New bank guarantee provisions in Vietnam from 1 April 2023

5 April 2023

On 1 April 2023, Circular No. 11/2022/TT-NHNN on bank guarantees (“Circular 11”) came into effect, replacing Circular No. 07/2015/TT-NHNN and Circular No. 13/2017/TT-NHNN (together, “Previous Regulations”). Circular 11 was issued by the State Bank of Vietnam (“SBV”) on 30 September 2022.

The article discusses the key highlights of Circular 11.

Electronic guarantees

Bank guarantees in electronic form is one of the most notable concepts introduced by Circular 11. Circular 11 allows credit institutions (“CIs”) and foreign bank branches (“FBBs”) to provide guarantees via electronic means upon customers’ request.

CIs and FBBs may decide on the methods, forms, technologies they wish to utilise to carry out electronic guarantee activities but must ensure the security and confidentiality of the information in accordance with regulations on money laundering prevention and e-transactions, SBV guidance on risk management in electronic banking, and other relevant regulations.

Where Electronic Know-Your-Customer (eKYC) is conducted, the maximum amount for an electronic bank guarantee is VND 4 billion for individual customers and VND 45 billion for institutional customers, except where:

• the customer’s identification has been verified by the competent authorities or electronically verified by electronic certification service providers in accordance with the Law on Identification and Electronic Verification;
• the customer has sent the request for the guarantee electronically via SWIFT;
• a customer’s identity and guarantee obligations are verified to be true through the Customs E-Payment Portal or the National Bidding Network System;
• customers use digital signatures as prescribed by law when requesting for a guarantee or entering into a guarantee issuance agreement with CIs or FBBs; or
• customers are CIs and FBBs.

Restriction on guarantees for bond issuance

Circular 11 extends the restrictions on bank guarantees issued for bond issuance. Pursuant to Circular 11, CIs and FBBs are prohibited from issuing bank guarantees for the payment obligations of bond issuers if the purpose of the bond issuance is (i) to contribute capital or purchase shares or the capital contribution of another enterprise, or (ii) to increase working capital.

Similar to the Previous Regulations, Circular 11 continues to restrict bank guarantees issued in relation to bond issuers’ payment obligations where the purpose of the issuance is to restructuring their own debts.

Circular 11 removes the previous restriction on CIs and FBBs from issuing a bank guarantee to a bond issuer which is a subsidiary and affiliate of other CIs.

Guarantees for off-the-plan housing

Circular 11 limits the guarantee amount for an off-the-plan housing project at the aggregate amount that the developer is permitted to receive in advance from the buyers as prescribed by law and any other amount paid under the purchase or lease-purchase housing contract (“SPA”).

To improve the protection of property buyers, Circular 11 now requires a commercial bank to issue a letter of guarantee (“Letter”) for each buyer based on the SPA signed between the buyer and the developer once it is appointed guarantee bank for the residential project. Prior to this, the bank will conclude a guarantee agreement with the developer (“Guarantee Agreement”). The Letter will be valid from its issuance to at least 30 days after the date of delivery and receipt of the house as set out in the SPA.

The Guarantee Agreement is effective from the time of signing to when the guarantee obligations set out in all Letters expire and the developer’s obligations under the guarantee agreement are completed. Circular 11 stipulates that where a Guarantee Agreement is terminated early, the bank and the developer must, no later than the next business day, announce the termination of the bank guarantee on their websites and deliver relevant written notification to the competent housing management authority.

Under Circular 11’s transition clause, commercial banks prohibited from guaranteeing off-the-plan houses, because they no longer meet the conditions prescribed under Circular 11, must continue to perform the existing signed guarantee agreements and corresponding commitments until their guarantee obligations are terminated.

Improvement of counter-guarantee payment process

Under the Previous Regulations, upon receiving a demand from the beneficiary, the guarantor must make payment to the beneficiary first and then seek reimbursement from the counter guarantor. Circular 11 now allows the guarantor to request the counter guarantor to directly make payment on behalf of the guaranteed party after receiving a valid application for the fulfillment of a guarantee obligation.

Should the counter guarantor fail to fulfil its obligations toward the guarantor, the guarantor shall fulfil its obligations toward the beneficiary and, at the same time, record to the mandatory loan account the amount paid on behalf of the counter guarantor and notify the counter guarantor thereof. The counter guarantor is obligated to repay in full such amount to the guarantor and the relevant interest amount.