Legislation on the conditions for borrowing at commercial banks

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 Student Code: 1253801010005 Class: 34 – CLC 37(B) HO CHI MINH CITY 2016 DECLARATION “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 CMB(s) Commercial bank(s) TABLE OF CONTENTS INTRODUCTION .1 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 1.1.2 The risks of commercial banks in the lending activity 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 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 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 49 CONCLUSION 50 LIST OF REFERENCES INTRODUCTION 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 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 hạn chế rủi ro tín dụng hoạt động thẩm định cho vay 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 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 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 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 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 CMBs - Secondly, basing on the basic theory, author moves on presenting, analyzing, assessing and commenting the typical contents of the legislation on the conditions for borrowing at CMBs - Finally, author studies and analyzes the shortcomings in applying the legislation on the conditions for borrowing at CMBs and after that, proposes some solutions to improve the practical implementation of legislation on the conditions for borrowing at CMBs - 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 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 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 dictionary also gives the definition of the term of “lending”, accordingly, 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 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 Law dictionary (2006), Encyclopedia Publishing House – Judicial Publishing House, p.143 happen The evaluation of the value of the security assets can sometimes be over the market price and sometimes lower the market price This inaccuracy in evaluating the value of the security asset may lead to some disadvantage consequences for both clients and CMBs Currently, many CMBs base on the land price frames of the provincial-level People’s Committees to evaluate the assets that are the land use rights and then decide the lending limits The value of security assets is not commensurate with the real value, especially the residential land use rights The value of residential land use rights that is brought out by the provincial-level People’s Committees is only used to determine the tax obligation, but it is not used for the sale in market, thus, this price is lower greatly than the price of land use rights transferred in the market.52 The evaluation of the value of security asset like this will not ensure the interest of clients, where they only have the rights to borrow less money than usual Otherwise, in some cases, with the current evaluation method of value, CMBs will reject the offer for borrowing of client with the reason that their security assets not satisfy the required value while the actual reason coming from the determining of price of CMBs If the evaluation of value of security asset over the market price will affect the interest of the clients, the evaluation of value of security asset lower the market price, otherwise, will not ensure the safety of the lending activity of CMBs This practice is seldom but we cannot deny the existence of this in some cases The evaluation of value is higher than the real value of security asset can deprive from the mistakes, shortcomings of the evaluator or come from the intentional acts of CMB’s officers for their own interests This practice put CMBs under high level of risks; therefore, CMBs must pay more attention to the process of the evaluating the security asset to ensure the safety in their business In summary, the higher or lower value of the security asset than the market price always affects the subjects in the lending relation; therefore, the accuracy in the process of evaluating the value is now the necessary elements to enhance the effectiveness in the lending activity Although this practice can come from many reasons, the main reason, in the author’s opinion, deprive from the lack of the specific regulations from the State in relation with the measures of evaluating the value of security assets This causes many potential risks for the extension of credit, especially the lending activity of CMBs 2.1.5.2 Difficulties in determining the authenticity of security assets and the ownership right of security assets of borrowers a Difficulties arising from the lack of faithfulness of borrowers To determine the authenticity of security assets and the ownership right of security assets, CMBs usually base on some legal papers For example, if the security assets are the moveable assets, CMBs require the sale contracts, invoices, vouchers, export-import contracts…, if the security assets are the immoveable assets, CMBs require the certificates of land use right and house ownership, the contracts on land use right transfer, the contracts on house ownership transfer 52 Phung Hong Thanh (2012), see supra note (44), p 50 40 However, those legal papers have still not showed the authenticity of security assets When a client intentionally forges these legal papers, CMBs are hard to realize through checking those legal papers For example, in the case of Huynh Thi Huyen Nhu (the former credit manager of Vietinbank Dien Bien Phu) and Vo Anh Tuan (former deputy director Vietinbank Nha Be) forged the passbook, confirmation latter of balance at Vietinbank and used these documents as the collaterals for some people to borrow money from the other banks Another example is the case in the Kien Giang province; accordingly, Nguyen Dong Hai, Duong Van Giau and Nguyen Hoang Minh created 55 forged certificates of land use right and used these certificates as collaterals to borrow money from six banks: ABBank, Vietcombank, SHB, Agribank, LienVietPostbank.53 From above example, we can see that, cases that clients use forged documents to qualify the condition for security assets are not rare and this causes many potential risks when the borrowers not have the ability to repay the debts and CMBs cannot handle with the security assets to recover the debts b Difficulties arising from the shortcomings of legislation - The existence of many certificates of immoveable assets In comparison with the moveable assets, the determination of immoveable assets is relatively easier because the immoveable assets have the stable nature Moreover, the laws and regulations require the immoveable assets must be registered the ownership rights and all the transactions relating to immoveable assets must be notarized or authenticated Due to this reason, the evaluation of information relating to the security assets is easier and more accurate Nevertheless, the determination of the security assets that are immoveable assets is not easy all the time One of the reasons causing the difficulty in examining those security assets can be mentioned are the legislation’s shortcomings in relation to the certificates of ownership rights of those assets Particularly, the different regulations at different time cause the practice of simultaneous existence of many certificates of land and house granted by competent state agency We can list these certificates, including land use right certificate (pursuant to the Land law 1987, the Land law 1993); certificate of ownership of dwelling house and the right to use residential land (pursuant to Decree No 60/CP of the Government dated 05/07/1994 on dwelling house ownership and residential land use right in urban areas); certificate of ownership of dwelling house and construction (Pursuant to Decree No 95/2005/ND-CP); house ownership right certificate (Pursuant to Law on Housing No 56/2005/QH11 of the National Assembly dated 29/11/2005 and Decree No 90/2006/ND-CP); certificate of land use rights and house and land-attached asset ownership (Pursuant to Decree 88/2009/ND-CP dated 19/10/2009 and the Land law 2013 and the Law on Housing 2014) According to the current laws and regulations, above certificates exist 53 “Swindling banks by forged documents, appropriating 100 billion VND”, http://canvaytien.net/lua-6-ngan-hang-bang-giay-to-dat-gia-mao-bo-tui-hon-100-ti-dong/, retrieved on June 18th, 2016 41 concurrently and have the same legal validity Due to the existence of such many certificates, the determination of the authenticity of these is not the easy task Originated from this practice, CMBs face many difficulties because if CMBs want to check these certificates, the evaluator must have wide knowledge of relevant legislation The existence of too much certificates together with lack of expertise of banks’ officers creates the gap for fraud and creates many risks for CMBs - Difficulties arising from the shortcomings of legislation of the properties to be formed in the future The security assets are the existing assets or properties to be formed in the future that are not banned from transaction by law Therefore, according to the current laws and regulations, beside the existing assets, properties to be formed in the future are recognized as the security assets for the loans at CMBs However, when evaluating the properties to be formed in the future, CMBs encounter many difficulties Currently, the laws and regulations have no provisions on the legal conditions for security assets that are the properties to be formed in the future This is one of the shortcomings of the Civil Code 2005 where it does not pay specific attention to these assets Therefore, in practice, parties cannot determine which conditions for the properties to be formed in the future to become a security asset.54 On the other hands, one of the reasons causing this practice is the discrepancy between legal documents in relation with the concept of the properties to be formed in the future Particularly, according to the provision of the Civil Code 2005, objects used to secure the performance of civil obligations are the existing objects or objects to be formed in the future Objects to be formed in the future are movable property or immovable property under the ownership of the securing party after the time the obligations are established or the security transactions are entered into.55 Unlike this, Decree No 11/2012/ND-CP of the Government dated 22/2/2012 specifies that the properties to be formed in the future include: assets procured with loan, assets which are in the making or lawfully created at the time of entering into the secured transaction, assets which have been formed and are subject to ownership registration but are registered in accordance with law after the time of entering into the secured transaction Properties to be formed in the future not include land use rights.56 Thus, the concept of the properties to be formed in the future between two legal documents has some differences Particularly, Decree No 11/2012/ND-CP has the wide meaning of properties to be formed in the future; accordingly, the properties to be formed in the future comprise tangible things, valuable papers and property rights, only except for land use rights Whereas, the properties to be formed in the future understood pursuant to the regulation of the Civil Code 2005 only comprise tangible things (moveable and immoveable properties) This 54 Le Thi Huyen Tran (2015), Vietnamese Law on mortgage of properties to be formed in the future, Law Bachelor thesis, Ho Chi Minh City University of Law, p 72 55 Article 302.2 of the Civil Code 2005 56 Article 1.2 of the Decree No 01/2012/ND-CP 42 discrepancy between two legal documents creates many difficulties in the lending activity As a result, CMBs not know exactly whether a specific property to be formed in the future of client recognized by law as the property to be formed in the future or not c Difficulties arising from the mistakes of commercial banks’ credit officers Although the forged legal documents relating to the security assets exist everywhere and cause the loss of many CMBs, the main reason for the clients easily using forged documents to swindle money arises from the mistakes of CMBs’ credit officers Subjectivity of credit officers is one of the vital reasons for the clients to use the security assets that are not real or are not the assets of the borrowers or third party In practice, there is a bank lending with the security assets of house and land For the convenience purpose, the credit officer and the notary of this bank agree to sign the mortgage contract at the bank’s main office and allow client himself to conduct the procedure on notarization of contract and mortgage registration at land use right registry When this client returns, this bank sees that these documents are all regular and then decide to disburse When the client defaults on the debt, the bank checks and then finds out the truth that there is not existence of house and land at the address provided by client Today, many cases that CMBs ignore the procedures relating to the notarization of mortgage contract as prescribed by law The mortgager bases on this point to state that the mortgage contract is invalid and refuse to perform the duty of repayment Practice shows that many CMBs ignore the process of entering into the mortgage contract, notarize and certify the contract when the loans are short-term loans with one or two weeks Instead, CMBs retain the certificates of land use rights and house and land-attached asset ownership to bring pressure to bear upon clients However, when the clients not repay, CMBs must return these certificates Besides, the credit officers not check carefully the security assets and relevant documents; therefore, they cannot realize this asset is the common property of husband and wife This carefulness of the credit officers in examining the security assets causes the many risks in the lending activity of CMBs; thus, it is urgent issue to enhance not only the expertise but also the responsibility of the credit officers 2.2 Proposals on improving the application of the conditions for borrowing at commercial banks 2.2.1 Group of the legal proposals 2.2.1.1 Proposals on improving legislation on the condition for borrower’s capacity Firstly, the necessary amendment of the provisions for borrower’s capacity of Regulation on lending to be in accordance with the practice Regulation on lending of the State Bank shows many shortcomings when applying in practice These shortcomings come from the reason that Regulation on lending took into effect from 2001 and is used to detail the Law on Credit Institution 1997 The birth of the Civil Code 2005 and especially the birth of the Law on Credit Institution 2010 replacing the Law on Credit Institution 1997 leads to the outcome that the current Regulation on lending is too old and exposes many 43 limitations For example, for the borrowing entities, Regulation on lending only mentions individuals and legal persons This means that pursuant to the this provisions of Regulation on lending, many entities recognized by the Civil Code 2005 as the subject of the legal relations such as private enterprises, households, co-operative groups only participate in the borrowing relation as individuals For the capacity of clients, Article 7.1 of Regulation on lending only mentions the civil legal capacity of the legal persons While other organizations such as private enterprises, households, co-operative groups must also have the civil legal capacity to take part in the borrowing relation Furthermore, in practice, CMBs also require these borrowers to provide the legal papers to prove their civil legal capacity These shortcomings are handled when the Decision No 127/2005/QD-NHNN is promulgated and took into effect; accordingly, the subject of the borrowing relation is amended and consists of individuals and organizations The civil legal capacity of the legal persons is also replaced by the civil legal capacity of organizations, hence, all entities of the borrowing relation are recognized as having the civil legal capacity However, there is one issue relating to the capacity of clients has not been settled so far As mentioned in the Chapter 1, the determination of the capacity of foreign clients in Regulation on lending does not unify with the Civil Code 2005 According to Regulation on lending, the capacity of foreign clients bases on the laws of the country of which the clients holds nationality or of which the individual is a citizen, whereas, the Civil Code 2005 require to base on the Vietnamese laws and regulations to determine the capacity of foreign clients The differences in two legal documents lead to many ways of understanding and cause the difficulty in applying these legal documents According to the viewpoint of author, originated from these shortcomings, the legislators should set up a new Regulation on lending that is used to detail the current Law on Credit Institution rather than detailing the old one The unification of provisions of Regulation on lending and the Decision No 127/2005/QD-NHNN in general and the provisions on the subject of the borrowing relation and the civil legal capacity of them is the urgent issue, creates many conveniences in applying the provisions of Regulation on lending Besides, for the capacity of foreign clients, the new Regulation of lending must have some adjustments that are suitable with the provisions of the Civil Code Secondly, the change of the civil legal capacity of the legal persons In the course of business, the civil legal capacity of the legal persons can totally change The change of the civil legal capacity of the legal person leads to the change of the financial situation of this legal person This means that CMBs will face the risk of non-recovery of debts Thus, the laws and regulations must have some provisions in relation with the responsibility of notifying the changes Accordingly, if there is an existence of any change relating to the civil legal capacity, the legal persons must have the obligation to establish the changing reports and then provide them for CMBs If the legal persons have the sign of unfaithfulness in providing these information, they must bear some disadvantage remedies Thirdly, issues on entering into the loan agreements with the households When entering into the loan agreements with the households, CMBs 44 encounter many difficulties relating to the determination of capacity of these entity The main reason for this practice is that the laws and regulations lack the clear and specific provisions on the households, for instance, the concept of the household, elements to constitute a household, the time of establishment and finishing a household Thus, today, CMBs have still lacked the legal mechanism to enter into the loan agreement with households Currently, the household is still recognized as a subject of the civil relation pursuant to the regulations of the Civil Code 2005 However, contrary to this, the household will not be recognized as a subject of the civil relation in accordance with the regulations of the Civil Code 2015 This means that the households will have no legal status to become the subject of borrowing relation when they want to borrow money from CMBs Instead, the households will participate in the borrowing relation under the manner of individuals When the Civil Code 2015 takes into effect, if the legislators intend to create a new Regulation on lending, they must pay attention to this change 2.2.1.2 Proposals on improving legislation on the condition for purpose for utilizing the loan capital Firstly, issue on the lawfulness of the purpose for utilizing the loan capital At the current point of time, the determination of lawfulness of the purpose for utilizing the loan capital is still not regulated in a specific legal document This means that if CMBs want to check whether a certain purpose is lawful or not, they must refer to many provisions of many legal documents The current Regulation on lending does not specify enough which purposes are prohibited In addition, economic and social situation always changes Therefore, depending on the State’s policy on economic and social development, each period will have the priorities or limits on specific business and production activities Thus, CMBs are usually on the verge of the non-recovery of debts when there is an existence of any change To solve this problem, author suggests that the change of the policy on the economic development should be conducted steps by steps to assure that CMBs have enough time to handle with in accordance with the changes Consequently, the prediction of the legislation should be enhanced Secondly, issue on the loan re-structuring of CMBs The loan re-structuring has its nature is to make the old debts to become the new ones in the future This loan re-structuring helps CMBs to handle with the bad debts and supports the borrowers to have more time for repayment However, loan re-structuring is still considered as not good for economy When performing the loan re-structuring, CMBs will not gain the final purpose of their business; otherwise, the loan re-structuring will create no motivation for the clients to perform obligation of repayment of the loans In the current practice, loan re-structuring is prohibited; however, this prohibition has not been recognized clearly in a legal document Although the loan re-structuring is determined as not bringing any benefit for CMBs as well as the economy, under some cases, the loan re-structuring can support the social issues For instance, when the borrowing entities are the households with financial difficulties or families borrow money for the study 45 purpose of their children…, the loan re-structuring in this case will help these entities have more time to perform the repayment obligation because this non-repayment of loans is just temporarily Moreover, these loans are only the small amount of money that is used for the consumption’s purpose; therefore, the loan re-structuring in this case will not harm the business of CMBs Due to above analysis, author suggests the State must clearly state their viewpoints in relation to the ban or allowance of the loan re-structuring in a legal document If the State’s viewpoint is that the loan re-structuring is prohibited like the current practice, they must amend the current Regulation on lending for the suitability As author clarified, not all the cases that the loan re-structuring is not good Thus, if the State recognized these cases for the loan re-structuring, they must have the clear regulations in relation to the cases of borrowing money for the purpose of the loan re-structuring, the term and the interest when borrowing for the loan re-structuring As consequence, the lending activity of CMBs will have effectiveness Reducing cases that CMBs are regardless of the potential risks due to the reason that lacking the regulations of law 2.2.1.3 Proposals on improving legislation on the condition for financial capacity of clients The determination of the financial capacity of clients is the difficult task for most of CMBs Not all CMBs have enough ability and expertise to evaluate exactly as well as realize the suspicious signs of the financial statements provided by clients Currently, the Government has promulgated the Accounting Law (2003) and the Law on the Independent Audit (2011) These legal documents partly support to ensure the faithfulness and the accuracy of the financial statements However, in our society, the legal environment relating to the account and audit is on the course of improvement Therefore, the shortcomings in the process of applying the Accounting Law and the Law on the Independent Audit are inevitable As a result, to support CMBs for effectively evaluating the financial statements of clients, it is necessary to improve legislation on the account and audit In particular, the competent state agency should promulgate some legal documents detailing the liability of the auditing enterprises in case they compromise with clients to establish the unfaithful financial statements The legislation should have the mechanism of supervising the auditing enterprises, enhancing the expertise and the ethnicity of the auditors 2.2.1.4 Proposals on improving legislation on the condition for project, plan for utilizing the loan capital Usually in practice, for the investment project or the plan to service living conditions such as buying or repairing houses, buying facilities, transportations… CMBs only have to check the lawfulness of purposes for utilizing the loan capital and some relevant documents to evaluate the project, plan for utilizing the loan capital Contrary to this, for the investment project or plan for production, business and services, CMBs must pay more attention to evaluate the effectiveness and the feasibility of these plans As author has analyzed, CMBs will actively examine and evaluate the condition for the project, plan for utilizing the loan capital Normally, CMBs will evaluate the economic nature and the legal nature of the plans Firstly, 46 on the legal aspect, the evaluation of the project, plan depends on the legal papers, such as Certificate of investment, Certificate of Business registration, Business license… Secondly, on the economic aspect, this evaluation can be considered through the level of feasibility of the project, plan and the investment scale However, the accurate evaluation requires CMBs to have strong human resource together with legal and economic specialists In practice, although the clients provide the unfeasible project or plan, CMBs still decide to lend The autonomy in evaluating the project, plan for utilizing the capital sometimes leads to risks for CMBs Moreover, the project, plan for utilizing the loan capital has an important meaning and affect the recovery of debts Therefore, according to author’s opinion, the State Bank should promulgate specific regulations as the framework criteria to evaluate the effectiveness and the feasibility of the project, plan for utilizing the loan capital 2.2.1.5 Proposals on improving legislation on the condition for the security for loan Firstly, issue on the evaluation of value of security assets It is necessary to set up a system of specific regulations detailing the evaluation of the security assets Accordingly, the evaluation of security assets of CMBs must follow the legislation on evaluation principles, measures and procedures of evaluation, standards of evaluation… This will limit the CMBs’ negligence during the course of evaluating the value of security assets because the inaccuracy in determining the value of asset will lead to some disadvantage consequences For example, if the evaluation is higher than the market price, the result is that the value of the security assets will be insufficient for the recovery of debts and interests when CMBs handle with the assets in cases of the non-repayment of clients Otherwise, if the evaluation is lower than the market price, this will affect the demands of capital of clients Therefore, the supplement of the regulations on evaluation of value of the security assets is known as the extremely important requirement in the process of improving the legislation on the condition for security for loans Secondly, issue on the determination of the ownership right of the security assets Nowadays, if a borrower wants to use an asset to secure for a loan at a CMB, this borrower must have the ownership right of this asset or the third party agrees to use his/her asset to secure for the loan of this borrower Nevertheless, legislation on determining the assets and the ownership right of assets still has many limitations, contradictions and unreasonable points Typical example is the existence of many certificates of ownership right of house and land Therefore, it is an urgent issue to improve the laws and regulations in relation to the assets and the ownership right of assets Thirdly, issue on the properties to be formed in the future The determination of properties to be formed in the future is a complicated issue due to the discrepancy of the laws and regulations In the current practice, the usage of properties to be formed in the future to secure for the loans at CMBs is more and more popular The general rule in the security transactions is that the 47 security asset owned by securer and the securer must have certificate of ownership right Contrary to this, for the properties to be formed in the future, the ownership right has not yet established at the time entering into the transaction Therefore, this is considered as a specific transaction and contains many risks However, the current laws and regulations have no specific and unified provisions relating to properties to be formed in the future to create a clear legal mechanism for CMBs to apply easier For instance, as author has mentioned, the concept of the property to be formed in the future does not unified in two legal documents: the Civil Code 2005 and the Decree No.11/2012/ND-CP This causes the difficulties in determining whether a specific asset is the property to be formed in the future or not In the author’s opinion, the legislators should unify those legal documents on the same issue; accordingly, it is necessary to widen the concept of property to be formed in the future like the regulations of Decree No.11/2012/ND-CP It should not limit under the scope of “tangible things” like the provisions of the Civil Code 2005 2.2.2 Supporting proposals to enhance the effectiveness in applying legislation on the conditions for borrowing In all sectors, human is the main key of success; therefore, human element in the banking sector is not an exception In the lending activity of the banks in general and CMBs in particular, human element, particularly the credit officers, is becoming more and more important The credit officers play a vital role in ensuring the right process of lending pursuant to the laws and regulations, accordingly, mitigating the risks, bringing the effectiveness in the lending activity and ensuring the recovery of debts Thus, besides improving the legislation on the conditions for borrowing, the enhancing of quality and expertise of CMB’s credit officers is important requirement As a result, in the course of business, CMBs should organize frequent courses to train the credit officers, give them the deep expertise to prevent the mistakes The existence of many forged legal documents proving the satisfaction of conditions for borrowing of clients is not rare; therefore, training the credit officers to realize the abnormal and deceitful signals in these documents is the important thing Moreover, the most important issue is to give the credit officers the legal update because the changes in the law can greatly affect the process of evaluating and the lending activity If the credit officers cannot seize the changes in the legal documents; it will, of course, lead to some mistakes and losses for CMBs Practice also shows that many risks of CMBs come from lack of morality of the credit officer; accordingly, credit officers not conduct the careful evaluation of borrowing dossiers of clients, lack responsibility and not collect enough information relating to the conditions for borrowing of clients Otherwise, they also intentionally falsify the borrowing dossiers, compromise with clients to appropriate money from banks serving for their own interests To overcome this practice, CMBs must focus on the recruiting process, they must choose carefully the candidates who have the clear backgrounds, did not use to violate the economic crimes Beside, credit officers must be put under the strict supervision of the managers; this will not create any gap for intentional or unintentional mistakes from the credit officers Besides, to reduce risks in the lending activity and to force the entities in the lending activity to follow legislation, when entering into the lending – borrowing 48 relation, both credit officers and clients must be notified and realized some criminal remedies as well as the penalty bracket for crimes relating to the lending activity prescribes by the Criminal Code This will prevent the negligence of responsibility of credit officers, coincidently, creates the fear for clients when they have intentions of fraud CONCLUSION OF CHAPTER In the Chapter 2, basing on the bases and the analyses of the legislation on the conditions for borrowing in the Chapter 1, author focuses on presenting and clarifying the existing shortcomings in the course of applying the legislation on the conditions for borrowing at CMBs Like the Chapter 1, in the Chapter 2, author points out the shortcomings steps by step: practical implementation of legislation on the condition for borrower’s capacity, purpose for utilizing the loan capital, financial capacity of borrower, projects or plans for utilizing the loan capital and the security for loan After the process of clarifying the shortcomings in the legislation on the conditions for borrowing, author carries on the thesis with some proposals to improve the application of legislation on the conditions for borrowing Besides, with the practice of low quality of the credit officers causing a part of risks in the lending activity, author also mentions some proposal to improve the quality of human element to perfect the lending activity and minimize the risks of CMBs 49 CONCLUSION For the enterprises, they demand a lot of capital to maintain the normal business operation in the volatile economy Like these enterprises, with the development of the economy, the needs of capital of individuals for consumption are higher Therefore, CMBs, through the lending activity, are the places where all above needs of capital of are satisfied through lending activity CMBs act as the financial intermediaries, mobilize money from citizens and lend with higher interest with the aim to gain the profit However, the obvious fact is that the lending activity of CMBs usually contains many potential risks Thus, to mitigate these risks, ensure the bank’s capital to be used effectively and be recovered on time; the conditions for borrowing are set up and both CMBs and clients are forced to follow Therefore, in all contents of the thesis, with the main aim is to state the important meaning of the conditions for borrowing in reducing risks, author focuses on analyzing, assessing the conditions for borrowing as prescribed by law and then giving the proposals to improve the application of legislation on conditions for borrowing at CMBs Author spends the Chapter on presenting the theory of the conditions for borrowing at CMBs with the orientation to clarify the vital meaning of the conditions for borrowing at CMBs in reducing risks together with the method of moving from general aspects to specific aspects Firstly, author conducts the process of presenting the generalization of the lending activity to clarify the concept, characteristics and the risks of the lending activity Secondly, author moves on clarifying the generalization of the conditions for borrowing at CMBs from the knowledge of the lending activity as well as the risks of this activity Accordingly, analyzing the surrounding aspects relating to the conditions for borrowing, including: the necessity of the conditions for borrowing, the elements affecting the formation of the legislation on the conditions for borrowing, the roles of recognizing the conditions for borrowing in the legal document and the requirements for the legislation on the conditions for borrowing Finally, pursuant to the basic knowledge of the conditions for borrowing, author move on minutely clarify each condition for borrowing as prescribed by law From the analyses in the Chapter 1, in the Chapter 2, author focuses on the practical implementation of legislation on the conditions for borrowing at CMBs Throughout the process of analysis, comparison; author brings out many existent limitations in the legislation on the conditions for borrowing at CMBs Finally, with the aim to improve legislation on the conditions for borrowing at CMBs, author proposes some solutions to improve the law as well as to enhance the effectiveness in applying legislation on the conditions for borrowing at CMBs Relevant knowledge of the research topic is very wide It relates to not only many different laws but also different expertise Therefore, to the extent of the Law Bachelor thesis together with limits in study ability, author will not avoid many certain shortcomings in spite of author’s best efforts in researching Hence, it is author’s pleasure and luckiness to receive additional reviews and feedbacks from teachers and readers 50 LIST OF REFERENCES A LEGISLATIVE DOCUMENTS Civil Code (Law No 33/2005/QH11) dated 14/06/2005 Civil Code (Law No 91/2015/QH13) of the National Assembly dated 24/11/2015 Law on enterprises (Law No 68/2014/QH13) dated 26/11/2014 Law on Credit Institutions (Law No 47/2010/QH12) dated 16/06/2010 Law on Credit Institutions (Law No 07/1997/QH10) dated 12/12/1997 Land Law (Law No 45/2013/QH13) dated 29/11/2013 Land Law (Law No 24-L/CTN) dated 14/7/1993 Land Law ( Law No 3-LCT/HĐNN8) dated 29/12/1987 Law on Housing (Law No 65/2014/QH13) dated 25/11/1014 10 Law on Housing (Law No 56/2005/QH11) dated 29/11/2005 11 Accounting Law (Law No 03/2003/QH11) dated 17/6/2003 12 Law on the Independent Audit (Law No 67/2011/QH12) dated 29/03/2011 13 Law on Public Debt Management (Law No 29/2009/QH12) dated 17/09/2009 14 Decree No 11/2012/ND-CP of the Government dated 22/2/2012 on amending and supplementing a number of articles of the Government’s decree No 163/2006/ND-CP dated 29/12/2006 on security transactions 15 Decree No 83/2010/ND-CP of the Government dated 23/07/2010 on registration of secured transactions 16 Decree No 88/2009/ND-CP of the Government dated 19/10/2009 on grant of certificates of land use rights and house and land-attached assets ownership 17 Decree No 151/2007/ND-CP of Government dated 10/10/2007 on the organization and operation of co-operative group 18 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 19 Decree No 90/2006/ND-CP of the Government dated 06/09/2006 on detailing and guiding the implementation of the housing law 20 Decree No 163/2006/ND-CP of the Government dated 29/12/2006 on security transactions 21 Decree No 95/2005/ND-CP of the Government dated 15/07/2005 on grant of the certificate of ownership of dwelling house and construction 22 Decree No 60/CP of the Government dated 05/07/1994 on dwelling house ownership and residential land use right in urban areas 23 Decision No 131/QD-TTg of the Prime Minister dated 23/01/2009 on the interest rate supports for organizations and individuals that take bank loans for production and business 24 Decision No 1627/2001/QD-NHNN of the State Bank dated 31/12/2001 on issuing regulations on lending by credit institution to clients 25 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 26 Circular No 02/2009/TT-NHNN of State Bank of Vietnam dated 03/02/2009 stipulating in detail the provisions of interest rate support for organizations and individuals borrowing bank loans for their business and business 27 Circular No 33/2011/TT-NHNN of the State Bank of Vietnam dated 08/11/2011 on amending, supplementing some articles of Circular No 13/2010/TT-NHNN dated May 20, 2010 of the State Bank of Vietnam stipulating prudential ratios in operations of credit institutions and regulations on lending by credit institutions to clients issued with the Decision No 1627/2001/QD-NHNN date December 31, 2001 of the Governor of the State Bank 28 Circular 25/2014/TT-NHNN of State Bank of Vietnam dated 15/09/2014 on guidance on procedures for registration, registration for change in foreign loan of businesses that not guaranteed by the Government B REFERENCES 29 Nguyen Thi My Anh (2012), Legal institution on borrowing entities in the loan agreement (in Vietnamese: “Chế định pháp luật chủ thể vay hợp đồng tín dụng”), Law Bachelor thesis, Ho Chi Minh City University of Law 30 Danh Pham My Duyen (2014), Legislation on the conditions for borrowing at commercial banks (in Vietnamese: “Quy định pháp luật điều kiện vay vốn Ngân hàng thương mại”), Law Bachelor thesis, Ho Chi Minh City University of Law 31 Vo My Duyen (2011), Law on regulating the evaluation for lending at commercial banks (in Vietnamese: “Pháp luật điều chỉnh hoạt động thẩm định cho vay Ngân hàng Thương mại”), Law Bachelor thesis, Ho Chi Minh City University of Law 32 Vo Thu Duyen (2011), 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 Ngân hàng Thương mại”), Law Bachelor thesis, Ho Chi Minh City University of Law 33 Le Thi Nam Giang (2014), Private International Law (in Vietnamese: “Tư pháp quốc tế”, Ho Chi Minh City National University Publishing House 34 Le Thị Ngan Ha (2011), Law on mitigating the credit risks in the evaluation for lending at commercial banks (in Vietnamese: “Pháp luật hạn chế rủi ro tín dụng hoạt động thẩm định cho vay Ngân hàng Thương mại”), Law Master thesis, Ho Chi Minh City University of Law 35 Tran Thi Thu Hang (2012), 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 Ngân hàng Thương mại”), Law Bachelor thesis, Ho Chi Minh City University of Law 36 Le Thi Bao Quyen (2011), Legislation on lending low-income people for buying house (in Vietnamese: “Quy định pháp luật cho vay mua nhà người có thu nhập thấp”), Law Bachelor thesis, Ho Chi Minh City University of Law 37 Phung Hong Thanh (2012), Legislation on the conditions for borrowing at commercial banks (in Vietnamese: “Quy định pháp luật điều kiện vay vốn NHTM”), Law Bachelor thesis, Ho Chi Minh City University of Law 38 Le Thi Huyen Tran (2015), Vietnamese Law on mortgage of properties to be formed in the future (in Vietnamese: “Thế chấp tài sản hình thành tương lai pháp luật Việt Nam”), Law Bachelor thesis, Ho Chi Minh City University of Law 39 Ho Chi Minh City University of Law (2013), Law on bank (in Vietnamese: “Luật Ngân Hàng”, Hong Duc Publishing House 40 Ho Chi Minh City University of Law (2012), The general regulations on the Civil law (in Vietnamese: “Những quy định chung Luật Dân sự”), Hong Duc Publishing House References from internet 41 Le Van Chi, “The lending activity of commercial banks”, https://voer.edu.vn/m/hoat-dong-cho-vay-cua-ngan-hang-thuong-mai/04b1555c 42 “The roles of the laws and regulations”, https://www.wattpad.com/2204016-vai-tr%C3%B2-c%E1%BB%A7a-ph%C3% A1p-lu%E1%BA%ADt 43 “Thesis on improving the legislation on security transactions in the activity of 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http://agribankquan5.com.vn/thong-doc-nguyen-van-giau-nghiem-cam-cho-vaydao-no/ 49 Le Trong Dung, “Support loan re-structuring to solve the bad debts”, http://www.farolaw.vn/index.php/tin-hot-ng/319-ng-h-o-n-e-x-ly-n-xau 50 “Swindling banks by forged documents, appropriating 100 billion VND”, http://canvaytien.net/lua-6-ngan-hang-bang-giay-to-dat-gia-mao-bo-tui-hon-100ti-dong/, ... 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. .. 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. .. 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