Content and form of agreement on credit extension serving letter of credit (L/C) operations in Vietnam

Agreement on credit extension serving letter of credit (L/C) operations (Image from the Internet)

Content and form of agreement on credit extension serving L/C operations in Vietnam

According to Clause 14, Article 5 Circular 21/2024/TT-NHNN, “agreement on credit extension serving L/C operations” means an agreement between the issuing bank, confirming bank, negotiating bank or reimbursing bank with the customer and other related parties (if any) on the extension of credit to the customer through issuance, confirmation, negotiation of payment and reimbursement of L/C.

Based on Article 29 Circular 21/2024/TT-NHNN, the credit granting agreement in letter of credit confirmation operations must include the following 5 contents:

- Information about related parties including issuing bank, confirming bank, applicant, beneficiary, and other related parties (if any);

- Information about the letter of credit, security measures (if any), and other information as required by the confirming bank;

- Type of currency, amount proposed for letter of credit confirmation;

- Credit granting term upon the confirmation of the letter of credit;

- Types of fees, interest rates, and penalties (if any).

In terms of form, the credit granting agreement is made in the form of a specific credit granting agreement for each transaction or a framework agreement applicable to all letter of credit confirmation transactions, with specific agreements attached.

Conditions to be satisfied by customers for confirmation of an L/C in Vietnam

On June 28, 2024, Circular 21/2024/TT-NHNN was issued, regulating letter of credit operations and other business activities related to letters of credit. Among them, confirming a letter of credit is when the confirming bank, upon the issuing bank's request, commits to paying the beneficiary upon receiving a complying presentation of documents, in addition to the commitment from the issuing bank. According to Article 27 Circular 21/2024/TT-NHNN, the bank considers and decides to confirm the letter of credit when the customer meets the following conditions:

(1) The letter of credit is issued by the customer to facilitate the purchase of legitimate goods and services;

(2) Has a feasible capital utilization plan;

(3) Has financial capability to fulfill the obligations committed under the letter of credit.

The bank does not have to consider condition (3) for customers in the following cases:

- The customer is the parent bank or a branch within the system in Vietnam of the parent bank of a foreign bank branch;

- The customer is a credit institution that is a foreign branch of a commercial bank.

In the case of a non-resident customer, the bank (except for foreign bank branches confirming the letter of credit in foreign currency carried out under the provisions of Clause 4, Article 27 Circular 21/2024/TT-NHNN) only considers and decides to confirm the letter of credit for the customer when the customer meets the conditions stipulated in Clause 1, Clause 2, Article 27 Circular 21/2024/TT-NHNN and must satisfy one of the following requirements:

- Is a foreign credit institution or a subsidiary of a commercial bank; is the parent bank or a branch within the system of the parent bank of a foreign bank branch;

- The customer provides 100% value of the letter of credit in assets, including the customer's deposit balance or collateral at the confirming bank;

- The beneficiary of the letter of credit is a resident.

Note: Foreign bank branches only consider and decide to confirm the letter of credit in foreign currency for foreign non-resident customers if they meet the conditions stipulated in Clause 1, Clause 2, Article 27 Circular 21/2024/TT-NHNN and the beneficiary is a resident.

Tran Trong Tin

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