved

1.3.3 Notaries and Authentication:

- Article 343 Civil Code (2005) stipulates: "Where the law stipulates, mortgage documents must be notarized, certified or registered" The current law has the following

provisions on notarization and authentication for higher admin property:

• The provisions at point a and d , Clause 3, Article 167 of the Land Law (2013), the credit contract of Land Use Right, Land Use Right and assets attached to land must

be notarized or authenticated The notarization is done at the Notary Organisation; the authentication is done at communal People’s Committee

• Also, the notarization and authentication credit contract is also made by agreement

of the parties (Article 9 of the Law on Notaries)

- On the Notaries authority: as stipulated in Clause 1, Article 37 and Article 47 of the Law on Notaries, Notariers of notary organisation perform notaries for mortgage contract within provinces and cities under central authority where the property maintains Where there is more than one RE in the provinces and cities directly under the central government, along been mortgaged to secure the performance of an obligation, the notary of that mortgage contract will be performed by Notaries headquartered in provinces under the central location of the property there is a conducted

A property has been mortgaged to secure the performance of an obligation and credit contract has been notarized which is then further collateral to secure a different obligations within the scope permitted by law, the amendmend and stipulation of mortgage contract must be notarized by the first Notarier who notarized the mortgage contract Where the first Notarier of mortgage contract changed to another Notarisation organization, or no longer practice notarization or unable to perform the notarization, the

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Notarier of such Notarisation organisation are hosting that notarized mortgage contract will perform notarization for it These provisions apply both to property in industrial parks, economic zones, hi-tech parks (including land use right)

- On the order and procedures: RE mortgage contract can be previously prepared or prepared by Notariers at the request of the person requesting to notarise In principle, the parties entered into the RE mortgage contract, the witnesses must sign or fingerprint or signature and fingerprint (if the parties agree) on the mortgage contract in front of Notariers Also, due to the signing of the RE mortgage contract of CI regularly with large number of transactions Therefore, to create favorable conditions for credit institutions to sign mortgage contract, Notary Law (2004) allows:

Where the competent contracting of credit institutions, other entities registered in Notarisation organisation specimen signature, it may enter into contracts before; notary must compare their signature with the signature notarized form before notarisation Thus,

we can see only the CI and new businesses may register the model signature at notarization organization and sign prior to the property credit contract, to all individuals, households and other entities (cooperatives, cooperatives, and other organizations are not business entities), they still have to sign or fingerprint on the mortgage contract in front of Notariers

- For higher authorities to authenticate property: under the provisions of the Housing Law and Land Law (2013), the power to endorse mortgage contract for houses under districtal People’s Committee for housing in urban areas, communal PC is authorized for mortgage contract for rural housing and land use right However, under the provisions of the Law on Notaries and Decree No 79/2007/ND-CP (2007) on the issue of copies from master registers , authentication of copies from originals and authentication of signatures notaries are only authenticated by Notariers of Notarisation Organisation for contract, transation relating to RE, districtal or communal PC do not have authorities to authenticate contracts and transactions in general

Article 8 Circular No 03/2008/TT-BTP dated 25/8/2008 of the Ministry of Justice

in guiding the implementation of Decree No.79/2007/ND-CP of the Government dated

18/5/2007 has determined: “notary is what a notarier certificates of authenticity, the legality of the contract or transaction; while district-level Justice Department, CPC authorized authentication of copies from originals papers, certification PPC should

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implement measures to develop local notarization organization in local in cases in the district has no notarization organization, the participants of the chosen credit contract, transaction of different localities or certified by the CPC in accordance with law” In

paragraph 2 and 3 of Article 83 Law on Promulgation of Legal Normative Documents

(2008) provides: “In the case of legal documents have different provisions on the same matter, the documents with legally higher base will be applied In the case of legal documents issued by the same agency having various regulations on the same issue, the applicable provisions of the document was issued later”

From the grounds cited above, we can see the provisions of the law on this issue still includes contradictions, not yet defined, specifically explaned Under the provisions of the Law on Promulgation of legal documents, the notarization and authentication of the land use right and property mortgage contract as land use right and assets attached to the land comply with the provisions of the Land Law 2013 (Law on Notaries issued after 2006); authentication of RE mortgage contract is land use right and assets attached to the land will be performed in compliance with also validating the housing property must comply with the provisions of the Law on Notaries (2006) (issued after the Housing Act 2005) and Decree No 79 above and so, are DPC and CPC authorised to authenticate mortgage contract in which credit assets are land use right and housing or not? On the order and procedures for authentication of these transactions, the current text did not have any legal provisions So after the Notary Law and Decree 79 takes effect, authentication of land use right and housing mortgage contract has not yet been implemented (except local has no notarisation organisation)

1.3.4 Registration:

World law regulated the registration of RE oriented compulsory or voluntary

Property Registration Law of the Russian Federation (1997) provides: "State Register of rights to RE and RE transactions are legal event recognized and certified by the state, the occurrence, limit, transfer or termination of rights to property under the provisions of the Russian Federation Civil Code" Thus, in Russia, the registration is made

compulsory, not specified the cases of voluntary registration Without the registration, the

SM by RE will not be recognized and protected by the State, thereby not establishing the rights of the parties to the transaction

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Property Registration Law of Korea (2009) and Japan (2004) did not specify on the principle of registration However, the registration is done on the principle of voluntary, based on the provisions on the validity of the registration Article 177 Civil Code of Japan

(2006) stipulates: "The owner of the property is not against a third party without the registration of ownership, loss or change of the Law on Registration of RE" Article 6

Property Registration Law of Japan (2004) also defined the validity of the registration of

an indirect way through the provisions of the order of priority of rights to RE: “Unless otherwise stated, the order of registration rights to the same property will be determined

by order of registration of such rights"

Property Registration Act of Korea in 2009 also have similar provisions: "The order of priority of the rights to the same property registered is identified in order to register, unless other provisions of law" [Article 5] Pursuant to this provision, can

determine the registration of RE is not mandatory However, if people have the right to non- performing RE registration, shall not be entitled to antagonism with third parties

Vietnam law forced RE mortgage transactions must register to ensure to validate Article 12 Decree No 163/2006/ND-CP (2006) on SM and Point 1, Article 3 Decree No 83/2010/ND-CP (2010) on SM registration provisions to register SM include: land use right mortgage, mortgage forest use rights and ownership right over planted production forests, mortgage aircraft, ships, aircraft and other cases if the law provides These SM have effect from the time of registration of the mortgage So we can see: except for the above assets, the mortgage and other RE not required for mortgage registration, mortgage registration shall be made only if the parties agree

On the order and procedures for registration of mortgage: people require registration

of mortgage (the mortgage or bank) must send to the SM registries a SM registration dossier includes: application for SM registration, RE mortgage contract and papers relating to the ownership and use of assets and a certified copy of proof of legal status from registration requirements SM Registration Agency will receive records request and resolve: deny or proceed to register SM and give result in accordance with law

1.3.5 Handling:

As stipulated in Article 744 of Thailand Civil and Commercial Code (2005), a mortgage contract may be terminated if: (i) terminate the obligation secured; (ii) have clearly described the mortgager in writing; (iii) an exemption for mortgagers; and (iv) the

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cancellation of mortgage contract Another form of treatment as prescribed by law in Thailand is to enforce mortgage contract For enforcement, the mortgagee must notify in writing to the person indebted to implement their obligations within a reasonable period has been fixed in the notice If debtors do not do exactly as stated, then the mortgagee may sue before the court to order the forfeiture proposed collateral to put up for auction This provision is similar to the provisions of the law of Vietnam

As stipulated in Article 357 Civil Code (2005), when debt repayment obligation has been fulfilled, the property mortgage contract also automatically terminate in accordance with credit contract RE mortgage contract may also terminate if the parties agree or being replaced by another suitable SM or mortgagor (in cases property owners are third parties) to repay debts, the RE borrowers will not be punished Also, when RE is being handled, at the end of the handle, the property is transferred to another person, property mortgage contract will be naturally terminated

- According to legal provisions, the banks are entitled to handle the property to recover the debt in the following specific cases:

• The borrower fails to repay obligations fully and on time

• Borrowers violated the credit contract and the Banks decided to apply measures to recover the loan before the maturity date, but the borrower fails to comply with the obligation to repay the loan before maturity

• The law stipulates that the property must be processed to perform other duties This

is the case of a property used to order security for many loans, and when one of these loans due date and the borrower fails to limit the repayment in full and on time, the property must be processed to recover debts

• Other cases agreed by the parties or required by law

- In principle of handling: The handling of the mortgage must comply with the principles defined in Article 58 Decree No.163/2006/ND-CP (2006), in particular:

• The disposal of assets is performed as agreed upon by the parties (the guarantor, the secured party or the secured parties); if there is no agreement or fails in agreement

is reached, the property will be sold at auction in accordance with the law

• The handling of the mortgage must be objective, open and transparent, ensure the rights and legitimate interests of the parties , individuals or organizations concerned

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and in accordance with the provisions of law

• The disposal of mortgage that secured party or the secured party authorization, unless the parties agree otherwise The asset disposal solver bases on content agreed on credit contract to proceed without a written authorization to handle the assets of the guarantor

• The handling of the mortgage is not taxable under the provisions of law

• In case the mortgage is land use right, housing, organizations and individuals purchase or receive the collateral alternative to implement the obligations of the guarantor must be eligible for license granting land use right, ownership of house and the assets attached to land; otherwise, they are only entitled to the value of land use right , the value of housing

- Regarding the method to handle property: Property in principle is handled according to the agreement on mortgage contract or a written agreement of asset disposal Where the parties can not handle in a manner agreed upon, the bank has the right to actively choose one of the methods for handling as defined in Article 59 Decree No.163/2006/ND-CP and Circular No 16/2014 /TTLT-BTP-BTNMT-NHNN (2014) guiding some collateral issues, specifically:

• Sale of property: bank or the guarantor or the parties agree to sell the property directly to the purchaser or lease or authorize a third party auction or direct sale to buyers

• Get the RE as an alternative to the implementation of security obligations: bank directly receives the RE, RE values obtained are defined as treatment at the nearest time basis to offset against the loan amount, interest arising from credit contract and other reasonable expenses as prescribed by law The securer receive the remaining amount after full payment obligations to the bank If the value of the property is insufficient to pay the value of the obligation, the borrower has the responsibility to repay the outstanding amount to the bank If the bank is not entitled to establish ownership and use rights for the property to be treated as prescribed by law, the parties select different processing methods to make

• Other methods agreed by the parties

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- Recovery of RE to handle: when seizuring the property, the bank must inform the holder of the property on the application of measures to seize in a reasonable time The written notice shall specify the reason, duration of the seizure, rights and obligations of the parties Banks may adopt any measure that does not violate the provisions of law, social morality during the seizure of collateral

In process of conducting the seizure, if the asset holding shows any opposing, obstructing, causing security, public order or commiting other law violations, the bank is entitled to request CPC and police agencies to seize collateral on the place of application of the measures prescribed by law for maintaining security and order, ensuring that the asset disposal exercise of the right to seize the collateral The mortgagor or a third party holding the collateral shall bear the reasonable and necessary expenses for the seizure; if the assets are not submitted

to treatment or having any acts to obstruct the legal seizure of property and causing damage to the bank, pay compensation will be taken

Conclusion of Chapter 1

RE mortgage is a form of asset mortgage, this is one of the common forms of SM which is most preferred by banks to ensure the implementation credit contract This SM gives banks the ability to liquidate the property or property value deduction for debt recovery, minimize the losses that can arise when borrowers Mortgage RE measures that

SM has many advantages compared to other SM, that is: the RE assets are often of great value, most of the case law requires a proof of rights ownership or use of property Therefore, the establishment of the property would guarantee greater certainty for banks when dealing with debt recovery Besides, in addition to strengthen the meaning of contract discipline, limit the negative and possible disputes arising from the borrower or the property owner does not fulfill the obligation This mortgage measure also has important implications for entities engaged in mortgage relations That is: for the mortgagor, the mortgaged property measures help obligor both for production and business capital, the medium can continue to exploit the utilities, enjoy the yields and profits from mortaged assets On the other hand, the mortgagor can still use the mortgaged property to perform other obligations if the property value is greater than the sum of the guaranteed obligations and mortgage party agreed This has created an opportunity for borrowers to be active in the production, trading and effective use of his property value As for the mortgagee: due to not

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direct holding, managing properties, this measure should help the bank not to pay any management fees, property preservation; simultaneously, giving the bank a flexible mechanism to evaluate and accept the property as collateral decisions When the violations occur, the bank has the right to seize the property to handle and is entitled for priority payment However, in order for this SM to maximize benefits, the study of theoretical issues of mortgage assets and mortgage RE generally thoroughly particular will create conditions for the actors concerned legal systems have been perceived correctly and effectively applied in practice, to ensure the SM is concluded, complied with the law, to contribute to economic and nation development

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Chapter 2 PRACTICAL IMPLEMENTATION OF THE PROVISIONS OF THE LAW ON REAL ESTATE MORTGAGE TO ENSURE IMPLEMENTATION CREDIT CONTRACT AT VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE

2.1 Overview of Vietnam Joint Stock Commercial Bank for Industry and Trade

VIETINBANK was established from the Industrial Credit Department and Commercial Credit Department under the State Bank of Vietnam, was officially put into operation on 08/7/1988 Over the past century quarter, after the implementation of equitization according to the guidelines of the State, so far, VIETINBANK has become one

of the leading state-owned banks; played the key role in the economy, implemented the policy effectively the party line, policies and laws of the State in life VIETINBANK has made important and active contributions in the development of economy, society, implementing industrialization and modernization of the country and international integration

With a vast network spreads over all provinces and cities across the country and some countries in the world, VIETINBANK now has Headquarter located in Hanoi, with: 01 Exchange Office; 151 domestic branches, two branches opened in the Federal Republic of Germany and the People's Democratic Republic of Laos; 03 representative offices (two domestic and one abroad); over 1,000 Exchange Offices/ Savings Office VIETINBANK has nearly 20,000 officers and employees

2.1.1 The Organizational Structure:

Chart 1: Organization System of VIETINBANK

(Source: website Vietinbank.vn)

Headquarters

Operation center Level 1 branches Representative offices Non business units Affiliated companies

Transaction offices Saving funds Level 2 branches Transaction offices Saving funds Affiliated branches

Transaction offices Saving funds

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Chart 2 : Structure and Executive Apparatus of Headquarter

(Source: website Vietinbank.vn)

Chart 3: Structure of The Executive Apparatus of The Exchange Office, Branch

(Source: website Vietinbank.vn) 2.1.2 Results of Business Activities:

In recent years, VIETINBANK has constantly expanded business operations, applied advanced technology, modernised banking services to efficiently serve the increasing needs of customers Besides the professional activities such as fund raising, international payments, currency trading services, investment consulting, lending is identified as a credit profession which always being in VIETINBANK’s top concern In the context of Vietnam's economy nowadays, bank credit has an important role in meeting the demand for capital to maintain production and business processes of customers, while contributing to the economic development investment The distribution of financial resources through bank credit channel regulation has contributed to harmonise capital in the whole economy, enabled production processes, business to be continuous, stable and

Opearting Depts Transaction offices Saving funds

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effective Results of operations are as follows:

Table 4: Results of Operations from 2011 to The End of 2014

Criteria Unit 31/12/2014 31/12/2013 31/12/2012 31/12/2011

Total assets Billion dong 661,131 576,368 503,530 460,420

Total funds mobilized Billion dong 428,456 511,670 460,082 420,212

Net operating profit before

credit risk provisions

Billion dong

11,811 11,874 12,526 13,296

Credit risk provision Billion dong (4,080) (4,123) (4,357) (4,904)

Corporate Income tax Billion dong (1,859) (1,943) (1,998) (2,132)

Dividend yield ratio (% on

charter capital at the end of

year)

(Source: Annual Audited Financial Reports from 2011 to 2014 by Delloite)

Budget contribution of over 4000 Billion dong in 2014 makes VIETINBANK become the bank whose the highest charter capital and equity in Vietnam banking system Recently, VIETINBANK has continued implementing effective solutions to improve credit quality, risk diversification, diversification of the credit portfolio Therefore, the actual bad debt ratio to the end of 2014 was only 1%, Q1 2015 increased to 1.23%, but still within the permitted limit of 3% stipulated by SBV

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2.2 Internal Regulation and Practical:

To minimize the risks from credit-granting activities, on the start-up date, the period from 1988 to 1995 - Period when Vietnam's economy was undergoing renovation but still identifiable centralized planning; lending banks focuses on State-owned enterprises under the specific direction of the State ; the private sector had not yet developed at this stage So the banks did not pay attention to the SM and not built into specific business processes The process of lending and the collateral in VIETINBANK was done mainly based on the legal documents issued during this period (mentioned and regulated about SM performing the contract), as: Ordinance on economic contracts in 1989; Ordinance on Civil Contracts in 1991; Land Law in 1993; Ordinance on Banks, Credit Cooperatives and Finance Institutions; and guiding documents When Civil Code was issued in 1995, SBV issued Decision No 217/QD-NH1 dated 17/08/1996 promulgating Regulation of mortgage, pledge and guarantee for bank loans; then the Government issued Decree No 178/1999/ND-CP dated 29/12/1999 of the loan security (amended and supplemented by Decree No 85/2002/ND-CP dated 25/10/2002) and Circulars of SBV to instruct two decrees above

Accordingly, VIETINBANK received security assets according to these regulations, new internal regulations were promulgated only in a simple form of the written instructions,

to direct the Branches After this time, Civil Code 2005 was issued replacing Civil Code

1995, The Government has issued Decree 163/2006/ND-CP dated 29/12/2006 on SM Since

2006, the Board, the Executive Board of VIETINBANK issued several policy documents for management, operating their business activities; in which, in the field of security for loans, VIETINBANK has issued the following documents:

- Decision 071/QD-BOD-NHCT35 dated 03/4/2006 of the Board VIETINBANK regulations on loan security

- Decision 612/QD-BOD-NHCT35 dated 03/4/2006 of the Board VIETINBANK regulations on implementing the loan guarantee in VIETINBANK system (replace Decision

- Decision No 2201/2012/QD-HDQT-NHCT35 dated 29/12/2012 of the Board of Director of VIETINBANK on amending and supplementing the Decision 1168 mentioned above and are effective

The above policy documents have concretized the provisions of law to apply to the actual business operations of VIETINBANK Accordingly, VIETINBANK has launched the basic principles and procedures for the appraisal and valuation of assets; negotiating, concluding and implementing the security contract; notarization, authentication and registration In general, these provisions of VIETINBANK are consistent with the law at the time of issuance, timely adjust the legal relations relating to the mortgage assets in general and RE in particular to protect property Even, there are many cases to limit risks in mortgage according to risk appetite in each period, VIETINBANK also gives some conditions on the collateral stricter than the provisions of the law

Within the framework of this thesis, kindly mention the basic principles relating to the credit asset which is RE specified in the documents mentioned above; thereby giving feedback on the practical application of these provisions in VIETINBANK and shortcomings, difficulties and problems in the RE mortgage process to ensure the implementation credit contract in VIETINBANK

2.2.1 General Conditions:

- According to Decision No 1718/QD-HDQT- NHCT35 dated 30/09/2014 of Board

of Director of VIETINBANK regulations on implementing the loan guarantee in VIETINBANK system: (i) For existing property, its ownership must belong to the customer or third parties; (ii) For RE formed in the future must have a basis for determining ownership of the mortgagor; (iii) the property must be transferable and there is

no dispute at the time signing credit contract In addition, the property must meet:

• For land use right: the location of the land is not in the planning and clearance areas Land use right has not been attached to ensure enforcement

- In addition, the property is accepted to be credit assets only if managing, monitoring can be handled Where the property meets the conditions but is being leased, the mortgage is accepted only if such property is handled when the violations occurs

- The principle to recognise property is land use right, assets attached to the land:

• For land use right accepeted for mortgage under law: VIETINBANK must receive collateral is land use right and assets attached to the land If when mortgage, assets attached to the land has not been built yet, VIETINBANK can accept assets for land use right only, and demand the mortgagee to commit in mortgage contract on mortgage assets formed in the future which is associated with that land (if any) for VIETINBANK

• The assets attached to the land, it is qualified to be security assets but the land use right is not for mortgage as prescribed by law: VIETINBANK can accept assets attached to the land as mortgage if only the assets and land use right both are legally owned by the mortgagor In this case, VIETINBANK holds Land use right Certificate and manage as other collateral but not record to off-balance sheet; simultaneously deal with the mortgagor in mortgage contract that: VIETINBANK holds land use right certificate or papers related to the land use right of the mortgagor and the mortgagor committed in mortgage contract: agree that VIETINBANK has full power to handle assets attached to the land and have the obligation to coordinate with VIETINBANK to implement land use right for the transferee

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2.2.2 Verification:

VIETINBANK assigns that all financial assets as RE must be assessed before considering, deciding to make security assets according to the Decision No 1718/QD-HDQT-NHCT35 in September 30th, 2014 of VIETINBANK Administrative Council assigning about implementing the loan security RE verification staffs must collect documents related to RE to analyze, evaluate legal risks, risks of reducing the value of assets, liquidity risks, RE management and monitoring risks, changed policy risks The verification process in fact as follows: verification staffs contact to the mortgagor to inspect, collate and collect documents related to RE from the mortgagor to determine the legality and the appropriateness of the documents content, since then evaluating, summarizing missing records, information to request the mortgagor to supplement and clarify

Surveying actual RE reaffirms the collected information Gathering the related information from competent agencies that issue the papers related to RE Gathering other information sources form local governments, polices, courts, registries of secured transactions offices, Credit Information Center of State Bank of Vietnam… Gathered information from these sources is often objective and highly exact, especially in determining the ownership and value of the RE In case of getting information from the press, internet… also need to photocopy, reprint to store to serve the verification On the basis of the gathered information and documents, the verification staffs must clarify the following issues:

- The legal of the certificate of ownership, using and papers related to RE Thereby, determining property owner, who have the authority to allocate the financial operations

- The origin and characteristics of RE Identifying that existing RE is conflicted or not? Have allowed deal or not? And have been enumerated in RE list that VIETINBANK allows to receive as financial property or not?

- Assessing the liquidity of RE in the market to ensure assets are handled and convenient handling

Forming the verification report: The verification staffs form the verification report

as self-contained document or refer in the credit verification statement and make a recommendation: get or not get this RE as financial property and recommend some RE management solutions, recommend handling ways in some situations as agreed to diminish

In case of needing re-verification, the above procedures must be repeated independently by other staffs and also be formed as independent RE verification report

2.2.3 Valuation:

- To perform the valuation of RE objectively, exactly with law, VIETINBANK assigns the branch that must set up valuation team to determine the value of RE In addition, the branch has a right to sign contract leasing subsidiary company of VIETINBANK that is a debt management and asset exploitation state-owned one-member limited liability company VIETINBANK or other businesses that have valuation function (under list of valuation enterprises eligible for valuation activities by the Ministry of Finance informed annually) to assess property prices in certain cases as a basis to determine the value of RE In fact, the valuation is done as the following:

• In case of setting up valuation team: Branch management establishes decision of setting up valuation team to determine the value of RE with component must have a minimum of 2 people that must have a member of the Chamber of Control Risk Management In case the RE is determined to secure a loan of 3 billion or more, or the RE is complex, out of the above mentioned components, the valuation team must have more 1 person in the Board branch management

• In case of hiring valuation: Branch has a right to sign initiatively contract leasing businesses to value RE in the cases: the valuation exceeds the ability of the branch;

or the parties do not reach an agreement for the value of RE of other cases according to assignments of VIETINBANK in each period These businesses must take responsibility for the results of their valuation In this case, the valuation will