A credit contract is a written agreement between a Foreign Invested Enterprise (FIE) as a lender and a domestic enterprise that fully meets the conditions prescribed by law. By providing information in the Credit Contract, HMLF provides advantages and disadvantages when a domestic enterprise signs a loan contract from an FIE secured by land use rights.
The credit contract
Credit contract is essentially a property loan contract, where the lenders are credit institutions, mainly commercial banks. Credit reflects the relationship of mutual capital use between entities in the economy on the basis of agreement. Accordingly, the lender transfers to the borrower a certain amount of value for a certain period of time, at the end of which the borrower must repay to the lender a larger amount of the original value (i.e. return both capital and interest).
In which, bank credit is the main form of credit of the market economy, because it meets the diverse capital needs of different entities. Bank credit is a form of lending between credit institutions on the one hand and organizations and individuals in the economy on the other; in which, a credit institution transfers monetary resources or assets to the borrower within a certain period of time on the principle of repayment of both capital and interest. Thereby, creating a favorable business environment for businesses of all economic sectors, contributing to sustainable development and improving the competitiveness of the economy.
Thus, from the definition of a contract and based on the nature of lending activities of credit institutions, it can understand that:
Credit contract is a specific form of property loan contract. Accordingly, the credit institution being the lender assigns the borrower a sum of money. The borrower use that money for a specified purpose within a certain period of time in accordance with the agreement on the principle of repayment of both principal and interest.
Subject of the credit contract
There are at least two parties involved in the credit contract relationship, in addition, there is a third party. In which, the two main actors are the lender (the credit grantor) and the borrower (the credit grantee).
For the credit institution, this subject is a special subject because it has the function of carrying out all or all banking activities, but must ensure many strict conditions of the law on capital,… and issues related to the specifics of the banking business. This entity can be a domestic or foreign credit institution.
For the borrower, collectively referred to as the customer, includes organizations and individuals that satisfy the conditions for conducting transactions and lending of credit institutions. Economic organizations can include enterprises, joint ventures, cooperatives, unions of cooperatives, etc.
Accordingly, the subject of the credit contract is the two parties involved in the transaction relationship by the credit contract; in which, the credit grantor is the representative of credit institutions established and operating in accordance with the law and the other party is the credit grantee.
Features of the credit contract secured by land use rights between a state-owned organization and a foreign credit institution
The Lender are carefully and detailed on the regulation list of loan levels, loan payment and the methods of paying loan. The Lender usually uses LIBOR interest rate – London Inter-Bank Offered Rate, the benchmark interest rate at which major global banks lend to each other in the international interbank market for short-term loans, the main globally accepted benchmark interest rate for interbank loans.
The lender will determine the rate in each disbursement will be a percentage per annum by summing up the margin, the fixed base rate, and the cost of excess financing. This level of regulation is quite similar to the Floating Interest Rate. Accordingly, the Borrower must comply with the regulation on the Ratio in each disbursement, which easily leads to the situation the Borrower do not have a clear understanding of how to regulate the ratio and the money need to pay for each disbursement.
This will easily cause a situation when foreign credit institutions ask to pay a penalty for not paying the loan in full. In the end, the Borrowers, often hold valuable land bases in the land fund, if they have to pay loans with high-interest rates to foreign lender, it can easily lead to a situation where mortgage land use rights for foreign credit institutions easily lead to seriously affected land fund.
If factors of the economic situation (such as inflation, economic crisis, the impact of the pandemic on the global economy, etc.) affect the Borrower, the Borrower is still unable to meet the repayment schedule. In case of the borrower is unable to repay the loan, there is a plan to help restructure the loan such as extending the loan principal or the borrower’s plan to pay off the debt completely all at once.
Advantage and disadvantage from Lenders perspective
Advantage:
– Under the 2013 Land Law, foreign lenders are not allowed to accept mortgages of land use rights from Vietnamese borrowers. However, between the borrower and the lender, the Present and Future Assets Mortgage Agreement may enter into an agreement to appoint a mortgage agent as security for the full value of the Borrower’s Land Use Rights. Thus, the Lender is provided with a direct mortgage on an asset class other than the Land Use Right, but closely linked to the Land Use Right.
– According to Vietnamese law, the lender does not have the status of a land user, even if the lender can mortgage the land use right, when dealing with the mortgage of the land use right, the lender can only mortgage the land use right may transfer the Land Use Rights for money without receiving the Land Use Rights in lieu of loan repayment. The signing of Present and Future Assets Mortgage Agreement by both parties can be used as a safeguard for the borrower to prevent the borrower from Mortgaging the Use Rights to another entity.
Disadvantage:
Borrowers can “get out” of the security arrangement and the lender by repaying the loan in full and using the “Present and Future Assets Mortgage Agreement” termination. This causes the lender to no longer benefit from the secured interest on the borrower’s current and future assets under the credit agreement. However, the lender can mitigate this situation with appropriate commitments between three parties: Lender, Borrower and Mortgage Agent.
Advantage and disadvantage from Borrower perspective
Vietnam has joined a series of Free Trade Agreements (FTAs), but the integration still limits in input fields of production such as land, finance, etc.. This credit contract also has advantages and limitations that need to be overcome.
Advantage:
– Enterprises, also known as borrowers, can expand their ability to attract investment capital and have more choices in capital mobilization methods.
– Investment demand of foreign organizations in Vietnam’s real estate has increased. If caught correctly, businesses can access more capital than the domestic market, contributing to the development of the economic and real estate market.
– Borrowers need to ensure that the land use rights in the whole process do not belong to an FIE, but the credit institution will process for resale or transfer, then will collect proceeds and return the money to an FIE. The foreign lender will have influence only on the value of the Land Use Rights, not on the collateral that is the land use rights.
Disadvantage:
Borrowers should note that borrowing in foreign currencies has a huge risk that Vietnamese businesses may encounter, which is huge exchange rate fluctuations, not including legal risks.
Borrowers should pay attention to the loan interest payment terms, to avoid the situation where binding terms in the loan contract lead to the borrower want to repay the loan to regain the land use right, the borrower must compensate for the penalties, the percentage of interest that the lender would have received when the borrower paid the loan in installments under the contract.
Conclusion
The contract for mortgage loan with land use rights of a domestic enterprise and foreign organizations is a useful and potential contract for businesses to attract investment capital to be able to carry out projects and domestic judgment. However, businesses need to understand the nature and provisions of this type of contract, to avoid the situation that when they are unable to pay the loan, they will lose the right to dispose of the land.
The current Land Law does not allow or allows very limited individuals and organizations of foreign countries when receiving the transfer of land use rights in their names. The current law on the right to access land of foreign-invested enterprises still has some limitations and shortcomings that need to be revised, supplemented and perfected. Foreign lenders need to pay attention to the provisions of the law as well as get support from the mortgage agents to be able to allow the Vietnamese company (the Borrower) to use its land use right to guarantee the foreign loans.
About us
HMLF is a Law Firm to provide legal services to foreigner who wishing to invest in Vietnam. With a team of experts and staff of HMLF try to provide optimal solutions to bring customers satisfaction when experiencing legal services.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: 0937215585
Website: hmlf.vn
