Legislation on the conditions for borrowing at commercial banks

Accordingly, “lending” means “a form of extension of credit whereby a credit institution provides a client with an amount of money to be used for a certain purpose and within a fixed per

MINISTRY OF EDUCATION AND TRAINING

HO CHI MINH CITY UNIVERSITY OF LAW

-*** -

THE MANAGING BOARD

OF SPECIAL TRAINING PROGRAMS

HO THI VAN ANH

LEGISLATION ON THE CONDITIONS FOR BORROWING AT

COMMERCIAL BANKS

LAW BACHELOR THESIS Faculty: Commercial Law Academic year: 2012 - 2016

HO CHI MINH CITY

2016

MINISTRY OF EDUCATION AND TRAINING

HO CHI MINH CITY UNIVERSITY OF LAW

-*** -

THE MANAGING BOARD

OF SPECIAL TRAINING PROGRAMS

HO THI VAN ANH

LEGISLATION ON THE CONDITIONS FOR BORROWING AT

COMMERCIAL BANKS

LAW BACHELOR THESIS Faculty: Commercial Law Academic year: 2012 - 2016

Supervisor: PhD Phan Thi Thanh Duong Author: Ho Thi Van Anh

“I hereby declare that this thesis is my own study under the logical guidance of PhD Phan Thi Thanh Duong, ensures the faithfulness and follows the regulations of citation and annotation of references I would bear full responsibility for this declaration”

July 19th, 2016

Ho Thi Van Anh

LIST OF ABBREVIATIONS

ABBREVIATION MEANING

TABLE OF CONTENTS

INTRODUCTION 1

CHAPTER 1: THE THEORY ON THE CONDITIONS FOR BORROWING AT COMMERCIAL BANKS 4

1.1 Generalization of the lending activity of commercial banks 4

1.1.1 The concept and the characteristics of the lending activity of commercial banks 4

1.1.2 The risks of commercial banks in the lending activity 7

1.2 Generalization of the conditions for borrowing at commercial banks 9

1.2.1 The necessity of the conditions for borrowing in the lending activity at commercial banks 9

1.2.2 The elements affect the formation of legislation on the conditions for borrowing 10

1.2.3 The roles of recognizing the conditions for borrowing in the legal document and the requirements for legislation on the conditions for borrowing 12

1.3 The contents of legislation on the conditions for borrowing at commercial banks 14

1.3.1 Legislation on the condition for borrower’s capacity 14

1.3.2 Legislation on the condition for the purpose for utilizing the loan capital 24

1.3.3 Legislation on the condition for the financial capacity of client 26

1.3.4 Legislation on the condition for project, plan for utilizing loan capital 27

1.3.5 Legislation on the condition for the security for loans 28

CONCLUSION OF CHAPTER 1 30

CHAPTER 2: PRACTICAL IMPLEMENTATION OF LEGISLATION ON THE CONDITIONS FOR BORROWING AT COMMERCIAL BANKS AND PROPOSALS ON IMPROVING THE APPLICATION OF CONDITIONS FOR BORROWING AT COMMERCIAL BANKS 31

2.1 Practical implementation of legislation on the conditions for borrowing at commercial banks 31

2.1.1 Practical implementation of legislation on the condition for borrower’s capacity 31 2.1.2 Practical implementation of legislation on the condition for the purpose for utilizing the loan capital 36 2.1.3 Practical implementation of legislation on the condition for the financial capacity of client 38 2.1.4 Practical implementation of legislation on the condition on project, plan for utilizing loan capital 38 2.1.5 Practical implementation of legislation on the condition for the security for loans 39

2.2 Proposals on improving the application of the conditions for borrowing at commercial banks 43

2.2.1 Group of the legal proposals 43 2.2.2 Supporting proposals to enhance the effectiveness in applying legislation on the conditions for borrowing 48

CONCLUSION OF CHAPTER 2 49 CONCLUSION 50 LIST OF REFERENCES

INTRODUCTION

1 Rational of the thesis

Globally, the banking sector plays an important role in every country’s economy, makes a remarkable contribution to the economic growth of a nation by providing the financial instruments to facilitate production in other industries The wealthy and strong banking system shall enhance the speed of economic development of a nation through its positive effects on both macroeconomic and microeconomic levels In Vietnam, the role of banking and finance industry is not different For years, the expansion of banks has been amazedly witnessed in this developing country Especially, in this banking system, commercial banks (hereinafter referred to as CMBs) take the most outstanding development since their appearance

The development of banks in general and CMBs in particular leads to the growth of the social economy However, it is undeniable fact that the banking operations of CMBs contain many potential risks coming from objective causes and subjective causes One of the main activities of CMBs is the lending activity that also brings not only benefits but also many risks for CMBs Therefore, reduction of risks in lending activity is now the urgent issue for not only CMBs but also the society As a solution to mitigate those risks in lending activity, a stringent system

of regulations in relation to lending activity, especially the conditions for borrowing become the necessary requirement As a result, the way how to enhance the compliance with legislations of the conditions for borrowing at CMBs and accordingly, reducing the maximum level of risks in lending activity more and more draws a lot of attentions to CMBs and the competent agencies of management Due

to the necessity of conditions for borrowing and the legislation for borrowing at

CMBs, author chooses the research topic “Legislation on the conditions for

borrowing at commercial banks” The first is to clarify the legislation on conditions

for borrowing, the second is to focus on the practical implementation to find out the current typical shortcomings and after that give some proposals to promote the effectiveness in applying the laws and regulations on the conditions for borrowing

at CMBs

2 Literature reviews of research

In relation to the lending activity of CMBs, there are many works not only the legal aspects but also the economic aspects Most of these works give a relatively overall view of the lending activity In the lending activity, the conditions for borrowing play a key role for not only lending activity but also CMBs and the economy Nevertheless, there are not many works of the legislation on the conditions for borrowing at CMBs and the practical implementation of legislation

on the conditions for borrowing at CMBs We can list some works relating to this topic, such as the Law Master thesis namely “Law on mitigating the credit risks in the evaluation for lending at commercial banks” (in Vietnamese: Pháp luật về hạn chế rủi ro tín dụng trong hoạt động thẩm định cho vay tại Ngân hàng Thương mại),

by Le Thi Ngan Ha in 2011; Law Bachelor thesis namely “Law on regulating the evaluation of loan files of commercial banks” (In Vietnamese: Pháp luật điều chỉnh hoạt động thẩm định hồ sơ vay vốn của Ngân hàng Thương mại), by Vo Thu Duyen

(in 2011) and Tran Thi Thu Hang (in 2012); Law Bachelor thesis namely “Law on regulating the evaluation for lending at commercial banks” (in Vietnamese: Pháp luật điều chỉnh hoạt động thẩm định cho vay ở Ngân hàng Thương mại) by Vo My Duyen in 2011… Relating directly to the topic of “Legislation on the conditions for borrowing at commercial banks”, it is recorded two works of Phung Hong Thanh (in 2012) and Danh Pham My Duyen (in 2014)

Generally, above works all have the applicable value and the practical meanings However, the current practice shows that the application of the conditions for borrowing at CMBs exposes many shortcomings Therefore, basing

on the previous thesis, author carries on the study of the legislation on the conditions for borrowing at CMBs Accordingly, the first is to present the theory on the conditions for borrowing at CMBs The second is to specify the defects in applying these conditions and then give the proposal to improve the legislation on the conditions for borrowing to help CMBs to reduce the risks in the lending activity

3 The purpose of the thesis

The purpose of this thesis is to bring out the general study of the lending

activity, the conditions for borrowing and to clarify the legislation on the conditions for borrowing at CMBs Presenting, analyzing the typical shortcomings of the practice in applying the legislation on the conditions for borrowing at CMBs Basing on the theory and adequately reflecting the practice in applying the legislation on the conditions for borrowing at CMBs, the thesis brings out some proposals to ensure the tightness in applying the legislation on the conditions for borrowing at CMBs

4 The research objects and the delimitations of the thesis

- The research objects of the thesis

Basing on the name of the thesis, the object author conducting the research are the current legislation on the conditions for borrowing at CMBs and the practical implementation of this legislation at CMBs To facilitate the research of this object, author studies steps by steps the following contents:

- Firstly, author focuses on researching the object under the aspect of theory The aim of this is to clarify contents of the lending activity of CMBs such as the concept and the characteristics and the risks of the lending activity Then analyzing the issues relating to the conditions for borrowing such as the necessity of conditions for borrowing, the elements affect the formation of the legislation on the conditions for borrowing, the roles of recognizing those conditions in a legal document and the requirements for legislation on the conditions for borrowing at

- The delimitations of the thesis

When conducting the research of topic “Legislation on the conditions for borrowing at commercial banks”, the requirements for research of this topic are very wide, including all the borrowing entities at CMBs in Vietnam However, within the framework of Law Bachelor thesis, it requires to focus on the research of borrowing entities that are Vietnamese individuals and organizations Moreover, thesis also focuses on studying and developing the legal aspects

5 The methodology of the thesis

Regarding to the research methodology, during the execution of the thesis, author focuses on using the legal knowledge; besides, adding the necessary knowledge of former studies In particular, the used methods are analysis, comparison and synthesis, which are used to clarify the contents of theory and practice in applying the legislation, accordingly, clarify the issues that are studied

6 The structure of the thesis

The thesis has three main parts, including introduction, content and conclusion In the part of content, it comprises of two chapters:

- Chapter 1: The theory on the conditions for borrowing at commercial banks

- Chapter 2: Practical implementation of legislation on the conditions for borrowing and proposals to improve the practice in applying the legislation on the conditions for borrowing at commercial banks

CHAPTER 1: THE THEORY ON THE CONDITIONS FOR BORROWING

AT COMMERCIAL BANKS 1.1 Generalization of the lending activity of commercial banks

1.1.1 The concept and the characteristics of the lending activity of commercial banks

The birth and the development of CMBs connect closely to the business, production activity and economy In the developed countries, almost all the citizens have at least one transaction with a certain CMB CMBs become the familiar and necessary financial institution in economic life and with the development of economy and technology, the banking operations of CMBs also have an obvious advance with various services, including deposit taking, credit extension and via-account payment CMBs perform many services; however, within these services, the credit extension is the most important activity and within the credit extension activities, the lending activity is the main activity providing a large amount of profit for CMBs.1

Originated from its special characteristics, the lending activity of CMBs plays an essential role for both of individuals, organizations and the economy Accordingly, CMBs, through the lending activity, act as the financial intermediaries linking the customers who have capital deficits with the customers who have capital surpluses Besides, this lending activity can help to regulate the supply and demand

of goods and services in the economy by providing capital for enterprises to produce goods and services, otherwise, providing money for citizens to consume these goods and services Moreover, the lending activity also contributes to social life’s development, creates many jobs for workers by helping the enterprises to expand the, hire more workers and as a result, reduce the unemployment

From above analysis, we can realize the necessity of CMBs as well as the lending activity of CMBs for economy in general and for each individual or organization in particular Although the lending activity is very essential and familiar to us, not all of us know the exact concept and typical characteristics of this activity; therefore, the following clarification of the concept and characteristics of the lending activity give us a general and exact approach to the activity happening around us every day

According to the Vietnamese dictionary2, “lending” means “giving money or tangible things to another person on condition that this person must pay the interests while he/she has not yet returned these money or tangible things” The Law dictionary3 also gives the definition of the term of “lending”, accordingly,

1 For most of banks in general and CMBs in particular, outstanding credit accounts for more than 50% of

assets and income from the lending activity accounts for from 1/2 to 2/3 of aggregate income of banks According to Le Van Chi, “The lending activity of commercial banks”,

https://voer.edu.vn/m/hoat-dong-cho-vay-cua-ngan-hang-thuong-mai/04b1555c , retrieved on July 13th, 2016

2

Vinh Tinh (2006), Vietnamese dictionary, Labor Publishing House, p.198

Retrieved from Le Thi Bao Quyen (2011), Legislation on lending low-income people for buying house, Law Bachelor thesis, Ho Chi Minh City University of Law, p 4

3 Law dictionary (2006), Encyclopedia Publishing House – Judicial Publishing House, p.143

“lending” means “the lender gives a sum of money or tangible things to the borrower to possess in an agreed period of time Lending can have interests or no interests The borrower has the obligation to pay the interests only when agreed by the parties or prescribed by law”

There is no necessity to open the dictionary to study the concept of lending because the borrowing – lending story becomes very usual and has a close connection to daily life of any person A person who is not an economic or/and law expert may also explain commonly the term of “lending”, according to his/her own understanding However, to a certain extent, the definition of “lending” is different when it is in different context Particularly, lending among individuals, organizations (which is regulated by the civil laws) is normally different from lending between individuals, organizations and CMBs (which is regulated by the banking laws)

For the lending among individuals, organizations; Vietnamese civil laws and regulations do not clarify a specific definition of “lending” However, according to the definition of “contracts for property loan” specified in Article 471 of the Civil Code 2005; we can understand that: “Lending” means a person (the lender) agrees with another person (the borrower), allows this person to use his/her property within

a specific time The condition in this case is that the borrower shall return when the loan is due and shall have to pay the interest only if so agreed upon or provided for

by law In daily life, we usually approach “lending” in term of a relation of extension of credit (money or tangible things) between an individual or organization and another individual or organization on condition that these money or tangible things shall be returned According to the Vietnamese dictionary cited above and according to the civil laws and regulations, we can generally understand that the lending activity includes three characteristics: Firstly, the transferred subject can be

a sum of money or tangible things Secondly, the lending activity is conducted based on the credit Finally, the lending activity bases on the repayment principle and maybe has some interests

Under the aspect of banking law, the concept of “lending” is mentioned in Regulations on lending by credit institutions to clients issued with Decision No 1627/2001/QD-NHNN of the Governor of the State Bank dated 31 December 2001 (hereinafter referred to as Regulation on lending) Accordingly, “lending” means “a form of extension of credit whereby a credit institution provides a client with an amount of money to be used for a certain purpose and within a fixed period of time

as agreed on the basis of the principle of repayment of both principal and interest”.4

Through above-mentioned analyses, we can see that the concept of “lending”

in the civil laws is wider than in the banking laws and the lending activity is not the characteristic activity of CMBs because many individuals and organizations also perform the lending activity as their business Although the lending activity is not considered as the characteristic activity of CMBs, this activity of CMBs is far

Retrieved from Le Thi Bao Quyen (2011), Legislation on lending low-income people for buying house, Law Bachelor thesis, Ho Chi Minh City University of Law, p 4

4 Article 3.1 of Regulation on lending

different from the lending activity of individuals, organizations due to below characteristics:

Firstly, the subject of extension of credit in the lending activity of CMBs

is an amount of money

One of the big differences of the lending activity among individuals, organizations (under the civil laws) and individuals, organizations with CMBs (under the banking laws) is the subject of extension of credit Particularly, the subject of the lending activity of individuals, organizations is very wide, comprises

an amount of money or tangible things while the subject of the lending activity of CMBs only consists of an amount of money The main reason why the subject of the lending activity of CMBs only consists of an amount of money is that the extension of credit by money will satisfy all the demands of borrowers and this is also the reason why lending is the main activity of CMBs.5

Beside the lending activity, CMBs also conducts some other services, including financial leasing, discount, re-discount valuable papers While the subject

of financial leasing is property, the subject of discount, re-discount is valuable paper; the subject of the lending activity of CMBs is an amount of money However, this subject leads to the latent risks because money are easily used for many purposes of borrowers; therefore, CMBs are hard to control the correct purposes as agreed

Secondly, the lending activity of CMBs is always established on the basis

of the loan agreement

The presence of the loan agreement is considered as the big difference between lending in civil laws and lending in banking laws In the civil laws, some cases that parties do not have to enter into the civil contract when lending, they just mostly base on their trust to decide to lend Contrary to this, banking laws and regulations regulates that “the lending by CMBs to a client must be implemented by way of a loan agreement”.6 The loan agreement must stipulate the loan conditions, the purpose of loan utilization, the method of lending, the loan amount, the interest rate, the loan term, the forms of loan security, the value of security assets, the method of repayment, and the other undertakings agreed by the parties Considering the nature, a loan agreement consists of characteristics of civil contract whereby recognizing the agreement between the CMB (the lender) and individual or organization (the borrower), accordingly, the CMB agrees to advance a sum of money to borrower to use in a certain period of time on condition that the borrower will return the principal and interest However, unlike a lending contract among individuals and organization, a loan agreement is a model-agreement drafted by CMBs The terms and the conditions are available in the loan agreement and when the parties enter into this contract, they just fill in the vacancy The reason for the presence of the model-agreement is that, in the lending activity, the entities participating in this activity must have certain special knowledge, while the borrowing entities are the individuals and organizations of all economic sectors Therefore, it will be a waste of time if the parties meet each other and then agree

5

Ho Chi Minh city University of Law (2013), Law on bank, Hong Duc Publishing House, p 309

6 Article 17 of Regulation on lending

and enter into the contract.7

Finally, the lending activity of CMBs is a stringent process

The lending activity of individuals and organizations is considered as not strictly bound by conditions or principles of law, it depends on the lenders’ will in which the lenders have their own right to determine the borrowers, the loan terms, the lending limits… as long as these are in accordance with the civil laws Contrary

to this, the lending activity of CMBs is professional and it must follow a stringent process To have the right to perform the banking operations (including the lending activity), CMBs must be established pursuant to the banking laws and regulations or

in other words, CMBs must have license for establishment and operation, must register their business After the legitimate establishment, when lending, CMBs must also follow steps by steps below processes: (1) setting up loan files, (2) analyzing to lend, (3) deciding to lend and entering into the loan agreement, (4) disbursing, (5) supervising the utilization of loan, (6) liquidating contract In contrary, under the civil laws, the lending activity between individuals and organizations does not have to follow a specific process Accordingly, the lenders sometimes do not care about the financial capacity or the projects, plans of the borrowers and especially do not need any security asset for the loan The lenders sometimes only pay attention to the level of their relationship with the borrowers to consider lending Thus, we can see that the lending activity of CMBs is much more complicated than the lending activity of individuals and organizations This complicated process in the lending activity of CMBs creates the clear differences with the lending activity of individuals and organizations

In brief, comparing with other activities of extension of credit, the lending activity of CMBs has a lot of features The study of above characteristics of the lending activity helps us to understand clearly the possible risks in this activity and the meaning of legislation on the conditions for borrowing

1.1.2 The risks of commercial banks in the lending activity

The lending activity creates a large amount of profits for CMBs and it contributes a lot to the development of society Despite the fact that the lending activity is very important, it also contains many latent risks The risks arising in the lending activity are understood as the loan does not fully repay when it is due These risks may come from below reasons

1.1.2.1 Objective reasons

- Borrowers lose their capacity

The capacity of clients is the one of the important elements that affects the decision on lending of CMBs When a client does not qualify this capacity, CMBs will not carry out the lending procedures Although the capacity is examined very careful by CMBs before entering into the loan agreement, the fact is that this capacity can be changed in the course of business of clients, especially clients who are the enterprises In the process of production and business of enterprises, some enterprises will conduct the illegal activities; produce and sell the goods that are not registered in the Business license; not perform the tax obligation… As a result,

7 Ho Chi Minh city University of Law, see supra note (5), p 311

these enterprises can be revoked the Business license Thus, the enterprise’s business operation is suspended and enterprise has no ability to repay the loan for CMBs

- Borrowers do not utilize the loan capital for agreed purpose

Relating to the purposes of utilizing the loan capital, CMBs will face two risks The first risk arising when CMBs conducts the evaluation of these purposes; accordingly, CMBs cannot discover the purpose provided by clients is illegal The second risk arising after the disbursement; accordingly, in the course of using the loan capital, client does not follow the agreed purpose with CMBs When the clients utilize the loan capital for the illegal purpose or they do not utilize as agreed with CMBs, the consequence is that the debts will possibly become the overdue debts, bad debts and the loan capital will not be maintained Besides, CMBs also encounter the risks of loss of debts when the client intentionally provides the unfaithful purposes with the aim to appropriate money through swindling Together with the lack of supervision from CMBs, the utilization of loan capital for unlawful purpose or do not follow the agreed purpose becomes popular and this will cause many risks for CMBs

- Weakness in the business of borrowers

CMBs usually lend for two main purposes of clients: the investment purpose and the consumption purpose; and the client of CMBs consist of individuals and organizations In the lending activity of CMBs, lending the organizations for the investment purpose brings more profits for CMBs than the others The amount of money for lending these organizations is usually extremely large; therefore, the loss

of this money will affect the safety of CMBs and the economy However, the risks

in the business of these organizations are inevitable things When the financial capacity of these organizations is weak and the capital of them is not enough for the production and business, the organizations will find another sources of support through borrowing money from CMBs to invest and develop their business Thus, the ratio of capital that enterprise participates in the business plan is very low while organizations accept risks to gain profit together with severe competition of market This leads to the result that the possibility of non-repayment of loans of borrowers

is very high Besides, lack of expertise and management capacity of organizations’ managers causes the unfeasibility of investment plans The ineffectiveness of business of organizations is the main reason causing the risks of not only CMBs but also the economy

- Fraud from the borrowers

As a concerned practice, fraud from the borrowers is increasing and with complicated cunning To appropriate money from CMBs, borrowers provide many forged legal papers to gain the trust from CMBs, to prove that they qualify the requirements for borrowing but the main aim is to swindle These legal papers can

be the identity card of borrowers, papers proving the capacity of organizations, proving the purposes for utilizing the loan capital, financial statements, documents proving the feasibility and effectiveness of plans or projects of utilizing the loan capital, papers showing the ownership right of security assets… Through the mass media, we can see many cases relating to these appropriations and these

appropriations are one of the main reasons causing the risks of loss of capital of CMBs

- Low expertise of credit officer

In all domains, human is considered as the main element to constitute the success In the banking sector, especially in the lending activity of bank, the quality

of credit officer plays a vital role in the effectiveness of the lending activity On the other hand, low expertise of credit officer will cause many risks to the lending activity of CMBs Nowadays, the expertise of credit officer show many limitations Many credit officers lack the expertise as well as the social knowledge so that they can make mistake when decide to lend Current borrowing entities are very diverse and they can conduct the business in many different sectors in the economy, while the credit officers do not have enough information or knowledge of the client’s business Thus, mistakes in evaluating for lending are easy to happen

1.1.2.2 Subjective reasons

Beside the objective causes, subjective causes are considered to partly contribute to the risks in the lending activity of CMBs For the individuals borrowing money for consumption purpose, the repayment of loans greatly depends

on the borrower’s health and job Thus, when there are subjective troubles with these elements such as illness or unemployment, natural disaster causing poor crop… the recovery of debts from borrowers becomes the difficulty task for CMBs because borrowers lose their ability to make income for the loan repayment For the organizations, the volatility of the economy, economic depression, the severe competition of market together with some other subjective elements such as storms causing damage of goods or fire… also lead to many disadvantages in the business operation of organizations, hence, these organizations cannot have enough money for repayment of loans for CMBs

In summary, above are the main reasons causing risks in the lending activity

of CMBs We can see that, to reduce these risks, the legislators try to find out many solutions and one of the most effective solutions is the presence of the conditions for borrowing Thus, the research of these risks will partly help us to approach the reason why the conditions for borrowing are established

1.2 Generalization of the conditions for borrowing at commercial banks

1.2.1 The necessity of the conditions for borrowing in the lending activity at commercial banks

Nowadays, no one in our society can deny the great importance of the lending activity of CMBs Lending is now the crucial element for the development

of economy and society and therefore, enhancing the efficiency in the lending activity is currently the concerned issue To increase the effectiveness and reduce the risks, the lending activity of CMBs must be operated under specific principles The principles of the lending activity are created with the aim to help and orientate the entities of the loan agreement to rightfully perform their rights and obligations Accordingly, when participating in the lending activity, credit institutions and the borrowers shall follow some principles:

The first is the principle of utilizing the loan capital for the correct purpose

as agreed in the loan agreement The main purpose of this principle is to mitigate

the risks and ensure the safety of the lending activity For CMBs, utilizing the loan capital for the correct purpose as agreed in the loan agreement ensures the recovery

of debts, avoids the loss and brings profits from lending For the clients, utilizing the loan capital for the correct purpose as agreed promotes the effectiveness in using the loan capital, ensures the repayments, accordingly, enhances the prestige and reinforces the relationships between clients and CMBs

The second is the principle of repaying on time the loan principal and interest

as agreed in the loan agreement This principle forces CMBs and the borrowers to conduct the businesses more effective in the severe market Accordingly, for CMBs,

if the borrowers perform rightfully the agreement on repaying on time the loan principal and interest, CMBs can ensure the aim of profits in their business For the borrowers, this principle forces them to find effective and feasible plan of using the loan capital to be able to repay the loan

Although the requirement is that the lending activity of CMBs must always

be conducted through two principles, it is the fact that these principles are not followed all the time These principles are very general and they are only the orientation for the lending activity, so that it is hard to ensure the compliance with these principles, gain the aim of the lending activity and reduce the risks This is the reason why the conditions for borrowing are established The birth of the conditions for borrowing creates the basis for the lending activity, they force the lenders and the borrowers to follow the principles and help CMBs easily to evaluate their clients

Another aspect explaining for the necessity of the conditions for borrowing is that, the lending activity has almost based on the trust between the lenders and the borrowers However, the trust between the parties definitely does not ensure the repayment while the non-recovery on the debts may lead to the adverse effects to not only the bank but also the economy As a result, to trust clients, it is compulsory for CMBs to carry out the process of evaluating the conditions for borrowing The satisfaction of these conditions is the prerequisite for any loan rather than only the trust Under the current laws and regulations, the conditions for borrowing consist

of five conditions, including:

- Firstly, the regulation on the conditions for borrower’s capacity;

- Secondly, the regulation on the conditions for the purpose for utilizing the loan capital;

- Thirdly, the regulation on the conditions for the financial capacity of client;

- Fourthly, the regulation on the conditions for project, plan for utilizing loan

capital;

- Finally, the regulation on the conditions for the security for loans;

1.2.2 The elements affect the formation of legislation on the conditions for borrowing

According to above analysis, we can see that the conditions for borrowing are very necessary for the lending activity of CMBs Each condition has its own meaning to reduce the risks and ensure the safety of the lending activity However, most of us do not know the fact that the legislators base on which grounds to bring out these conditions for borrowing Why do they bring out these conditions but do

not bring out other conditions? It is not by chance that the laws and regulations recognize these conditions but not others These conditions are given through the practice and analysis of the reason of risks faced by CMBs in the lending activity Although CMBs have a lot of risks as specified above, the main risks causing the loss of money of CMBs when enter into a lending transaction are divided into two main classes: the legal risks relating to the loan agreement and the financial risks of clients These risks create two grounds to establish the conditions for borrowing which are clarified as follow

1.2.2.1 Legal elements

One of the characteristics of the lending activity is that the lending activity is always established basing on the loan agreement Due to the presence of the loan agreements, the validity of loan agreements is considered as the most important thing in the lending activity With the civil contract’s nature, the elements affecting the validity of the civil contract also affect the validity of the loan agreement To constitute the valid loan agreement or in other words, to reduce the legal risks causing the loan agreement to be invalid; the legislators recognize some elements for the conditions for borrowing to limit the risks of invalidity of the loan agreement These elements include the capacity of the clients and the purposes for utilizing the loan capital As we can see, the capacity is the precondition and the most important element to create a valid civil contract in general and a loan agreement in particular Otherwise, the lawful purpose for utilizing the loan capital is also necessary Lack

of these elements in the lending activity may lead to some certain legal consequences and the parties may not reach their goals when entering into the loan agreement This is the reason why the capacity of client and the lawful purpose are mentioned in the conditions for borrowing

1.2.2.2 Financial elements

Unlike the normal civil transactions, the lending transaction contains many potential risks The cause of these risks derives from the subject of extension of credit is a sum of money It is easy for CMBs to lend the client a sum of money but repayment of client is hard to predict Otherwise, the default on the debts of client affects not only one CMB but also many CMBs, even the economy Due to this reason, the safety of the lending activity is the most important things However, how can we maintain the safety of the lending activity? From the practice of the lending activity, the legal specialists set out to find the main reasons causing the nonpayment of clients They figure out that the nonpayment is affected by weakness

in some financial elements of clients Thus, the most effective solution to limit the nonpayment is to bring out some conditions for borrowing that all clients must follow to ensure the repayment These conditions include the financial capacity of client; the project, plan for utilizing the loan capital and the security for loan

In short, the main reason for the establishment of the conditions for borrowing can be divided into two reasons The first reason is to ensure the validity

of the lending transaction or the loan agreement, which consists of the capacity of client and the lawful purpose for utilizing the loan capital If the legal elements are set up to constitute a valid contract, the financial elements of client affect the repayment of the loan capital Hence, if two elements are ensured by all CMBs, the

risks in the lending activity will remarkably be mitigated, so that both clients and CMBs will reach their goals when participating in the lending - borrowing activity

1.2.3 The roles of recognizing the conditions for borrowing in the legal document and the requirements for legislation on the conditions for borrowing 1.2.3.1 The roles of recognizing the conditions for borrowing in the legal document

As we all knew, the conditions for borrowing play a vital role in the lending activity of CMBs CMBs are hard to recover the debts and earn the profits without the conditions for borrowing Despite the fact that these conditions are very important, we may not bring these conditions into effect if we do not recognize it in

a legal document The recognition of conditions for borrowing in a legal document can bring following effectiveness:

Firstly, creating the legal basis for CMBs and enhancing the compliance with compulsory conditions for borrowing of CMBs

The conditions for borrowing originated from the practice of the lending activity of CMBs CMBs are the economic organizations, have the enterprises’ nature Hence, the aim of their business is the profit The nature of the lending activity is that the banks borrow to lend, so that CMBs want to find more and more clients However, the lending activity contains many risks due to the reason that the effectiveness in the lending activity depends mostly on the effectiveness of using the loan of clients As we all know, the final aim of the conditions for borrowing is

to reduce the risks in the lending activity of CMBs and every CMB always wants to limit the risks to develop We can image that the conditions are not legally bound, each bank has the choice to determine whether apply these conditions or not What will happen if CMBs have the right to choose to apply all conditions or part of or none of these conditions CMBs, like any business organization, always want to make a lot of profit To earn this money, they tend to accept or ignore the potential risks This leads to the result that the big debts but lack necessary conditions to ensure the repayment Therefore, the recognition of conditions for borrowing in the legal document and making them become the compulsory elements for all banks to follow is very necessary and useful This recognition will help to enhance the compliance with the conditions for borrowing of CMBs, force CMBs to evaluate each condition of their clients before extending the credit If CMBs ignore one of the conditions and causes the damage, they will bear some legal consequences specified by law

Secondly, supporting the borrowers when borrowing at CMBs

The borrowers are people who have the demands for using the loan capital of the credit institution in general and CMBs in particular The borrowers of CMBs come from many different backgrounds and operate many business lines Therefore, the recognition of conditions for borrowing in the legal document helps the borrowers have the framework orientation when they want to borrow money Besides, the recognition of conditions for borrowing in the legal document together with the liability force the borrowers to take caution when giving “the trust” to CMBs

Thirdly, creating the mechanism for the State’s supervision to the lending activity

In the social life, the laws and regulations play an important role The laws and regulations are established with the aim to regulate the social relations and they are considered as the most efficient tool for governing the society of the State.8 In the banking sector, the banking laws and regulations also have the same role and meaning These laws and regulations greatly support the State, particularly the State Bank to easily perform the function of state management of banking operations including management of the lending activity of CMBs Thus, the banking legislation in general and the legislation on conditions for borrowing in particular is seen as the most efficient mean for the State to supervise the observance of laws to ensure the safety in the lending activity of CMBs The clear regulations help the State to compare the current laws and regulations with a specific act and then determine whether it violates the laws and regulations or not If there is no condition for borrowing specified in a legal document, it is hard for the State to perform the inspection and supervision of the lending activity through finding a legal base to attribute the responsibility to any entity when there is the existence of damage In other words, the recognition of conditions for borrowing in the legal document gives many advantages for the State to govern and supervise the lending activity of CMBs

1.2.3.2 The requirements for legislation on the conditions for borrowing

Lack of legislation on the conditions for borrowing; CMBs, especially the lending activity of CMBs are definitely not doing well The establishment of the conditions for borrowing creates the better mechanism for CMBs to evaluate their clients effectively The application of the laws on bank in general and the application for legislation on conditions for borrowing in particular are not outside the aim to reinforce the safety of CMBs The more stringent the regulations are, the fewer risks CMBs face However, the legislation on the conditions for borrowing must follow one key rule, that is: Legislation on the conditions for borrowing must ensure the right to autonomy in the lending activity of CMBs Hence, the balance between the regulations and the autonomy in the lending activity of CMBs is considered as the most important thing that the legislators must concern and ensure CMBs, like any enterprise, must be recognized the right to autonomy in their business Therefore, although the laws and regulations stipulate the conditions for borrowing, these conditions must not deeply intervene into the lending activity of CMBs Accordingly, in the lending activity, CMBs have the right to find the markets, customers and to sign the loan agreement proactively The conditions for borrowing must stop at the framework regulations Accordingly, each CMB will have the right to amend, supplement essential regulations in accordance with

orientations and strategies of its own business

8 “The roles of the laws and regulations”,

retrieved on July 13th, 2016

1.3 The contents of legislation on the conditions for borrowing at commercial banks

1.3.1 Legislation on the condition for borrower’s capacity

When an entity wants to borrow money from a CMB, the first thing this CMB wants to know is the capacity of this entity This is because the loan agreement is also the civil contract; therefore, the loan agreement must follow the general regulations like the civil contract The condition for borrower’s capacity including the civil legal capacity and the civil act capacity plays an important role to constitute a valid contract In other words, the loan agreement will be invalid if it does not satisfy the condition for capacity and this, of course, leads to adversely legal consequences to the entities of contract

The condition for borrower’s capacity is regulated at the Article 7.1 of Regulation on lending This condition is considered as the first and the most important condition for borrowing According to the current regulation, to borrow money from CMBs, the client must qualify the civil legal capacity and the civil act capacity, 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 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;

- In the case of a borrower being a foreign organization or individual, it must have civil legal capacity and capacity for civil acts under the laws of the country of which the organization 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;

Therefore, according to the current laws and regulations, “customers borrowing from the credit institutions shall be Vietnamese and foreign organizations, individuals”.9 Prior to the amendment and the supplement by Decision No 127/2005/QD-NHNN, Regulation on lending stipulated that the customers borrowing from the credit institutions comprise Vietnamese legal persons, individuals and foreign legal persons, individuals.10 Private enterprise and the partnership hereby are not the legal persons listed Therefore, when they have the

9 Article 1.2 of Decision No 127/2005/QD-NHNN of the State bank of Vietnam dated 03/02/2005 on the

amendment and supplement of several articles of the regulation on lending by credit institutions to customers issued in conjunction with the decision No 1627/2001/QD-NHNN dated 31/12/2001 of the governor of the State bank

10 Article 2.2 of Regulation on lending

demand to borrow money from CMBs, these enterprises only enter into the loan agreement in terms of individuals borrowing.11 This regulation is not reasonable and definitely does not ensure the rights of these entities Otherwise, the recognition

of only individuals and legal persons becoming the entities of borrowing activity does also not ensure the rights of typical entities like households and co-operative groups These are the independent entity of the legal relation regulated and recognized by the civil laws However, according to the regulations of Regulation

on lending, these entities only participate in the legal relations as the individuals; in other words, they could not enter into the loan agreements in their own name In the current market economy, the diversity of the economic sectors brings about the diversity of the borrowing entities Thus, the laws and regulations must be amended for a suitable application The amendment of the Decision No 127/2005/QD-NHNN has partly broadened the scope of the entities in the loan agreements; as a result, this can protect the lawful interests of the borrowing entities

According to the current legislation, the borrowing entities of CMBs include individuals and organizations Organizations consist of Vietnamese organizations and foreign economic organizations The borrowers, which are Vietnamese organizations, are divided into two classes: the economic organizations that have the legal status and the economic organizations that do not have the legal status and the other organizations Pursuant to the current laws and regulations on enterprises, the economic organizations with the legal status comprise the limited liability companies, joint-stock companies, partnerships and cooperatives The distinction between the borrowing entities has an important meaning It supports CMBs easily

to determine the capacity of each client Issues on the capacity of clients will be clarified as follow:

1.3.1.1 The capacity of Vietnamese borrowers

a The borrowers are Vietnamese individuals

When an individual wants to borrow money from a CMB, he/she must satisfy the condition on the capacity, including the civil legal capacity and the civil act capacity These are the necessary and sufficient conditions for individuals to participate in the civil relations in general and the borrowing relations at CMBs in particular Lack of the civil legal capacity, individuals will not conduct the legal acts that arises the rights and the obligations If an individual only has the civil legal capacity but lack of the civil act capacity, this individual does not have his/her capability to establish, perform the civil rights and obligations through his/her acts

In particular:

Firstly, the civil legal capacity of individuals

The civil legal capacity of an individual is his/her capability to have the civil rights and the civil obligations.12 These are the objective rights and obligations, are the capability of individuals regulated by the State The civil legal capacity of an

11 Nguyen Thi My Anh (2012), Legal institution on borrowing entities in the loan agreement, Law Bachelor

thesis, Ho Chi Minh City University of Law, p 14

12 Article 14.1 of the Civil Code 2005

individual shall exist from the time he/she is born and terminate when he/she dies Although the Civil Code 2005 stipulates that all individuals have the same civil legal capacity and have the civil legal capacity when they are born; however, in some circumstances, the State will restrict the civil legal capacity of an individual Consequently, when lending, CMBs must examine whether this individual is being restricted the civil legal capacity or not This is necessary to ensure the borrowing transactions to satisfy the legislation, to ensure the safety of capital and the lending activity of CMBs

Secondly, the civil act capacity of individuals

Beside the civil legal capacity, individuals must have the civil act capacity to qualify the condition for borrowing at CMBs The civil act capacity of an individual

is his/her capability to establish, perform civil rights and obligations through his/her acts Therefore, each individual (with different age, different psycho-physiological condition and different capability of cognizing and controlling his/her acts) will not have the same civil act capacity Regulation on lending does not require individuals

to have the full civil act capacity, it just stops at having the civil act capacity Hence, CMBs, when deciding to lend, must notice the individual’s capability to perform his/her rights and obligations This is clarified as follow:

- Individuals with the full civil act capacity

Individuals who are full eighteen years old or older, are not declared by the court as losing their civil act capacity, are determined as the individuals with full civil act capacity.13 The laws and regulations allow these people to participate in all the civil transactions and to be responsible for their own acts Consequently, these individuals totally have the right to borrow money from CMBs by themselves, without any representative

- Individuals with part of civil act capacity

Individuals who are between full six years old and under full eighteen years old are determined as group with part of civil act capacity According to the laws and regulations, these entities are allowed to perform the transactions that meet their daily-life needs suitable to their age group These individuals are called by the legal science as the group that has not yet have the full civil act capacity As a result, they only join a few civil transactions When they want to borrow money from CMBs, these individuals must have the consents of their representatives at law Hence, when lending these individuals money, beside the determination of the civil act capacity, CMBs must check the elements relating to their representatives at law Accordingly, the representatives must qualify the conditions for competence of representatives, representatives’ capacity and virtue…

As a rule, all civil transactions that are established and performed by individuals with part of civil act capacity (apart from those transactions to meet their daily-life needs suitable to their age group) must have the consents of their

13

Ho Chi Minh city University of Law (2012), The general regulations on the Civil law, Hong Duc Publishing House, p 133

representatives at law However, the laws and regulations also give an exception to this rule Accordingly, in cases where a person who is between full fifteen years old and under full eighteen years old has his/her own property to ensure the performance of obligations, such person may establish and perform civil transactions by him/herself without the consent of his/her representative at law, unless otherwise provided for by law.14 As a result, when a person under this case borrows money from CMBs, the banks totally have the right to lend this person money without the consent of the representative at law if this person proves that he/she has own property This regulation facilitates the borrowing process of individuals It also helps them to participate actively in the civil transactions without depending on the representatives at law

- Individuals with limited cognition or behavior control

These individuals are the new entities that are recognized for the first time in the Civil Code (Law No 91/2015/QH13) of the National Assembly dated 24/11/2015 (take into effect 1/1/2017) (hereinafter referred to as the Civil Code 2015) According to the Civil Code 2015, these individuals are defined as “adults with limited cognition or behavior control due to his/her physical or spiritual condition”.15

The guardians represent these individuals in the civil transactions.16Thus, for these individuals, when they participate in the borrowing activity from the CMBs, they must borrow through their guardians As a results, CMBs must check the information relating to these guardians

- Individuals without full civil act capacity or loss of full civil act capacity Individuals without full civil act capacity or loss of full civil act capacity are determined as follow:

+ Persons who are under full six years old shall not have civil act capacity.17+ When a person is incapable of cognizing or controlling his/her acts due to mental disease or other ailments, the Court may, at the request of the person(s) with related rights or interests, issue a decision to declare such a person as having lost his/her civil act capacity, based on the conclusion of a competent medical examination body.18

According to the current regulations, these entities do not have the right to participate in the civil transactions themselves, the civil transactions relating to these individuals must be established and performed by the representatives at law Regulation on lending stipulates that individuals without full civil act capacity or loss of full civil act capacity do not have the right to borrow money from CMBs However, pursuant to the Civil Code 2005, these individuals’ civil transactions are established, performed by the representatives at law The borrowing transactions are

14 Article 20.2 of the Civil Code 2005

15

Article 23.1 of the Civil Code 2015

16 Article 57.1(b) of the Civil Code 2015

17

Article 21 of the Civil Code 2005

18 Article 22.1 of the Civil Code 2005

also the civil transactions, thus, to be suitable with the regulations of the Civil Code

2005, Regulation on lending must allow these individuals to borrow money from CMBs and those transactions will be performed through the representatives at law

- Individuals with the restrictions on the civil act capacity

Persons whose addiction to narcotics/drugs or to other stimulants leads to the squandering of their families' property may be declared by decision of the Court to

be persons with a restricted civil act capacity, at the request of persons with related rights or interests or of relevant agencies or organizations.19 The civil transactions related to the property of individuals with restricted civil act capacity must have the consents of their representatives at law, except for the transactions to meet their daily-life needs Hence, this group of individuals has the civil act capacity equivalent to the group of individuals with part of the civil act capacity If they want

to borrow money from CMBs, they must have the consents of their representatives

at law and these representatives at law must satisfy the previous mentioned conditions

As clarified, Vietnamese laws divide the civil act capacity into many different levels Different individuals have different level of the civil act capacity; accordingly, the capability of establishing and performing the rights and the obligations is also different Therefore, when lending money to an individual, CMBs must determine carefully the civil act capacity of this individual This determination will be carried out by the way asking the clients to provide some documents to prove the civil act capacity, including identity cards and passports, etc… Though these papers, CMBs can know the exact age of an individual and hereby determine whether this person satisfies the borrowing condition or not Besides, the determination of the civil act capacity of clients supports CMBs to orientate to collect some additional papers to constitute the valid borrowing transactions For instance, when an individual wants to borrow money, through the identity card provided by this client, CMBs know that this client is seventeen years

of age Thus, the determination of age of client helps CMBs to know that CMBs must collect additional papers proving the consent of representative at law of this client As a result, the loan agreement can be ensured the validity and this reduces the unworthy risks for CMBs

b The borrowers are Vietnamese organizations

- The organizations are the legal persons

Many clients participating in the borrowing transactions of CMBs are the legal persons These legal persons borrow money from CMBs for their production and business, with the amount of borrowing money usually accounts for high ratio The legal persons, as general understanding, are the organizations recognized by laws as the entities of the legal relations like individuals They have the independent and equal legal status with the other individuals and the other entities when participating in the legal relations The legal persons also have the rights and bear the obligations arising from the legal relations that they participate With the legal

19 Article 23.1 of the Civil Code 2005

definition, the legal persons are the organizations established lawfully, have well-organized structure, possess property independent from that of individuals and other organizations, and bear their own liability with such property and independently enter into the legal relations in their own name.20

An entity recognized by laws as a legal person, when it takes part in the civil relation in general and conducts the borrowing activity from CMBs in particular, this legal person must satisfy the condition for the capacity, including the civil legal capacity and the civil act capacity Those are the important conditions due

to the reason that the capacity of the legal persons is the capability of the legal persons establishing and performing the rights and the obligations as required by law Moreover, this capacity is the practical capability of the legal persons to join the legal relations and hereby perform the civil rights and obligations arising from these relations

Firstly, to participate in the borrowing activity of CMBs, the legal persons must have the civil legal capacity, which is the capability of the legal persons to have the civil rights and obligations consistent with the purpose of their operation.21The civil legal capacity of a legal person shall arise from the time it is established and shall terminate from the time it ceases to be a legal person When conducting the process of checking the civil legal capacity of the legal persons, CMBs shall base on the legal papers that show the civil legal capacity of the legal person These papers comprise the certificates of Business registration, the business licenses, the certificates of eligibility for business operation, practicing certificates… These are the documents clarifying the business lines, the scope of operation of the legal persons, reflecting minutely the civil legal capacity of the legal persons

Secondly, beside the civil legal capacity of the legal persons, CMBs also pay

a lot of attention to the civil act capacity of the legal persons Despite the fact that the Civil Code 2005 does not mention the civil act capacity of the legal persons, this does not mean that the legal persons do not have the civil act capacity The civil act capacity of the legal person is “the capability of legal person, through the representative, establishing and performing the civil rights and the civil obligations”.22

Hence, when participating in the borrowing relation, the legal persons must qualify the condition on have the civil act capacity; accordingly, the legal persons must have the representatives at law or the authorized representatives Specific conditions for the representatives of the legal persons are clearly regulated

in the Civil Code 2005 The representative at law of the legal person usually record

in the legal person’s charter or decision on establishment The authorized representative of the legal person shall be identified through proxy or mandate contract…

- The private enterprises

The organizations recognized by Regulation on lending to become the entities of the borrowing relation are the private enterprises The private enterprise

20 Ho Chi Minh city University of Law (2012), see supra note (13), p 149

21

Article 86.1 of the Civil Code 2005

22 Ho Chi Minh city University of Law (2012), see supra note (13), p 196

is defined as “an enterprise owned by an individual who is responsible for its operation with all of his/her property”.23

The private enterprise has unlimited liability, the owner shall be responsible for all private enterprise’s operations with his/her property A noticeable characteristic of the private enterprise is that it is not recognized as the legal person and thus, it has no right to participate independently

in the legal relations in its own name All the private enterprise’s operations depend

on the status of its owner

Originated from above characteristics, if there is a change of the owner (such

as the death or missing of the owner, the replacement of the owner of private enterprise…), the private enterprise is also affected, even ceased the existence of the private enterprise That is the reason why the laws and regulations mention the conditions for capacity of the owner of the private enterprise when this person participates in the borrowing relation: “The owner of a private enterprise must have civil legal capacity and capacity for civil acts”.24 Due to the reason that the private enterprise’s status is not separated with the owner’s status – also the representative

at law of private enterprise, the laws and regulations must minutely regulate the capacity of the owner of the private enterprise when this enterprise wants to borrow money from CMBs Examining the capacity of the owners is also examining the civil act capacity of the private enterprises The determination of the capacity of the owner of the private enterprises is the same as determination of capacity of individuals

Beside the civil act capacity, the private enterprises also have the civil legal capacity to perform the civil rights and the obligations suitable with their operations

If we only examine the condition for the capacity of the owners of private enterprises, it just stops at determine the civil act capacity of these private enterprises In the lending activity of CMBs, to determine the civil legal capacity of the private enterprises, CMBs usually require the owners of the private enterprises

to provide the certificates of Business registration, the business licenses, practicing certificates… These are the reliable documents for the owners to prove the civil legal capacity of the private enterprises

- The households

The current Vietnamese Civil Code recognizes the households as the subject

of the legal relation Accordingly, Article 106 of the Civil Code 2005 stipulates that:

“The family households in which members have common property and jointly contribute their efforts and labor to their common economic activities in agricultural, forestry or fishery production or in a number of other production and/or business domains defined by law shall be subjects when participating in civil relations in such domains”

As we can see, the Civil Code 2005 does not bring out the definition of the household; it just describes the conditions for the household to become a subject of the legal relation To be recognized as the subject of the legal relation, a household must have some following characteristics, including: firstly, a household must be a

23

Article 183.1 of Law on enterprises (Law No 68/2014/QH13) dated 26/11/2014

24 Article 7.1(a) of Regulation on lending

collection of many people and these people must have common property; secondly,

a household must be a collection of members who jointly contribute their efforts and labor to their common economic activities

Currently, the laws and regulations have no regulation mentioning the capacity of the households There is also no determination of the time of arising or the time of terminating the capacity of the households With this legal practice, the households are considered as the “spontaneous entities” They have no specific legal event as specified by laws like individuals with “the birth” and “the death” or the legal persons with “the establishment” and “the cease”.25 Thus, the determination of the capacity of the households is not an easy task Otherwise, comparing with other entities, the civil legal capacity of the households is limited within some areas, including “the common economic activities in agricultural, forestry or fishery production or in a number of other production and/or business domains defined by law” Hence, with the current regulations, the households only have the right to borrow money for agricultural, forestry or fishery production or in

a number of other production and/or business domains

Due to the difficulties in determining the capacity of the households, the laws and regulations pay more attention to the capacity of the households’ representatives (usually the heads of the households) when considering the condition for the borrowing entity’s capacity to constitute the borrowing relation The determination

of the capacity of the households’ representatives (including the civil legal capacity and the civil act capacity) is the same as the determination of capacity of individuals

To check the capacity of the households’ representatives, CMBs usually ask the households’ representatives to provide family record books, identity cards… In addition, CMBs usually require the households’ representatives to provide the documents proving the borrowing activity for the common purposes of the households Besides, the heads of the households also have the right to authorize the other members to represent the households to participate in the borrowing transaction on condition that the authorization satisfies the principles of the Civil Code 2005

- The co-operative groups

Beside the households, the Vietnamese legal system also recognizes the co-operative groups – group of simple economic organization - as the subject of the legal relation Basing on the Civil Code 2005’s regulations and relevant legal documents, the co-operative group is defined as follow: “The co-operative group is

an independent collective economic organization which is formed on the basis of cooperation contract which are entered into by three or more individuals who jointly contribute property and labor in order to perform certain tasks and to jointly enjoy benefits and jointly bear liabilities”.26

Like any other subjects, the co-operative groups have their own capacity The co-operative group’s capacity is the capability of the co-operative group to become the subject that is independent with other subjects when joining the legal relation, is

25

Ho Chi Minh city University of Law, see supra note (13), p 256

26 Ho Chi Minh city University of Law, see supra note (13), p 272

capability of enjoying the rights and bearing the obligations of the co-operative group.27 The capacity of the co-operative groups also consists of two aspects; those are the civil legal capacity and civil act capacity

The civil legal capacity of the co-operative groups is understood as the capability of enjoying the rights and bearing the obligations The Civil Code 2005 regulates that the co-operative groups are only allowed to perform “certain tasks” This means that there is a limitation in the civil legal capacity of the co-operative groups However, despite this regulation, there is no legal document specifying minutely these certain tasks Contrary to this, Decree No 151/2007/ND-CP of Government dated 10/10/2007 on the organization and operation of co-operative group stipulates that: “Cooperative groups may select production and business domains that are not prohibited by law, and operate freely regardless of the administrative boundary of the locality where their cooperation contracts are authenticated”.28 Hence, according to this regulation, we can generally understand that, the civil legal capacity of the co-operative groups is not restricted in any production and/or business domains.29

Beside the civil legal capacity, the co-operative groups also have the civil act capacity The civil act capacity is understood as the capability of the co-operative groups through their acts establishing and performing the civil rights and the obligations The civil legal capacity of the co-operative groups is usually performed through the activities of the co-operative group and the activities of the co-operative groups are performed through the activities of their representatives When dealing with the co-operative groups in the lending activity, CMBs only discuss directly with the representatives of the co-operative groups who are the heads of the co-operative groups The heads of cooperative groups may authorize group members to borrow money from CMBs

Like the legal persons, individuals, the capacity of the co-operative groups arises at the same time of establishing and terminates at the same time of ceasing the co-operative groups The time of establishment of the co-operative groups is the time the cooperation contract authenticated by People’s Committees This characteristic creates the clear difference with the households If the capacity of the households is hard to determine, the capacity of the co-operative groups is easier to determine through the cooperation contracts The presence of these cooperation contracts supports CMBs with the process of checking the capacity of the co-operative groups Besides, basing on these contracts, CMBs can determine the purposes of operation of the co-operation groups, the term of cooperation… Those are the important elements serving the lending activity, ensuring the validity of the loan agreements

As above-mentioned analysis, the representatives of the co-operative group are the persons who conduct the borrowing activity Therefore, the laws and regulations request that CMBs examine the capacity of the co-operative groups to

27 Ho Chi Minh city University of Law, see supra note (13), p 276

28

Article 12.1 of Decree No 151/2007/ND-CP

29 Ho Chi Minh city University of Law, see supra note (13), p 278

ensure the validity of the loan agreements In practice, the examination of the capacity of the heads or the authorized members of the co-operative groups is not essential The main reason is that a person who is the member of the certain co-operative group is always full eighteen years old or older This means that a member of the co-operative group is definitely full of civil act capacity and of course, satisfies the condition for the capacity (apart from cases of limit of the civil legal capacity as regulated by law) Thus, instead of checking the capacity of the representatives, CMBs have a tendency to pay more attention to determine whether the authorization is legitimate or not and the borrowing activity of the representatives is for the common purposes of the co-operative groups or not

1.3.1.2 The capacity of the foreign borrowers

The Vietnamese legal system also takes special interest in the borrowing entities that are the foreign individuals and the foreign organizations because these entities more and more participate in the borrowing activity to meet the needs of investment Unlike the internal entities, the existence of the foreign element requires the determination of the capacity of these entities to follow the private international principles Accordingly, Article 7.1(b) of Regulation on lending specifies that: “In the case of a borrower being a foreign organization or individual, it must have civil legal capacity and capacity for civil acts under the laws of the country of which the organization 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”

Therefore, Regulation on lending stipulates that the determination of the capacity of the foreign legal persons bases on the nationality law of the foreign legal persons (Lex Societatis30) and the determination of the capacity of the foreign individuals bases on the nationality law of these individuals (Lex patriae31) However, when examining the capacity of the foreign individuals and the foreign legal persons, CMBs do not just base on the provisions of Regulation on lending CMBs must also follow the regulations for the civil transaction involving foreign element at the Civil Code 2005 and the Decree No 138/2006/ND-CP of the Government dated 15/11/2006 on detailing the implementation of the Civil Code’s provision on civil relations involving civil elements (hereinafter referred as Decree

No 138/2006/ND-CP) One big issue needed to solve is that the differences between these legal documents on the same matter of determining the capacity of foreign individual and foreign legal person In particular:

- For the civil legal capacity of the foreign individuals, according to the regulation of the Civil Code 200532 and the Decree 138/2006/ND-CP33, the civil legal capacity of a foreigner shall be determined according to the law of the country

Article 761.1 of the Civil Code 2005

33 Article 6.1 of the Decree No.138/2006/ND-CP

of which he/she bears the nationality The civil legal capacity of a foreigner residing

in Vietnam is determined according to the provisions of Article 14 thru Article 16 of the Civil Code 2005 Thus, unlike Regulation on lending that determines the civil legal capacity of the foreign individual through nationality, the Civil Code 2005 and the Decree No 138/2006/ND-CP divide foreign individual into two classes: foreign individual resides in Vietnam and foreign individual resides in foreign nation The Civil Code 2005 and the Decree No 138/2006/ND-CP also stipulate the way to determine the civil legal capacity of each class (base on the residence law) As a result, if CMBs only base on Regulation on lending to determine the civil legal

capacity of the foreign individuals, they accidentally omit an important regulation

- For the civil legal capacity of the foreign legal persons as well as the civil act capacity of the foreign individuals and the foreign legal persons, unlike the Regulation on lending, the Civil Code 2005 and Decree No 138/2006/ND-CP stipulate that the civil legal capacity of foreign legal persons shall be determined in accordance with the Vietnamese law The reason is that borrowing transaction always establishes and performs in Vietnam; therefore, the determination of capacity of these entities basing on the nationality pursuant to the Regulation on

lending has no meaning at all

In brief, Regulation on lending just generally regulates the condition for determining the capacity of the foreign individuals and the foreign legal persons Otherwise, those regulations are not in accordance with the regulations of the Civil Code 2005 that has higher legal effect The differences in the regulations between two legal documents can lead to mistakes in the application of law However, we must notice that Regulation on lending came into effect since 2001 but the Civil Code came into effect since 2005 Hence, beside Regulation on lending, CMBs must currently examine the regulations of the Civil Code 2005 when determining the civil legal capacity and the civil act capacity of the foreign individuals and the foreign legal persons This shall ensure the sufficiency and the accuracy and reduce the potential risks when lend these entities money

1.3.2 Legislation on the condition for the purpose for utilizing the loan capital

Each entity when borrowing money from CMBs has its own purpose Despite the variety of the purposes, these purposes can be divided into two classes: consumption purposes and the production, business purposes The purpose of utilizing the loan capital depends on the own decision of the borrowing entity Therefore, the question is that “why do CMBs pay a lot of attention to the purpose

of utilizing the loan capital”? The answer for this question is that the borrowing entities do not follow the purposes that are allowed by law all the time There are some cases that the borrowing entities utilize the loan capital for unlawful purposes These includes: borrowing for using the narcotics; dealing in narcotics; buying the military weapons; dealing in the military weapons, military gears for the armed forces; dealing in reactionary, depraved or superstitious cultural products or those harmful to aesthetical or personality education; dealing in the fire crackers of all kinds…

The borrowing entities of CMBs have many different purposes for utilizing the loan capital, therefore, to ensure the safety and effectiveness of the lending