The legal regulations on conditions for borrowing by commercial banks

The legal regulations on conditions for borrowing by commercial banks include conditions: the capacity of clients, financial capacity to repay loans, lawful purpose, effect of using loan

MINISTRY OF EDUCATION AND TRAINING

HO CHI MINH CITY UNIVERSITY OF LAW COMMERCIAL LAW FALCUTY



DO THI ANH THU

THE LEGAL REGULATIONS ON CONDITIONS FOR BORROWING BY COMMERCIAL BANKS

BACHELOR’S THESIS Major: Commercial Law

HO CHI MINH CITY – 2011

HO CHI MINH CITY UNIVERSITY OF LAW COMMERCIAL LAW FALCUTY

HO CHI MINH CITY - 2011

COMMITMENT

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

ABBREVIATION

Asia Commercial Bank ACB

Civil Code 2005 CC 2005

Credit Information Center CIC

East Asia Bank DongABank

Law on Credit Institutions 2010 LOCI 2010

Mekong Housing Bank MHB

Private Credit Information Center PCIC

Regulations on lending ROL

Saigon Commercial Bank SCB

Technology Commercial Bank TechcomBank

Vietnam Joint Stock Commercial bank For Industry And Trade VietinBank

TABLE OF CONTENTS

COMMITMENT

ABBREVIATION

PREFACE

CHAPTER 1: THE LEGAL INSTITUTIONS ON THE CONDITIONS FOR

BORROWING BY COMMERCIAL BANK 6

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

• The general of commercial bank 6

• Lending activity of commercial bank 8

• The concept of lending activity 8

• The principles of lending activity 9

• Classification of lending activity 12

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

• Conditions for borrowing by commercial bank 15

• The concept and meanings of conditions for borrowing 15

• The concept of conditions for borrowing 15

• The meanings of conditions for borrowing 17

• The contents of statutory conditions for borrowing 17

• The required conditions 19

• The capacity of clients 19

• Financial capacity to repay loans 24

• Lawful purpose for utilizing the loan capital 25

• The optional conditions 30

• Effect of using loans 30

• Implementation of security for loans 32

CHAPTER 2: APPLICATION OF THE LEGAL REGULATIONS ON CONDITIONS FOR BORROWING BY COMMERCIAL BANK AND SOME RECOMMENDATIONS 39

2.1 Application of conditions for borrowing 39

2.1.1 Situation of loan at present commercial bank 39

2.1.2 The implementation of conditions for borrowing 41

2.1.2.1 Conditions for borrowing formed by commercial bank 41

2.1.2.1.1 Group of conditions of borrowers 41

2.1.2.1.2 Group of conditions of security for loans 43

2.1.2.2 Statutory conditions for borrowing 47

2.2 Recommendations for improving the law 57

2.2.1 Strengthen credit information 58

2.2.2 Strengthen monitor of use borrowed funds activities 60

2.2.3 Improving regulations on security for loans 61

CONCLUSION

PREFACE

1 Urgency of the subject

For more than 20 years of innovation, from XIth National Party Congress, our country’s economy has made great progresses from a backward centralized economy level move to a dynamic market one Along with economic progresses, the financial intermediary institutions are introduced to serve the growth Commercial bank is a kind of them As a financial intermediary, commercial bank raises the idle capital and redistributes to areas in need through using many forms of credit, satisfy the capital demands for production and business of organizations and individuals in society

Today credit activities have had developments both in quality and quantity Lending is the most exciting and crucial activity It is playing an important role in providing timely funds for organization and individuals to serve the demands of production and consumption Othewise this work contains many risks when borrowers cannot repay principal and interest at maturity Conditions for borrowing are the rules that borrowers must satisfy when they want to borrow money from commercial banks As

a “first gate” that the borrowers must “pass” when they want to access to bank loans, and the period before signing credit agreement, conditions for borrowing are really the factor that may promote or limit lending activity of banks Having such a significant role, but now the law of conditions for borrowing does not promote totally its role which is to identify customers as those who can use loans effectively, pay principal and interest on time, form which commercial banks can prevent credit risks and contribute to economic development The conditions for borrowing which are not appropriate with the actual situation have restricted capital accessibility of forces of production and consumption while there are careless implementations of conditions lead to loss of capital of banks

Therefore author has chosen the theme “THE LEGAL REGULATIONS ON CONDITIONS FOR BORROWING BY COMMERCIAL BANKS” as my thesis

with desire that the studying and understanding will be able to reflect the implementation of law on conditions for borrowing by the commercial banks, thereby contributing some small measures to improve the processing of these legal regulations and efficiency of lending activity of commercial banks

2 Research situation

The legal regulations on conditions for borrowing by commercial banks include conditions: the capacity of clients, financial capacity to repay loans, lawful purpose, effect of using loans, and implementation of security for loans in accordance with law

At the present the legal regulations on conditions for borrowing by commercial banks have not been studied systematically and deeply in view of legal aspect through thesises, dissertations as well as reference books or academic journals Works now stop at the study of each specific issue in the conditions for borrowing, also studied them in many different aspects, and not focus on legal aspect Namely the problems of financial capacity to repay, lawful purpose, and effect of using loans (investment projects and business and production plans) are mainly studied under economic aspects Only the condition of security for loans is quite specific researched in view of the law Author can cite to research projects such as bachelor’s thesis “The security measures in bank loans Current status and solution to complete” by Huynh Tuong Long (1998); bachelor’s thesis “The legal regulations on mortgage in lending activities of credit institutions” by Doan Thi Kieu Oanh (2009)… These articles and academic journals also spent a lot of “land” to discuss about security for loans such as

“Risks of mortgage savings” by lawyer Truong Thanh Duc in Banking Review out of Dec 23th, 2008, or article “The mortgage assets in ensuring the implementation of credit activities by Nguyen Van Hoat in The State and Law Review No 126 May 10/1998 ,and many studies of other authors cannot be described here on security measures for loans But in all the works mentioned above, the condition of the security measures for loans is considered independently as measures to ensure the implementation of civil obligations, not be considered as a condition for borrowing by commercial banks Thus it can be seen that conditions for borrowing by commercial banks have not been studied adequately as a system of conditions through independent and fully comprehensive view with its significance in view of the law

In the thesis, author will attempt to clarify the legal provisions on this subject based on personal knowledge as well as reviewing the relevant precious works, compared to practical applications of the law to make an overall picture about the conditions for borrowing by commercial banks today

3 The scientific meanings and practical applications

Studying deeply and systematically the subject “The legal regulations on conditions for borrowing by commercial banks” will allow us to thoroughly discuss this issue

This thesis is to clarify contents and meanings of legal provisions on conditions for borrowing by commercial banks, figure out how to correctly understand and apply the provisions of this law in real situations At the same time the thesis also reviewed the applications of the provisions on the conditions for borrowing by banks It considered the effect of lending activities of banks and the borrower’s accessibility to the loans prescribed through the performance of conditions for borrowing, from which recognized whether the legal regulation on conditions for borrowing were appropriate

or not, the provisitions should be specified differently or in greater detail or not, found problems if any, and think given towards improving the conditions for borrowing by commercial banks

This thesis can also be a document for review to appreciate the system of conditions for borrowing set out by law in practice, which banks have been basing on to determine whether a borrower is lent money Research is necessary to devise criteria and other mechanisms for how lending activity by commercial banks is still able to avoid the risk efficiently but customers can access to the loans timely

Other than materials has been cited, this thesis is studied in a systematic way of conditions for borrowing in the commercial banks The contents of the thesis focus on analyzing the conditions for borrowing in view of legal and practical application aspect It can be useful for anyone wanting to study the lending operations of commercial banks

4 The aims and tasks of research

The purpose of this thesis is to study deeply law provisions on conditions for loans of commercial banks, which provides solutions to improving the legal regulations on conditions for borrowing

For that purpose, the tasks of this thesis are:

- Research and evaluate the contents prescribed by the law on conditions for borrowing by commercial banks with the relevant legal documents, clarify how to understand correctly these regulations Also indicate the meanings of the law on conditions for borrowing of banks today

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

- Identify the current status of implementation of regulations on conditions for borrowing of banks today and propose recommendations to perfect the legal regulations on conditions for borrowing of banks

5 The scope of research

In this thesis, the author only focused on contents relating to regulations on conditions for borrowing by commercial banks For specific conditions for borrowing, the author studied only law aspect, how to understand the law, not study economic aspects of conditions through specified in detailed data

In addition, the author also studied the conditions for borrowing by represented commercial banks in the area of Ho Chi Minh City to compare bank’s application of legal provisions on conditions for borrowing with others’s

7 Research methods

In this thesis, the author mainly used methods such as: statistics, analysis, comprison

- In chapter one, statistics and analysis were used to clarify contents of conditions for borrowing described by the law

- In chapter two, comparison was used essentially to specify the status of implementation of legal provisions on conditions for borrowing

8 Lay out thesis

Besides the preface, list of references, list of acronyms, this thesis consists of two chapters:

Chapter 1: The legal institution of conditions for borrowing by commercial banks Chapter 2: Application of legal regulations on conditions for borrowing by commercial banks and recommendations

CHAPTER 1 THE LEGAL INSTITUTION OF CONDITIONS FOR BORROWING BY COMMERCIAL

BANK

1.1 OVERVIEW OF COMMERCIAL BANK AND LENDING ACTIVITY

OF COMMERCIAL BANK

1.1.1 The general of commercial bank

In economy of any nations, the credit institution has always played as an important role In society there are always organizations and individuals owning an amount of idle capital but for some reason they don’t use in profit-making business Besides, there are organizations and individuals engaging in production, business and consumption demand for capital However, these two entities hardly see each other directly Even despite having seen each other, it is very difficult to form their borrowing relationship because of lack of belief and capacity to draft a close credit contract to protect the interest of both parties, thus contributing to stabilization of the economy.1

The credit institutions which are financial intermediaries have raised idle capital in the society and redistributed into the sectors needing capital for development The concepts of commercial bank are stipulated as follows: “Commercial bank shall mean

a credit institution to conduct all banking activities and other related business operations in accordance with this law for profit-making purpose.”2 Following this provision, the commercial bank is a kind of credit institutions, so it must ensure to complying with all legal provisions which impose on credit institutions on the establishment, registration, activities, reporting…

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

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

page194

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

kinds of banks which do not operate for profitable target such as banks for social policies This feature also determines criteria and mode of operations of commercial banks, which are autonomous and self- responsibility in their business activities

Commercial banks have been performing primary activities including capital mobilization, lending and other banking services such as payment services, collecting and paying of customers, preserving valuable documents, papers, maintaining and purchasing securities on behalf of clients, foreign currency trading, gold, silver, financial adviser, help companies to issue shares, bonds…Among them lending activity is the most important one of commercial banks Stemming from the nature of commercial bank is borrowing to lending, so the business object of banks is currency called capital Capital that banks use for business is raised capital; capital owned by bank is for only a small percentage Commercial banks convert deposits into loan capital to borrow in order to provide funds for production and business activities of the economy By this way commercial banks can find out major income source for themselves, refund deposit to customers, offset the expense of business and create profit3 The main business of banks is monetary credit activity to satisfy the borrowing requirements of many entities in society Loan capital is used primarily to provide monetary credit for many objects so that the risks will be dispersed However, the commercial banks have to face to risks that will be varied and at different levels

Activities of commercial banks are also overseen by the State Bank This comes from the commercial banks are the financial intermediary institutions in the economy with main activities consisting of mobilizing idle capital of organizations and individuals in society and redistributing into areas that need capital through other forms of credit So when the activities of commercial banks have problems, it will easily lead to chain collapse, destabilization of economy and serious consequences Therefore the supervision of The State Bank for credit institutions is necessary and suitable for international practice

In summary commercial bank is a financial intermediary playing an important role in the economy By monetary lending activity for profit, commercial banks have been redistributing idle capital into areas in need, contributing to motivate production and social life Besides, lending activity of commercial banks also contains many risks

3 Essay on analysis of the consumer lending in Asia Bank, Da Nang on website

http://namnguyenft.vn/pages/viewtopic.php?f=82&t=2168

leading that it must be subjected to supervision and management of the State banks through the law

1.1.2 Lending activity of commercial bank

1.1.2.1 The concept of lending activity

The concept of lending activity is specified in two legal documents with the following contents: “Lending is a form of credit in which lender commits borrower to give a sum of money to be used for identification purposes in certain period of time agreed upon repayment of both principal and interest.”4 Regulations on lending by credit institutions to clients issued with Decision 1627/2001/QD-NHNN of the Governor of the State Bank dated 31/12/ 2001 and Decision 127/2005/QD-NHNN dated 03/02/2005 by the Governor of the State Bank of amending and supplementing some articles of the Regulations on lending issued together with the Decision 1627/2001/QD-NHNN (hereinafter called the ROL) also has a provision stipulating lending activity as follows: “Lending means a form of the extension of credit whereby

a credit institution provides a client with an amount of money to for a certain purpose and a fixed period of time as agreed on the basis of the principle of repayment of both principal and interest.”5 Thus lending activity of commercial banks is a work which is based on the confidence of banks for their clients Lending is that commercial bank transfers a sum of money to customer to use in a certain period of time, when the time gone by, customer must pay to the bank both principal and interest When lending, banks have not been received an equal compensation, just as consumers had already repaid both principal and interest, the banks achieved their purpose of this operation

So the banks must have trust in that customers will make payment of debt obligations

on time then they lend money to clients Customers wanting to make trust for banks must prove that they have capacity of timely repayment of principal and interest through satisfying the conditions for borrowing Therefore the conditions for borrowing are bases for banks to have trust in customers, then they decide whether to lend or not Lending based on trust in customers, which is determined by satisfying

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

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

the conditions for borrowing; have meaning that banks have bases for lending that limit the most risks

In fact, besides conditions for borrowing, if this is the first time borrower has borrowing elationship with bank, bank’s trust for borrowing stems from borrower’s healthy and effective business, the reputation in the market and especially through the evaluation loan files meeting the requirements of the banks

1.1.2.2 The principles of lending activity

As the above analysis, lending is the most important and main activity of commercial banks Capital which commercial banks mainly use to lend is raised from organizations and individuals in society So the most significant issues all commercial banks concern are how to preserve their capital and generate revenue to sustain the internal system Derived from this reason, in their lending activity, commercial banks must comply with a number of principles

 The first principle: the principle of use loans in accordance with purposes agreed in the credit agreement When individuals or organizations want to borrow money from banks, the first mandatory requirement is that they have to present their purpose Credit institutions will base on the loan purpose along with other factors such as financial capacity, the security for bank loan, production and business plans, economic feasibility and engineering feasibility…to decide whether customers are lent6 During use of loans period, the borrowers must use the loan capial in accordance with the purposes committed in the credit contracts to ensure effect of use of loans and to repay the principal and interest on time

But this principle is not applied to all forms of lending Some specific kinds of lending such as overdraff, issuing, credit reserves and banks cannot control the use of loans so they should not need to comply with this principle7

6 Ho Chi Minh City University of law, Faculty of commercial law (2007), Banking Law Curriculum,

Vietnam National University Publishing House, Ho Chi Minh City, pp 223

7 Ho Chi Minh City University of law, Faculty of commercial law (2007), Banking Law Curriculum,

Vietnam National University Publishing House, Ho Chi Minh City, pp 224

This principle allows banks to ensure that bank loans are used for proper purposes agreed since then limit the credit risks for banks When lending, banks have to base on lawful purpose for utilizing bank loans, capacity of profit-making from this purpose, since then determine solvency of customers

If customers do not use the bank loans for these purposes without notifying or agreement of banks, in all likelihood bank loans can be used wastefully and customers are insolvent

 The second principle: the principle of timely repayment of both principal and interest

Capital of banks is mainly mobilized as mentioned above Banks have responsibility to repay to depositors upon maturity or upon their request If the banks cannot repay to the depositors because of insolvency of clients, consequences will be very serious as mentioned above Otherwise commercial bank is an economic organization operating on the principle of autonomy and responsibility for its business activities with the goal of profit This profit is the interest8 With the above analysis, we can see if the customers perform obligation of repayment on time, this will help banks to preserve their loan capital, carry out obligations to depositors, achieve the purpose of their operation, and find out areas which is the best investment Besides, on the client side the obligation to pay timely principal and interest will push customers to use loans effectively, responsibly, carefully in compliance with its obligations

From the point of view of law, this principle secures civil rights and civil obligations to comply with the law Civil Right is the bank’s right to be received principal and interest on time A civil obligation is the borrower’s obligation to repay both principal and interest due If this principle is implemented seriously, that will avoid disputes relating to borrower’s insolvency occurring in the lending relationship between banks and customers, therefore reducing the civil disputes in this field then contribute to stabilizing the economy

8 Ho Chi Minh City University of law, Faculty of commercial law (2007), Banking Law Curriculum,

Vietnam National University Publishing House, Ho Chi Minh City, pp 225

 The third principle: the principle of avoiding risk The risk is that customers do not repay on time principal and interest

This principle stems from the nature of the lending activity of commercial banks Lending is a very risky activity The customer’s repayment of principal and interest to the bank entirely depends on the repayment capacity of clients But the repayment capacity of clients is a factor which is difficult to predict accurately though the banks have built their own process of consideration and approval of lending If the bank runs the risks of lending activities, it may lead

to chain bankruptcy as has been said above Even there were more serious problems when the bank went bankrupt Because banks borrow money from organizations and individuals in society, if the banks go bankrupt, the consequence is that a series of depositors will fall into bankruptcy9

Avoiding risk is interpreted as commercial banks preserve their loan capital by avoiding all cases of lending which can likely lead bank not to be repaid capital and interest on time such as not lending those customers who unable to repay timely principal and interest, for those who have the right to decide to lend at commercial banks in accordance with the Law on Credit Institutions 2010 (hereinafter called LOCI 2010), not lending without security for loans or with preferential terms and the total amount of loans is 5% of equity of commercial banks for a number of objects prescribed in LOCI 2010 Also to avoid the risk, banks must not lend money to a borrower more than 15% of equity of banks for one client

To implement this principle, banks should be cautious in their lending decisions by through appraisal process to make lending decisions Banks must determine carefully that whether clients are get loans or not, credit limit, preferential conditions

From the awareness above, the bank’s strictly implementation principle of avoiding risks is an extremely important part in ensuring the safe of operations of banks and healthy system of credit institutions

9 Ho Chi Minh City University of law, Faculty of commercial law (2007), Banking Law Curriculum,

Vietnam National University Publishing House, Ho Chi Minh City, pp 228

In summary each principle has its own meaning, but all have a relationship of mutual interaction Implementation of this principle is the prerequisite for the implementation

of other principles The principle of using loans in accordance with purposes agreed in the credit agreement to ensure that customers use the loan capital for the effective purposes committed Since then customers may gain profit and repay to the banks at maturity This means banks comply with the principle of avoiding risks The first and second principles have a role to ensure that borrowers comply with civil obligations which are use bank loans for agreed purposes and timely repayment All three principles are specified in the provisions of the LOCI 2010 and ROL In summary three principles of lending by commercial banks have an interactive relationship This principle is the premise of others The all three principles aim at ensuring that the obligations in credit contract are done and helping banks to preserve their loan capital for lending

1.1.2.3 Classification of lending activity

There are many criteria for the classification of lending activities of commercial banks: based on the loan terms, the forms of guaranteed loans, purposes of using loan capital, forms of value of loans… The following is some typical criteria to classify lending activities, which may affect conditions for borrowing:

 Based on the purposes of using loan, lending activities of commercial banks are divided into:

- Consumer credit: lending activity in order to meet demand of individuals, families, and society, contribute social life’s improvement In consumer credit, commercial banks often develop products such as student loans, loans to buy the house, apartment, car loans, travel loans, loan application before personal account…

- Production and circulation of goods credit: lending to meet capital needs for individuals, organizations and enterprises engaging in production and business For this type of credit commercial banks often develop diverse products such as additional loans for working capital, lending additional fixed capital, lending support export loans

 Based on the loan terms:

- Short-term loans: loans with a duration of 12 months

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

- Long-term loans: loans with a duration of over 60 months

 Based on the forms of security for bank loans:

- Loans secured by the property: the establishment of legal basis for the commercial banks to have second lawful sources from specific assets apart from the official debt collections

- Loans not secured by the property: the form of lending which mainly is based on reputation of the individual customers, or guaranty of socio-political organizations whose members are borrowers Each bank has own method to identify and select

1.1.2.4 The risks in lending activity and the need to build conditions for

borrowing Lending is an activity which contains many risks Risk in lending activity is not to recover the loan and interest that become due The risk in lending activity of banks is very diverse It is latent during loaning period It stems from many different causes It outside manifestations are overdue debts, bad debts, loss of capital Here the author only refers to the risk caused by the subjective causes, which means the risk caused by humans, and humans can overcome it

The following is some popular causes of risk in lending activity of commercial banks: First customers did not use loans effectively, which means that the investment projects, and business plans were not feasible, did not bring economic efficiency and leaded to loss-making Second other reasons are that the borrowers did not use borrowed funds for purposes committed when borrowing at the banks, or used for unlawful purposes, did not put into production and business activities, did not make profit from the loans All of them caused losses and wastage of loan capital from which the debts could not be recovered Third the customers even were not careful when using loans, especially customers were not asked for participation of their own capital in investment, or security for loans When the borrowers could not loss anything, they would not be cautious and careful as making a business investment, which lead to loss of capital10 Fourth in the case of consumer credit, while borrowers

10 http://www.taybacuniversity.edu.vn/elib/Kinh te/Thong tin bat can xung trong hoat dong tin dung tai Viet Nam (TS Huynh The Du - DH Kinh te TP HCM).pdf

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

To avoid the risks that can happen, right from the start, before deciding to lend, banks should thoroughly check that whether borrowers use loans effectively or not, for lawful purposes or not, can repay principal and interest on time or not and whether have security properties are sufficient to repay the loans… Stemming from these purposes, the construction of conditions for borrowing is very necessary for banks to determine customers who have capability of efficient use of capital and repay principal and interest due At that time lending activity of banks achieves efficiency Recognizing this, legal regulations on conditions for borrowing are stipulated as foundation rules for banks to build the conditions for their particular loans

1.2 CONDITIONS FOR BORROWING BY COMMERCIAL BANK

1.2.1 The concept and meanings of conditions for borrowing

1.2.1.1 The concept of conditions for borrowing

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

With such an important role, conditions for borrowing by commercial bank have been legislated into content in the banking law Specifically Article 7 of ROL has provisions on conditions for borrowing

However, because commercial banks are business organizations operating under autonomy and self-responsibility, and the purpose of profit, so the law has promoted the autonomy of the credit institutions which commercial banks in particular:

“1 Credit institutions, foreign bank branches have autonomy in their business and responsibility for the results of their operations No organization or individual may illegally intervene in the business of credit institutions and branches of foreign banks

2 Credit institutions, branches of foreign banks may refuse to grant the credit request, provide other services if found ineligible, ineffective, inconsistent with the provisions

of the law.”11

In addition, Article 93 of the Credit Institutions Act 2010 also stipulates:

“1.Pursuant to the provisions of this Code and other provisions relating to law, credit institutions must construct and promulgate regulations for the internal operations of credit institutions, ensure control mechanisms, internal audit, strengthen internal risk management process associated with banking operations process and plans to handle emergencies

2 Credit institutions must issue internal regulations following:

a) Regulations on credit, loan management to ensure the correct use of the loan purpose…”

Article 28 of ROL has stipulated as follows "1 Credit institutions and borrowers shall

be responsible for implementation of these Regulations Based on these Regulations and the provisions of relevant legal instruments, credit institutions shall issue specific guidelines for loan business in accordance with their own conditions, characteristics and charter.”

Based on the three provisions above, it can be inferred that the conditions for borrowing specified in ROL are compulsory patternable provisions for commercial

11 Vietnam Law on Credit Institutions 2010, Art.7

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

That the law hands authority over to commercial banks for stipulating provisions of conditions for borrowing in the autonomy is completely justified Because banks are also business owner, it must be recognized and protected their free business by the law12 However, because of the specific activities of commercial banks as noted above, the freedom of business of commercial banks is protected at lower levels than other usual enterprises In addition to adjusting applyed to all enterprises by the law, banks are subjected to direct regulation of the State Banks when performing operations such as gold and foreign exchange, lending through requirements of increasing or decreasing the required reserve ratio, other financial instruments, and legal documents The freedom of business of commercial banks is shown to be self-determination; customer choice, choice of the form of loans or credit decisions within the framework made by the law, and shall bear all on their business results by themselves If the law limits this power of commercial banks, this restriction may lead

to shrinking market share and make it difficult for commercial banks to provide capital to the economy13

1.2.1.2 Meanings of conditions for borrowing

The application of conditions for borrowing by commercial banks in process of consideration and approval of lending will help banks to identify customers with the capacity to use loans effectively, make profit, from which to repay principal and interest to banks on time Conditions for borrowing by commercial bank is a way for banks to filter customers immediately after receiving the credit files, to avoid the customers who do not have the capacity to use loans can lead to bad debts for banks From the point of view of law, customers need only meet the conditions for borrowing

of commercial banks when asking for bank loans But because of the freedom of

12 Nguyen Van Tuyen (2000), Learning about Banking Law-Theory and Practical exercises, The

People’s Public Security Publishing House, Ha Noi, pp 104

13 Nguyen Van Tuyen (2000), Learning about Banking Law-theory and practical exercises, The

People’s Public Security Publishing House, Ha Noi, pp 104

business as stated above, although clients had already met the conditions for borrowing, banks could decide not to lend if the loans werw not deemed suitable for their credit policies

1.2.2 The contents of statutory conditions for borrowing

Conditions for borrowing are stipulated by the law in Article 7 of ROL as follows:

“1 The client has civil legal capacity and capacity for civil acts and bears civil responsibility as stipulated by law, in particular:

In the case of a borrower being a Vietnamese legal entity or individual:

- A legal entity must have civil legal capacity;

- An individual or an owner of a private enterprise must have civil legal capacity and capacity for civil acts;

- A representative of a household must have civil legal capacity and capacity for civil acts;

- A representative of a co-operative must have civil legal capacity and capacity for civil acts;

- A partner of a partnership must have civil legal capacity and capacity for civil acts; (b) In the case of a borrower being a foreign legal entity or individual, it must have civil legal capacity and capacity for civil acts under the laws of the country of which the legal entity holds nationality or of which the individual is a citizen, if the foreign law is required to be applied by the Civil Code of the Socialist Republic of Vietnam or

is referred to in an international treaty to which the Socialist Republic of Vietnam is a signatory or participant;

2 It must have a lawful purpose for utilizing the loan capital;

3 The client must have the financial capacity to ensure repayment of the loan within the time-limit undertaken;

4 It must have an investment project or plan for production, business and services which is feasible and effective or it must have an investment project or a feasible plan

to service living conditions which complies with the law;

5 It must comply with the regulations of the Government and the guidelines of the State Bank of Vietnam on security for loans

1.2.2.1 The required conditions

Required conditions are known as conditions that all customers wanting to borrow from commercial bank must satisfy They include the capacity of customer, financial capacity to repay loans and lawful purpose These conditions are required because they are the basic conditions to ensure that using loan capital is legal and minimal capacity of insolvency of the customers

1.2.2.1.1 The capacity of clients Following the Article 7 of the ROL, customers of commercial banks include: institutions, Vietnamese individuals and organizations, foreign individuals and organizations:

“1.The clients have civil legal capacity and capacity for civil acts and bears civil responsibility as stipulated by law, in particular:

In the case of a borrower being a Vietnamese organization or individual:

- An organization must have civil legal capacity

- An individual or an owner of private enterprise must have legal capacity and capacity for civil acts;

- A representative of a household must have legal capacity and capacity for civil acts;

- A representatives of a co-operative must have legal capacity and capacity for civil acts;

- A partner of a partnership must have legal capacity and capacity for civil acts;

In the case of a borrower is foreign individual or organization, it must have legal capacity and capacity for civil acts under the laws of the country where the organization holds or in which individual is a citizen, if the foreign law is required to

be applied by the Civil Code of the Socialist Republic of Vietnam or is referred to in

an international treaty to which the Socialist Republic of Vietnam is a signatory or participant.”

 The first is the conditions of the borrowers who are organizations and individuals in Vietnam: Individuals and sole proprietorship owners, representatives of households, co-operative groups, and partners of a partnership must have legal capacity and capacity for civil acts The civil legal capacity of individuals is prescribed in Article 14 of the Civil Code 2005 (hereinafter called CC 2005) It can be understood as individual civil rights and civil obligations prescribed by law from birth out to the die The law is the same for everyone without discrimination Capacity for civil acts of individuals is prescribed in Article 17 of CC 2005 This is the capability

of individuals to establish and perform civil rights and obligations through their acts According to the provisions of Articles 18, 19 and 20 of CC 2005, individuals under age of six have no capacity for civil acts, from the full of age of six to under age of eighteen have insufficient capacity for civil acts, the full eighteen and older will have the capacity for civil acts except lost (Article 22 CC 2005) or limited capacity for civil acts (Article 23 CC 2005) Another point to note is that the civil law also has provisions for the full of age of fifthteen to under age of eighteen who have had sufficient personal property to ensure implementationof obligations They may be granted bank loans in accordance with law (Clause 2 of Article 21 of CC 2005) But there are almost no commercial banks which grant to the full of age of fifthteen to under age of eighteen for loans because the conditions for borrowing also include other conditions that are difficult for people from age of fifthteen to under age of eighteen to satisfy

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

loans will be used for production and business activities or use for private purposes of owners of private enterprises, representatives of family households and co-operatives,

on that basis, identify bank’s debt colletions

Apart from the provisions on the capacity of clients which considered in the conditions for borrowing mentioned above, according to the author, the customers wanting to borrow from commercial banks must have to satisfy a condition that ROL has not stipulated yet This is circumstances in which lending is not permitted prescribed in Clause 1 of Article 126 of the Credit Institutions Act 2010 Accordingly, although borrowers had already met the conditions of legal capacity and capacity for civil acts, but felt into these circumstances, they shall not be lent at commercial banks The cases are not granted credit by the law just mentioned include: Members of Board

of Directors, members of Council, members of the Controller Committee, General Director (Director), Deputy General Director (Deputy Director) and equivalent positions of commercial banks; parents, spouses and children of members of the Board, the Controller Committee, general directors (directors) and similar titles When these objects demands loans at commercial banks, the banks are not allowed to lend

Vietnamese organizations wanting to ask banks for loans need to have conditions of civil legal capacity It is understood that scope of activities that the organization is done For example economic organizations such as limited liability companies, join-stock companies, their legal capacity is the business, employing workers, factory in compliance with activities recorded in the certificate of business registration of enterprises

As well as for individuals, if the borrowers are legal entities banned borrowing as prescribed in provisions in clause 1 and 4 of Article 126 of the Credit Institutions Act

2010, which is that legal entities are shareholders whose representatives of contributed capital as members of Board Director, members of the Controller Committee of commercial banks which are joint stock companies; legal entities are limited partners

or owners of commercial banks which is Limited liability companies (state-owned commercial bank was established in the form of a limited liability company members having a 100% state owned) enterprises operating in the securities business which commercial banks are controlled14 If the borrowers are legal entities and enterprises

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

in one of the cases above, despite meeting the condition of capacity of clients or all other conditions for borrowing, they will not be granted loans by commercial banks These circumstances in which lending are not permitted are very important because they are to prevent internal lending Internal lending is very dangerous for transparent operation of the banks If the banks lend money to objects who held key management positions in banks, or to individuals having tie relevance to those who have right to decide to lend, it will easily lead to dispersed assets of the banks, personal gain Even some banks will be established aimed at fraud because the banks’ loan capital is mainly raised These banks lend to conduct these cases will be dealt according with the law Specifically defined in Clause 2 of Article 25 of Decree 202/2004/ND-CP regulations on administrative sanctions in the field of monetary and banking activities, banks will be fined from 5,000,000 VND 12,000,000 when lending to the following objects: Providing loans to members of Board of Directors, members of Controller Committee, General Directors (directors), deputy general director (deputy directors)

of credit institutions, loans for persons who evaluate and approve of loans, finance leasing, loans for parents, spouses and children of members of Board Director, members of Controller Committee, General Director (Director), Deputy General Director (Deputy director) of credit institutions, except the cases that the laws has different provisions

 The second content of the capacity of clients is the capacity of foreign organizations and individuals As stipulated in Article 7 of ROL, the capacity of foreign individuals and institutions are defined as follows: "In the case of a borrower

is foreign individual or organization, it must have legal capacity and capacity for civil acts under the laws of the country where the organization holds or in which individual

is a citizen, if the foreign law is required to be applied by the Civil Code of the Socialist Republic of Vietnam or is referred to in an international treaty to which the Socialist Republic of Vietnam is a signatory or participant " This provision above is absolutely right with the provisions of civil law but have not completed yet CC 2005 issued after the ROL had added the important content in the Part 7 stipulating regulations on civil relations involving foreign elements

- First under Article 761 of CC 2005, foreign individuals have civil legal capacity as citizens of Vietnam unless the Vietnamese legislation contains different provisions In

the cases of foreign individuals establishing and implementing civil transactions in Vietnam, their civil act capacity shall be determined by the law only of the Socialist of Republic of Vietnam society Thus when an individual wants to borrow capital from commercial banks in Vietnam, the bank will consider the capacity of the foreign customer as an individual Vietnam, which we consider above

- Second as stipulated in Clause 2 of Article 765 of CC 2005, in cases of foreign legal entities establishing and performing civil transactions in Vietnam, their civil legal capacity is determined by the law of Socialist Republic of Vietnam This means that if

a foreign legal entity wants to borrow funds from a commercial bank in Vietnam, the bank will consider all conditions of this entity as a Vietnamese legal entity folowing to content analysis above

When combining both contents specified in this ROL and contents specified in part 7

of CC 2005, we will have comprehensive view of civil legal capacity and capacity for civil acts of foreign individuals and organizations that the bank must consider in the conditions for borrowing So when commercial banks consider loaning borrower or not, the first condition is that the borrowers who are individuals, private enterprise owners, partners of partnerships and representatives of family households, co-operative must have civil legal capacity and capacity for civil acts That is those persons must be eighteen years-old or older, do not lose their capacity for civil acts that is suffering from mentally ill or other illnesses leading to loss of cognitive abilities, behavior, or are limited capacity for civil acts, and not be in loan prohibited cases

In summary, the capacity of clients in conditions for borrowing of commercial banks

is prerequisite The commercial banks when considering the capacity of clients would consider the contents as analyzed above The law having this provision to protect the transaction, namely borrowing transactions from commercial banks must be established by those who can afford their own decisions on behalf of all themselves, make sure not to cause damage for commercial banks Violation of this condition can lead to invalidation of credit contracts, principal and interest is not obtained and causing great losses to credit institutions

1.2.2.1.2 Financial capacity to repay loans

Financial capacity to ensure repayment of loans within the time-limit undertaken is prerequisite for all customers who borrow money from commercial banks But the scope of this condition is different in each case of lending

Financial capacity of clients prescribed in Clause 8 of Article 3 of ROL as follows:

"Financial capability of borrower means the capacity of the capital and assets of the borrower to ensure regular operations and to discharge payment obligations." It can be understood that the financial capacity of borrower is sources of capital and assets that are available when customers borrow from commercial banks These properties can be used to repay debts at maturity

In general, the scope of this condition depends on each borrower If borrower is an individual, borrowing for the purposes of service life, the financial capacity is often considered as earnings and existing assets of the borrower This income was diminished the expenses that are for life and living of the borrower For customers that are organizations with legal status, financial capacity of them are determined based on the existing assets of clients including fixed assets, receivable accounts under the contract of manufacturing business venture and capital of entities… also for the customers are organizations without legal status, the financial capacity of the customers is determined including not only the assets of the organizations that need for themselves but also the assets of those who have responsible assets associated with organizations such as private enterprise owners, partner of partnerships

Now identifying what specific financial capacity of clients is and what criteria commercial banks base on are not specified by the law The banking law has given full decide authority for the commercial banks in each their loan products The law only regulates in some cases as in Official Dispatch 1132/NHNN-CSTT dated 18/10/2002 of the State Bank on mortgage lending with valuable paper guiding the commercial banks to determine the financial capacity to repay the of customers by the actual value of valuable papers According to this Official Dispatch, the bank simply asks customers to provide information on plans, projects and purposes of loan capital Appraisal is not necessary to apply to this case Although enpowering commercial banks to set forth content of the financial capability of clients promoted the autonomy, freedom and self-responsibility of commercial banks, and facilitated banks to have regulations complying with each kind of their loan products The banks also made certain arbitrariness when defining how the financial capability of clients is Because the financial capacity of clients at the time of borrowing is not necessarily to equal to

the value of loans, it can lead to the risks if banks do not evaluate the financial capacity of clients accurately

Prescribing this condition of financial capacity of clients is fully rational This is a prerequisite that banks must consider when making lending decisions When the customers are asked for a certain percentage of capital which is invested in the project, they will make the project better because if there are loss-making, they themselves are damaged Determination of financial capacity will also help banks to identify customer’s sources of repaymen, therefore creating the trust of bank in customers on the effective use of loans and repayment of principal and interest on time This is very important factor for lending activities because apart from the banks must follow the principles, they also base on their trust in clients

1.2.2.1.3 Lawful purpose for utilizing the loan capital All customers wanting loans at commercial banks are required to explain their purpose for utilizing the loan capital This condition is absolutely necessary because it helps the bank to determine the legality of the purpose that is one of the statutory foundations for making lending decisions

Lawful purpose for utilizing the loan capital means that the use of loan capital does not contravene the provisions of the law According to legal documents relating to the purpose for utilizing the loan capital, there are two grounds for the banks to determine the legality of the loan purposes, which consist of provisions on circumstances in which lending is not permitted and provisions on only specific circumstances in which lending is permitted

 The first, based on legal provisions on circumstances which lending is not permitted in to determine the legality of the purpose for utilizing the loan capital Under the provisions of Clause 1, Article 9 of the ROL, commercial banks will not lend for some capital needs15, namely:

- In order to procure assets and for costs which will form assets the purchase and sale, transfer or disposal of which is prohibited by law

- In order to make payment for transactions which are prohibited by law

15 Decision No 1627/2001/QD-NHNN, Art.9 (1)

- In order satisfy financial requirements of transactions which are prohibited by law Such ROL have chosen the method of exclusion in which this provision has listed the unlawful purpose, so the remaining purposes which are not listed are lawful This method is reasonable because the purposes for utilizing the bank capital in society are very diverse Regulations on lending issued together with Decree 284/2000/QD-NHNN of the State Bank dated 25/08/2000 which has been replaced by the current ROL had defined the lawful loan purposes by listing these purposes that commercial banks are allowed to lend for, also defined loan purposes that the banks are not allowed to lend for16 This method was limited because it could not list all the activities needing and allowed to borrow from commercial banks Besides the enumerative method was limited autonomy and freedom of business of commercial banks in making decisions these purposes which they will lend for

In addition to the ROL, other document on determining legality of the loan purpose is Official Dispatch 258/NHNN-CSTT dated 11/01/2010 regulating on stop lending for god exchange business Accordingly, since the effective date of this Dispatch if customers want to borrow for the purpose of gold exchange business, banks will not accept because of illegal loan purpose.17

 Second based on provisions on only specific circumstances in which lending is permitted As the case of foreign currency loans to resident customers, banks are allowed to lend foreign currency to resident customers if that customers’ purposes are one of the following cases: For the payment of importing foreign goods and services

or for implementation of business plans for production of goods cross the border, the border of Vietnam, or for other purposes which must be approved in writing by the State Bank18 If customers wanting to borrow foreign currency do not have one of the

18 Circular No 07/2001/TT-NHNN on provisions of the foreign currency loans to credit

institutions for borrowers are residents, Art.1

purposes above or are not approved by the State Bank in writing, the commercial banks will not approve loans because of illegal purpose

Another case is stipulates on Law on Land 2003 that: if secured assets are land use right and assets owned by customer attached to land, the purposes which are accepted

by banks are limited as follows: According to Clause 7 of Article 113 of the Law on Land 2003, family households and individuals using land which is not leased land are allowed to mortgage or guarantee the land use right with credit institutions authorized

to operate in Vietnam or with a domestic economic organization or individual in order

to borrow money for production or business Point b of Clause 1 of Article 111 of the Law on Land 2003 has provisions that rights and obligations of economic organizations using leased land, which is that mortgage or guarantee the their owned assets attached to the leased land with credit institutions authorized to operate in Vietnam in order to borrow for production or business in accordance with the provisions of law Thus since the Law on Land takes effect (on 07/01/2004), family households and individuals using leased land have the right to mortgage or guarantee land use right at credit institutions, or economic organizations to borrow capital for production (which may include services), that do not use for other purposes such as security for the purchase and sale contracts, investment, construction or service life needs, including education, housing or medical treatment to save people However, this only happens for the blank land use right, but if the land has housing or other assets attached to land, the Law on Land does not mention For this reason the borrowers still mortgage or guarantee for somebody these assets a block of real estate This complies with legal regulations on the determination of the legality of the loan purpose as the case of conventional loans above.19

Another issue needs to pay attention is the loan re-structuring Loan re-structuring is understood that when customers have credit relationships with banks, the loan term came to maturity, but for some reason, these customers could not afford to repay or did not repay deliberately and looked forward to lending at the banks or other credit institutions for repayment of mature loans20 Loan re-structuring is a special business

of commercial banks It is not implemented commonly and only conducted in

19 19 http://thongtinphapluatdansu.wordpress.com/2010/07/17/10-v

ấn-dề-php-l-trong-việc-th ế-chấp-bảo-lnh-bằng-quyền-sử-dụng-dất/

20 http://vn.360plus.yahoo.com/lehoang_0176/article?mid=89

accordance with specific regulations of the State Bank21 So form the point of view of conditions for borrowing, if there is no the guidance of the State Bank, loan capital for loan re-structuring means the loan will not be used for production, business or consumption, but is used to cover the debt problems Therefore the use of loans will not gain profits

Now the law has not specified and detailed the cases in which loan re-structuring is allowed and vice versa Only specific case is that when the Circular 02/2009/TT-NHNN dated 03/02/2009 detailing the implementation of interest rate support for organizations and individuals lending bank’s capital to business was issued, the State Bank Governor Nguyen Van Giau explained that according to this circular, this interest rate subsidy act is prohibited in the case of interest rate subsidy loans to repay debts in commercial banks lending or debts in other commercial banks22 Thus in the problem of loans supported for interest rate subsidy, loan re-structuring is forbidden According to the author, if customers express that loan purpose is to restructure loans meanwhile there is no the guidance of the State Banks, in principle, the loan re-structuring is not allowed because the ability to credit risk for banks is huge, specially when the loan re-structuring is to repay the loan in other banks Banks lending must base on appraisal client’s investment projects, production, business and service plans Source to collect debts of commercial banks is profits from operations of the borrower If the capital is used for loan re-structuring, it means that is not used for production and business activities, not making profits, also means that does not generate source of collection debts for the banks However in fact, customers often do not show the purpose for loan-restructuring So to avoid the risk of lending stemming from loan-restructuring, banks must carefully evaluate loan records and monitor the use of loans to identify whether customers restructure loans

In summary, when a client wants to borrow money from commercial banks, the banks must consider whether the loan purposes are in cases of ROL and relevant documents forbidding to determine whether these purposes are legal or not

21 Decision no 1627/2001/QD-NHNN, Art.9 (2)

22 Cho-Vay-Dao-No/

http://www.vcosa.org.vn/vn/Tin-tuc-Su-Kien/Tin-Tuc-Kinh-Te-The-Gioi/Khong-Chap-Nhan-Legal consequences of failure in compliance with the condition are not specified in ROL.Considering legal aspects of the lending, relationship between banks and customers is a civil transaction, so unlawful purposes made this transactions violates the prohibitions of the law, so this transaction will be invalid23

If lending transaction between commercial bank and its customer is invalid, the rights and obligations arising for the parties will invalidate since the time of establish thereof The parties shall be restored to the original status and shall be return to each other what they have received24 When lending transaction is invalid, the borrower must repay the bank loan capital, but has no obligation to pay interest because it originally had no interest payment obligations incurred by customers Besides the legal consequences mentioned above, if the commercial banks lending to customers’ needs which are prohibited under the provisions of law shall be fined from 10,000,000

to 20,000,000 in accordance with Clause 3 of Article 25 of Decree 202/2004/ND-CP having provisions on sanctioning of administrative violations in the field of monetary and banking

If customers do not use the loan for purposes agreed in the credit contract, that means violating this contract, the banks will stop lending and collect debt ahead of time25 One example in particular cases is that Circular 02/2009/TT-NHNN dated 03.02.2009 detailing the interest rate support for organizations and individuals lending capital of banks for production and business has provisions of the legal consequences of not using loans for production and business purposes Accordingly if the customers are detected not using loans in compliance with purposes which are the subject to interest rate subsidy provided for in Article 1 of this Circular, they shall be revoked interest support before26 This means that the banks stop lending with interest rate support to customers and switch to lending with the normal interest loans

1.2.2.2 The optional conditions

23 Civil Code 2005, Art.128

24 Civil Code 2005, Art.137

25 Decision no 1627/2001/QD-NHNN, Art.25 (1d)

26 Circular No 02/2009/TT-NHNN detailing the interest rate support for organizations and

individuals lending capital of banks for production and business, Art.1

Optional conditions are the conditions which in some cases of lending banks can skip Specifically: first the bank will not consider conditions of effective use of loans if they lend for consumption such as asset purchase or advance personal account in which the loans are to serve the daily living conditions because banks cannot monitor the use of loans as well as no necessity for the projects or plans Second banks can skip consideration of security for loans if the clients demonstrate abundant financial ability

to ensure repayment of the loan within the time-limit undertaken

1.2.2.2.1 Effect of use of loans Effect of use of loans means how the loan will be used, how to invest in any sector to gain better efficiency, generate revenue Effect of use of loans is expressed through an investment project or plan for production, business and services or an investment project or plan to service living conditions As provision in Clause 6 of Article 3 was amended in the Regulations for lending, investment project or plan for production, business and services or investment project or plan to service living conditions is a collection of proposals on capital requirements, how to use the capital, the results obtained in a period defined for specific activities for production, business, services, investment and development or in service life27 This condition is set only for customers who need capital to make investments, business, and often borrowed large amount of money

Accordingly, if clients want to borrow from commercial banks, they need to prepare a specific plan including proposal, the economic and engineering theoretical factual foundations showing clearly investment projects, plans for production, business, services, or investment projects, plans to service living conditions Besides these calculations must be based on science about capital needs for projects, plans, how to use the funds to achieve the highest efficiency World Bank (WB) definition of investment projects is the overall policies, activities and costs associated with each other are planned to achieve certain objectives within a certain time28 However,

27 Decision 127/2005/QD-NHNN by the Governor of the State Bank of amending and

supplementing some articles of the Regulations on lending issued together with the Decision 1627/2001/QD-NHNN, Art.3 (6)

28 Dr Nguyen Duc Thang (2009), Improve the quality of appraising investment projects of commercial banks – Experience in Bank for Investment and Develoment of Vietnam, National Politics Publishing

Housing, pp 8

besides actual investment project, plan of business, services or plan to service living conditions, an important content is plan of repayment This plan shows how borrowers will make the repayment, what sources are used for repayment, schedule for repayment, thereby creating confidence of the banks in the effectiveness of the project, plan as well as responsibility for the debts of customers

The appraisal of investment project, plan for production, business, services, plan to service living conditions is performed by commercial banks following the provisions

in Article 15 of the ROL Commercial bank is the subject which review and evaluate the feasibility and efficiency of investment project or plan for production, business, services or investment projects or plan to service living conditions and capacity to repay for making lending decision In essence, the appraisal of investment projects, plans for production, business, services of commercial banks are analysis and evaluation activities to select efficiency project on finance, having capacity to repay both principal and interest on time and to assess economic results of these projects The meaning of this condition: commercial banks have the foundation to know how the bank loans are used and efficiency of utilizing the bank loan capital If investment projects, plans for production, business and services are feasible and achieve economic efficiency, clients will be able to repay the bank on time, on the contrary, the commercial banks will not lend because clients cannot ensure financial capacity to repay

Legal meaning of this provision is when considering and assessing an investment project, plan for production, business, services, banks will quantify accurately the basic parameters relating to the operation of investment project, plan for production, business services such as size, capital structure, efficiency; improve credit quality; help banks to find the project consistent with the future direction of the banks, support investment management agencies; support customer in the implementation of investment project, plan for production, business, services

1.2.2.2.2 Implementation of security for loans Security for loans is a way of banks to preserve their capital When customers were unable to make timely repayment obligations, the banks could liquidate the securied assets to recover debts Banks may decide to apply security for loans with assets or without assets, and applies to any customers, except for these cases stipulated by law that the author will analyze below